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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 1-32532
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 20-0865835
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check One):
Large Accelerated Filer |X| Accelerated Filer |_| Non-Accelerated Filer |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
At December 31, 2006, there were 62,637,469 shares of Registrant's
Common Stock outstanding.
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended
December 31
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(In millions except per share data - unaudited) 2006 2005
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REVENUES
Sales and operating revenues $ 1,803 $ 1,686
Equity income 4 2
Other income 6 8
----------- -----------
1,813 1,696
COSTS AND EXPENSES
Cost of sales and operating expenses 1,489 1,397
Selling, general and administrative expenses 266 253
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1,755 1,650
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OPERATING INCOME 58 46
Gain on the MAP Transaction (a) - 2
Net interest and other financing income 16 10
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 74 58
Income taxes (21) (23)
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INCOME FROM CONTINUING OPERATIONS 53 35
Income (loss) from discontinued operations (net of income taxes) (b) (4) 31
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NET INCOME $ 49 $ 66
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BASIC EARNINGS PER SHARE - Note H
Income from continuing operations $ .82 $ .49
Income (loss) from discontinued operations (.06) .43
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Net income $ .76 $ .92
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DILUTED EARNINGS PER SHARE - Note H
Income from continuing operations $ .81 $ .48
Income (loss) from discontinued operations (.06) .43
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Net income $ .75 $ .91
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DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
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(a) "MAP Transaction" refers to the June 30, 2005 transfer of Ashland's
38% interest in Marathon Ashland Petroleum LLC (MAP), Ashland's maleic
anhydride business and 60 Valvoline Instant Oil Change centers in
Michigan and northwest Ohio to Marathon Oil Corporation in a
transaction valued at approximately $3.7 billion.
(b) Ashland sold APAC to Oldcastle Materials, Inc. in August 2006 for
approximately $1.3 billion. After-tax operating results of APAC,
excluding previously allocated corporate costs, are reflected in
discontinued operations, with prior period restated.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31 September 30 December 31
(In millions - unaudited) 2006 2006 2005
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 516 $ 1,820 $ 601
Available-for-sale securities 436 349 479
Accounts receivable 1,385 1,441 1,226
Allowance for doubtful accounts (44) (40) (35)
Inventories - Note F 580 532 499
Deferred income taxes 76 93 66
Other current assets 65 55 80
Current assets of discontinued operations - - 472
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3,014 4,250 3,388
INVESTMENTS AND OTHER ASSETS
Goodwill and other intangibles 377 310 231
Asbestos insurance receivable (noncurrent portion) 440 444 363
Deferred income taxes 189 186 222
Other noncurrent assets 443 450 478
Noncurrent assets of discontinued operations - - 967
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1,449 1,390 2,261
PROPERTY, PLANT AND EQUIPMENT
Cost 2,042 2,007 1,848
Accumulated depreciation and amortization (1,079) (1,057) (1,015)
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963 950 833
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$ 5,426 $ 6,590 $ 6,482
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Current portion of long-term debt $ 7 $ 12 $ 12
Trade and other payables 1,059 1,302 1,025
Dividends payable - 674 -
Income taxes 10 53 2
Current liabilities of discontinued operations - - 203
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1,076 2,041 1,242
NONCURRENT LIABILITIES
Long-term debt (less current portion) 70 70 77
Employee benefit obligations 303 313 394
Asbestos litigation reserve (noncurrent portion) 577 585 512
Other long-term liabilities and deferred credits 522 485 483
Noncurrent liabilities of discontinued operations - - 88
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1,472 1,453 1,554
STOCKHOLDERS' EQUITY 2,878 3,096 3,686
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$ 5,426 $ 6,590 $ 6,482
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
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Accumulated
other
Common Paid-in Retained comprehensive
(In millions - unaudited) stock capital earnings loss (a) Total
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BALANCE AT SEPTEMBER 30, 2005 $ 1 $ 605 $ 3,251 $ (118) $ 3,739
Total comprehensive income (b) 66 (12) 54
Cash dividends (20) (20)
Issued 164,203 common shares under
stock incentive and other plans (c) 9 9
Repurchase of 1,764,730 common shares (96) (96)
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BALANCE AT DECEMBER 31, 2005 $ 1 $ 518 $ 3,297 $ (130) $ 3,686
=========== =========== =========== =========== ===========
BALANCE AT SEPTEMBER 30, 2006 $ 1 $ 240 $ 2,899 $ (44) $ 3,096
Total comprehensive income (b) 49 11 60
Cash dividends (1) (17) (18)
Issued 492,303 common shares under
stock incentive and other plans (c) 28 28
Repurchase of 4,712,000 common shares (267) (21) (288)
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BALANCE AT DECEMBER 31, 2006 $ 1 $ - $ 2,910 $ (33) $ 2,878
=========== =========== =========== =========== ===========
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(a) At December 31, 2006 and 2005, the accumulated other comprehensive
loss (after tax) of $33 million for 2006 and $130 million for 2005 was
comprised of a minimum pension liability of $113 million for 2006 and
$160 million for 2005, net unrealized translation gains of $81 million
for 2006 and $31 million for 2005, and net unrealized losses on cash
flow hedges of $1 million for 2006 and $1 million for 2005.
(b) Reconciliations of net income to total comprehensive income follow.
Three months ended
December 31
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(In millions) 2006 2005
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Net income $ 49 $ 66
Unrealized translation adjustments 9 (11)
Related tax benefits 1 -
Net unrealized gains (losses) on cash flow hedges 1 (1)
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Total comprehensive income $ 60 $ 54
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(c) Includes income tax benefits resulting from the exercise of stock
options of $8 million in fiscal year 2007 and $2 million in fiscal
year 2006.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Three months ended
December 31
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(In millions - unaudited) 2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 49 $ 66
Loss (income) from discontinued operations (net of income taxes) 4 (31)
Adjustments to reconcile income from continuing operations to
cash flows from operating activities
Depreciation and amortization 28 25
Deferred income taxes 11 39
Equity income from affiliates (4) (2)
Distributions from equity affiliates 2 1
(Gain) on the MAP Transaction - (2)
Change in operating assets and liabilities (a) (212) (306)
Other items - (1)
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(122) (211)
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of common stock 13 4
Excess tax benefits related to share-based payments 6 1
Repayment of long-term debt (5) (5)
Repurchase of common stock (288) (96)
Cash dividends paid (692) (20)
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(966) (116)
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Additions to property, plant and equipment (35) (25)
Purchase of operations - net of cash acquired (73) -
Purchases of available-for-sale securities (286) (227)
Proceeds from sales and maturities of available-for-sale securities 207 152
Other - net 2 3
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(185) (97)
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CASH USED BY CONTINUING OPERATIONS (1,273) (424)
Cash (used) provided by discontinued operations
Operating cash flows (4) 64
Investing cash flows (27) (24)
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DECREASE IN CASH AND CASH EQUIVALENTS (1,304) (384)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,820 985
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 516 $ 601
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(a) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission regulations. In the opinion of management all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. These condensed consolidated
financial statements should be read in conjunction with Ashland's
Annual Report on Form 10-K for the fiscal year ended September 30,
2006. Results of operations for the period ended December 31, 2006,
are not necessarily indicative of results to be expected for the year
ending September 30, 2007. Certain prior period data has been
reclassified in the condensed consolidated financial statements and
accompanying footnotes to conform to current period presentation.
On August 28, 2006, Ashland completed the sale of the stock of its
wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC),
to Oldcastle Materials, Inc. (Oldcastle). The operating results and
assets and liabilities related to APAC have been reflected as
discontinued operations in the condensed consolidated financial
statements for all periods presented. Unless otherwise noted, amounts
in these Notes to Condensed Consolidated Financial Statements exclude
amounts attributable to discontinued operations.
In June 2006, Ashland redefined its reportable business segments as it
continues to evolve into a diversified, global chemical company.
Performance Materials and Water Technologies, formerly combined under
Ashland Specialty Chemical, have now been separately disclosed since
these businesses serve different markets and recent acquisitions have
made Water Technologies a much larger and more distinct part of
Ashland. Performance Materials includes three related business groups:
Composite Polymers, Casting Solutions, and Specialty Polymers and
Adhesives. Water Technologies also includes three related business
groups: Drew Industrial, Drew Marine, and Environmental and Process
Solutions (which is the business acquired from Degussa AG in May
2006). Disclosing Performance Materials and Water Technologies
separately provides greater visibility to Ashland's strategy of
expanding its products, services and geographical reach in key market
segments where it competes. For further information on this revised
disclosure see "Information by Industry Segment" immediately following
the Notes to Condensed Consolidated Financial Statements on pages 15
and 16 of this document. Prior periods have been conformed to the
current period presentation.
The preparation of Ashland's condensed consolidated financial
statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosures of contingent assets and liabilities.
Significant items that are subject to such estimates and assumptions
include long-lived assets, employee benefit obligations, income taxes,
reserves and associated receivables for asbestos litigation and
environmental remediation. Although management bases its estimates on
historical experience and various other assumptions that are believed
to be reasonable under the circumstances, actual results could differ
significantly from the estimates under different assumptions or
conditions.
NOTE B - NEW ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (FASB)
issued Financial Accounting Standard No. 157 (FAS 157), "Fair Value
Measurements," which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit
fair value measurements since the FASB has previously concluded in
those accounting pronouncements that fair value is the relevant
measurement attribute. FAS 157 becomes effective for Ashland on
October 1, 2008. Ashland is currently in the process of determining
the effect, if any, the adoption of FAS 157 will have on the
consolidated financial statements.
In September 2006, the FASB issued Financial Accounting Standard No.
158 (FAS 158), "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans," which requires an employer to
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE B - NEW ACCOUNTING STANDARDS (CONTINUED)
recognize the overfunded or underfunded status of a defined benefit
pension or other postretirement plan (other than a multiemployer plan)
as an asset or liability in its Consolidated Balance Sheet and to
recognize changes in that funded status in the year in which the
changes occur through accumulated other comprehensive income, which is
a component of stockholders' equity. FAS 158 also requires additional
disclosures in the notes to the consolidated financial statements
about certain effects on net periodic benefit costs for the next
fiscal year that arise from delayed recognition of the gains or
losses, prior service costs or credits, and transition asset or
obligation. FAS 158 is effective for Ashland on September 30, 2007 and
will not have an impact on the Statement of Consolidated Income, but
will affect Ashland's Consolidated Balance Sheet. If Ashland had
adopted this statement as of September 30, 2006, it would have
increased accrued benefit liabilities by $117 million with a
corresponding deferred tax asset increase of $46 million and an
additional reduction in accumulated other comprehensive income of $71
million.
In June 2006, the FASB issued Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes," an interpretation of
FASB Statement No. 109, "Accounting for Income Taxes." FIN 48
prescribes a minimum recognition threshold and measurement attribute
for the financial statement recognition of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition for tax related positions.
FIN 48 becomes effective for Ashland on October 1, 2007. Ashland is
currently in the process of determining the effect, if any, the
adoption of FIN 48 will have on the consolidated financial statements.
NOTE C - DISCONTINUED OPERATIONS
As described in Note D of Ashland's Annual Report on Form 10-K for the
fiscal year ended September 30, 2006, Ashland completed the sale of
the stock of its wholly owned subsidiary, APAC, to Oldcastle on August
28, 2006. The sale price of $1.30 billion was subject to adjustments
for changes in working capital and certain other accounts from
September 30, 2005, until the closing date. Oldcastle paid $34 million
at closing as a preliminary estimate of the working capital adjustment
that was subsequently calculated at $7 million. During the December
2006 quarter, Ashland repaid $25 million of the estimated purchase
price adjustment to Oldcastle. Per the agreement, Oldcastle has a
defined period of time to review this working capital calculation;
therefore, future adjustments to the gain on the sale are possible
until final approval is received. Ashland's Board of Directors
authorized that substantially all of the $1.23 billion after-tax
proceeds of the sale of APAC be distributed to the shareholders of
Ashland by funding the completion of the then existing share
repurchase authorization, an additional repurchase authorization and a
one time special dividend. For further information on the special
dividend and share repurchase programs see Note J - Capital Stock.
The total gain on the sale of APAC recorded in the September 2006
quarter, including a pension and other postretirement curtailment
gain, amounted to $162 million pretax and $110 million after-tax. In
the December 2006 quarter subsequent post-closing adjustments were
made to the gain, which adjusted the total gain on sale of APAC to
$162 million pretax and $105 million after-tax.
APAC qualifies as discontinued operations under FASB Statement No. 144
(FAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets." Accordingly, the results, net of tax, and assets and
liabilities of discontinued operations are presented separately in
Ashland's condensed consolidated financial statements and the notes to
condensed consolidated financial statements have been adjusted to
reflect discontinued operations. The amounts eliminated from
continuing operations did not include allocations of corporate
expenses included in the selling, general and administrative expenses
caption in the Statements of Consolidated Income and the related
combined 39% U.S. federal (35%) and state (4%, net of federal
deductions) statutory income tax benefits of such expenses. These
corporate expenses were $10 million for the December 2005 quarter. In
accordance with a consensus of the Emerging Issues Task Force
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - DISCONTINUED OPERATIONS (CONTINUED)
(EITF 87-24), allocations of general corporate overhead may not be
allocated to discontinued operations for financial statement
presentation.
Due to refinements in the working capital calculation and other
post-closing adjustments, the gain may continue to be adjusted in
future periods. Adjustments to the gain will be reflected in the
quarter they are determined and recorded in the discontinued
operations caption in the Statements of Consolidated Income.
Components of amounts in the Statements of Consolidated Income related
to discontinued operations are presented in the following table for
the three months ended December 31, 2006 and 2005.
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(In millions) 2006 2005
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REVENUES FROM DISCONTINUED OPERATIONS
APAC $ - $ 733
INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES)
APAC - 31
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (NET OF INCOME TAXES)
APAC (4) -
NOTE D - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
In December 2006, Performance Materials acquired Northwest Coatings of
Oak Creek, Wisconsin, a formulator and manufacturer of adhesives and
coatings employing ultraviolet and electron beam (UV/EB)
polymerization technologies from Caltius Equity Partners. The
transaction, which includes production facilities in Milwaukee,
Wisconsin and Greensboro, North Carolina, was valued at $74 million.
At the time this purchase transaction was announced, Northwest
Coatings had trailing twelve month sales of approximately $40 million.
The results of Northwest Coatings are included in the Statement of
Consolidated Income from the date of acquisition.
In May 2006, Ashland acquired the water treatment business of Degussa
AG (Degussa), branded under the Stockhausen name, with five
manufacturing facilities operating in Germany, China, Brazil, Russia
and the United States. The acquisition allows Ashland's Water
Technologies segment to expand its technology base, product line and
service levels while continuing to develop its presence in key
emerging international markets. For its fiscal year ended December 31,
2005, Degussa reported sales and operating revenues (translated to
U.S. dollars) of $258 million and operating income of $10 million. The
transaction, denominated in Euros, was valued at $162 million at the
exchange rate on the acquisition date. For further information on the
purchase price allocation of this transaction see Note L in Ashland's
Annual Report on Form 10-K for the fiscal year ended September 30,
2006.
DIVESTITURES
On August 28, 2006, Ashland completed the sale of the stock of its
wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC),
to Oldcastle Materials, Inc. (Oldcastle). The operating results and
assets and liabilities related to APAC have been reflected as
discontinued operations in the condensed consolidated financial
statements for all periods presented. For further information on this
transaction see Note C - Discontinued Operations.
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - DEBT DEFEASANCE
During the December 2005 quarter Ashland entered into an in-substance
defeasance of approximately $49 million to repay current and long-term
debt that had a carrying value of $44 million on the balance sheet as
of December 31, 2005. Because the transaction was not a legal
defeasance the investment has been placed into a trust and will be
exclusively restricted to future obligations and repayments related to
these debt instruments. The investments have been classified on the
balance sheet as other current assets or other noncurrent assets based
on the contractual debt repayment schedule. The carrying value of the
investments to defease debt, including other defeasements that
occurred in fiscal 2005, at December 31, 2006 was $45 million and at
September 30, 2006 was $51 million. The carrying value of the debt at
December 31, 2006 was $39 million and $44 million at September 30,
2006.
NOTE F - INVENTORIES
Inventories are carried at the lower of cost or market. Certain
chemicals, plastics and lubricants are valued at cost using the
last-in, first-out (LIFO) method. The remaining inventories are stated
at cost using the first-in, first-out (FIFO) method or average cost
method (which approximates FIFO). The following table summarizes
Ashland's inventories as of the reported Condensed Consolidated
Balance Sheet dates.
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December 31 September 30 December 31
(In millions) 2006 2006 2005
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Chemicals and plastics $ 577 $ 540 $ 497
Lubricants 94 84 88
Other products and supplies 53 55 56
Excess of replacement costs over LIFO carrying values (144) (147) (142)
------------ ------------- ------------
$ 580 $ 532 $ 499
============ ============= ============
NOTE G - GOODWILL AND OTHER INTANGIBLES
In accordance with FASB Statement No. 142 (FAS 142), "Goodwill and
Other Intangible Assets," Ashland conducts an annual review for
impairment. Impairment is to be examined more frequently if certain
indicators are encountered. In accordance with FAS 142, Ashland
reviewed goodwill for impairment based on reporting units, which are
defined as operating segments or groupings of businesses one level
below the operating segment level. Ashland has completed its most
recent annual goodwill impairment test required by FAS 142 as of July
1, 2006 and has determined that no impairment exists. The following is
a progression of goodwill by segment for the three months ended
December 31, 2006. There was no significant goodwill activity for the
three months ended December 31, 2005.
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Performance Water
(In millions) Materials Distribution Valvoline Technologies Total
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Balance at September 30, 2006 $ 110 $ 1 $ 29 $ 70 $ 210
Acquisitions 47 - - 1 48
Currency translation adjustment 1 - - 1 2
----------- ------------- --------- ------------ --------
Balance at December 31, 2006 $ 158 $ 1 $ 29 $ 72 $ 260
=========== ============= ========= ============ ========
Intangible assets consist of trademarks and trade names, patents and
licenses, non-compete agreements, sale contracts, customer lists and
intellectual property. Intangibles are amortized on a straight-line
basis over their estimated useful lives. The cost of trademarks and
trade names is amortized principally over 10 to 25 years, intellectual
property over 5 to 17 years and other intangibles over 3 to 30 years.
Ashland reviews intangible assets for possible impairment whenever
events or changes in circumstances indicate that carrying amounts may
not be recoverable. Intangible assets were comprised of the following
as of December 31, 2006 and 2005.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE G - GOODWILL AND OTHER INTANGIBLES (CONTINUED)
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2006 2005
-------------------------------------- --------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(In millions) amount amortization amount amount amortization amount
--------------------------------------------------------------------------- --------------------------------------
Trademarks and trade names $ 64 $ (20) $ 44 $ 55 $ (19) $ 36
Intellectual property 40 (6) 34 19 (4) 15
Other intangibles 50 (11) 39 24 (8) 16
-------- ------------ -------- -------- ------------ --------
Total intangible assets $ 154 $ (37) $ 117 $ 98 $ (31) $ 67
======== ============ ======== ======== ============ ========
Amortization expense recognized on intangible assets for the three
months ended December 31 was $3 million for 2006 and $1 million for
2005. As of December 31, 2006, all of Ashland's intangible assets that
had a carrying value were being amortized except for certain
trademarks and trade names that currently have been determined to have
indefinite lives. These assets had a balance of $32 million as of
December 31, 2006 and $23 million as of December 31, 2005. In
accordance with FAS 142, Ashland annually reviews these assets to
determine whether events and circumstances continue to support the
indefinite useful life. Estimated amortization expense for future
periods is $11 million in 2007 (includes three months actual and nine
months estimated), $11 million in 2008, $10 million in 2009, $7
million in 2010 and $6 million in 2011.
NOTE H - EARNINGS PER SHARE
Following is the computation of basic and diluted earnings per share
(EPS) from continuing operations.
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Three months ended
December 31
--------------------------
(In millions except per share data) 2006 2005
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NUMERATOR
Numerator for basic and diluted EPS - Income
from continuing operations $ 53 $ 35
=========== ===========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 64 72
Common shares issuable upon exercise of stock options and stock appreciation rights 1 1
----------- -----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 65 73
=========== ===========
EPS FROM CONTINUING OPERATIONS
Basic $ .76 $ .92
Diluted $ .75 $ .91
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE I - EMPLOYEE BENEFIT PLANS
Presently, Ashland anticipates contributing $51 million to its U.S.
pension plans and $7 million to its non-U.S. pension plans during
fiscal 2007. As of December 31, 2006, contributions of $20 million
have been made to the U.S. plans and $1 million to the non-U.S. plans.
The following table details the components of pension and other
postretirement benefit costs.
------------------------------------------------------------------------------------------------
Other postretirement
Pension benefits benefits
------------------------ ------------------------
(In millions) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31
Service cost $ 9 $ 15 $ 1 $ 2
Interest cost 19 21 3 3
Expected return on plan assets (21) (25) - -
Amortization of prior service credit - - (1) (2)
Amortization of net actuarial loss 5 10 - -
---------- ---------- ---------- ----------
$ 12 $ 21 $ 3 $ 3
========== ========== ========== ==========
NOTE J - CAPITAL STOCK
On September 14, 2006 Ashland's Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of
APAC to the Ashland Common Stock shareholders as a one-time special
dividend. Each shareholder of record as of October 10, 2006, received
$10.20 per share, for a total of $674 million. This amount was accrued
as dividends payable in the Condensed Consolidated Balance Sheet at
September 30, 2006. Substantially all of the remaining proceeds were
directed to be used to repurchase Ashland Common Stock in accordance
with the terms authorized by Ashland's Board of Directors and as
further described below.
The stock repurchases were made pursuant to two different programs
authorized by Ashland's Board of Directors. The first program,
originally approved on July 21, 2005, authorized the purchase of $270
million of Ashland common stock in the open market. After 3.5 million
shares at a cost of $196 million had been purchased under the initial
authorization, on January 25, 2006, Ashland's Board of Directors
increased the remaining authorization by $176 million to $250 million.
As of September 14, 2006, Ashland had completed all repurchases to be
made under this program.
The second program was authorized by Ashland's Board of Directors on
September 14, 2006, employing the remaining after-tax proceeds from
the sale of APAC to repurchase up to an additional 7 million shares.
To facilitate this repurchase program, Ashland entered into a stock
trading plan with Credit Suisse Securities (USA) LLC (Credit Suisse).
The stock trading plan, amended and restated on September 20, 2006,
allowed Credit Suisse to make daily repurchases of stock starting on
October 2, 2006, in accordance with the instructions set forth in the
filed plan and within the safe harbor from insider trading liability
provided under Exchange Act Rule 10b5-1.
Ashland repurchased 4.7 million shares for $288 million in the
December 2006 quarter and 1.8 million shares for $96 million in the
December 2005 quarter. Since the inception of the first described
share repurchase program on July 21, 2005 through the completion of
the second share repurchase program on December 19, 2006, Ashland
repurchased a total of 13.2 million shares at a cost of $793 million.
These repurchases represent approximately 18% of shares outstanding on
June 30, 2005. The stock repurchase actions are consistent with
certain representations of intent made to the Internal Revenue Service
with respect to the transfer of MAP.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES
ASBESTOS-RELATED LITIGATION
Ashland is subject to liabilities from claims alleging personal injury
caused by exposure to asbestos. Such claims result primarily from
indemnification obligations undertaken in 1990 in connection with the
sale of Riley Stoker Corporation (Riley), a former subsidiary.
Although Riley was neither a producer nor a manufacturer of asbestos,
its industrial boilers contained some asbestos-containing components
provided by other companies.
A summary of asbestos claims activity follows. Because claims are
frequently filed and settled in large groups, the amount and timing of
settlements and number of open claims can fluctuate significantly from
period to period.
--------------------------------------------------------------------------------------------------------------------
Three months ended
December 31 Years ended September 30
-------------------------- ----------------------------------------
(In thousands) 2006 2005 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------
Open claims - beginning of period 162 184 184 196 198
New claims filed 1 2 6 12 29
Claims settled - (1) (3) (6) (7)
Claims dismissed (12) (4) (25) (18) (24)
---------- ----------- ---------- ---------- ----------
Open claims - end of period 151 181 162 184 196
========== =========== ========== ========== ==========
Since October 1, 2003, Riley has been dismissed as a defendant in 82%
of the resolved claims. Amounts spent on litigation defense and claim
settlements averaged $686 per claim resolved in the three months ended
December 31, 2006, compared to $1,961 in the three months ended
December 31, 2005, and annual averages of $1,428 in 2006, $1,985 in
2005 and $1,655 in 2004. A progression of activity in the asbestos
reserve is presented in the following table.
--------------------------------------------------------------------------------------------------------------------
Three months ended
December 31 Years ended September 30
-------------------------- ----------------------------------------
(In millions) 2006 2005 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------
Asbestos reserve - beginning of period $ 635 $ 571 $ 571 $ 618 $ 610
Expense incurred - - 104 - 59
Amounts paid (8) (9) (40) (47) (51)
---------- ----------- ---------- ---------- ----------
Asbestos reserve - end of period $ 627 $ 562 $ 635 $ 571 $ 618
========== =========== ========== ========== ==========
Ashland retained Hamilton, Rabinovitz & Alschuler, Inc. (HR&A) to
assist in developing and periodically updating independent and
accurate reserve estimates for future asbestos claims and related
costs given various assumptions. The methodology used by HR&A to
project future asbestos costs is based largely on Ashland's recent
experience, including claim-filing and settlement rates, disease mix,
enacted legislation, open claims, and litigation defense and claim
settlement costs. Ashland's claim experience is compared to the
results of previously conducted epidemiological studies estimating the
number of people likely to develop asbestos-related diseases. Those
studies were undertaken in connection with national analyses of the
population expected to have been exposed to asbestos. Using that
information, HR&A estimates a range of the number of future claims
that may be filed, as well as the related costs that may be incurred
in resolving those claims.
From the range of estimates, Ashland records the amount it believes to
be the best estimate of future payments for litigation defense and
claim settlement costs. During the most recent update of this estimate
completed during the June 2006 quarter, it was determined that the
reserves for asbestos claims should be increased by $104 million. This
increase in the reserves was based on the results of a non-inflated,
non-
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
discounted 51-year model developed with the assistance of HR&A. This
increase resulted in total reserves for asbestos claims of $627
million at December 31, 2006, compared to $635 million at September
30, 2006 and $562 million at December 31, 2005.
Projecting future asbestos costs is subject to numerous variables that
are extremely difficult to predict. In addition to the significant
uncertainties surrounding the number of claims that might be received,
other variables include the type and severity of the disease alleged
by each claimant, the long latency period associated with asbestos
exposure, dismissal rates, costs of medical treatment, the impact of
bankruptcies of other companies that are co-defendants in claims,
uncertainties surrounding the litigation process from jurisdiction to
jurisdiction and from case to case, and the impact of potential
changes in legislative or judicial standards. Furthermore, any
predictions with respect to these variables are subject to even
greater uncertainty as the projection period lengthens. In light of
these inherent uncertainties, Ashland believes its asbestos reserve
represents the best estimate within a range of possible outcomes. As a
part of the process to develop Ashland's estimates of future asbestos
costs, a range of long-term cost models is developed. These models are
based on national studies that predict the number of people likely to
develop asbestos-related diseases and are heavily influenced by
assumptions regarding long-term inflation rates for indemnity payments
and legal defense costs, as well as other variables mentioned
previously. Ashland has estimated that it is reasonably possible that
total future litigation defense and claim settlement costs on an
inflated and undiscounted basis could range as high as approximately
$1.9 billion, depending on the combination of assumptions selected in
the various models. If actual experience is worse than projected
relative to the number of claims filed, the severity of alleged
disease associated with those claims or costs incurred to resolve
those claims, Ashland may need to increase further the estimates of
the costs associated with asbestos claims and these increases could
potentially be material over time.
Ashland has insurance coverage for most of the litigation defense and
claim settlement costs incurred in connection with its asbestos
claims, and coverage-in-place agreements exist with the insurance
companies that provide substantially all of the coverage currently
being accessed. As a result, increases in the asbestos reserve have
been largely offset by probable insurance recoveries. The amounts not
recoverable generally are due from insurers that are insolvent, rather
than as a result of uninsured claims or the exhaustion of Ashland's
insurance coverage.
Ashland has estimated the value of probable insurance recoveries
associated with Ashland's estimate of its asbestos liabilities. Such
recoveries are based on management's assumptions and estimates
surrounding the available or applicable insurance coverage. One such
assumption is that all solvent insurance carriers remain solvent.
Although coverage limits are resolved in the coverage-in-place
agreement with Equitas Limited (Equitas) and other London companies,
which collectively provide a significant portion of Ashland's
insurance coverage for asbestos claims, there was a disagreement with
these companies over the timing of recoveries. In estimating the value
of future recoveries, Ashland has historically used the least
favorable interpretation of this agreement under which the ultimate
recoveries are extended for many years, resulting in a significant
discount being applied to value those recoveries. On June 16, 2006 an
arbitrator reached a decision essentially confirming that
interpretation. Ashland will continue to apply this methodology based
on this arbitration decision.
At December 31, 2006, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from insurers amounted
to $470 million, of which $69 million relates to costs previously
paid. Receivables from insurers amounted to $474 million at September
30, 2006 and $393 million at December 31, 2005. The receivable was
increased by $104 million during the June 2006 quarter, reflecting the
updated model used for purposes of valuing the reserve described
above, and its impact on the valuation of future recoveries from
insurers. About 31% of the estimated receivables from insurance
companies at December 31, 2006 are expected to be due from Equitas and
other London companies. Of the remainder, approximately 97% is
expected to come from companies or groups that are rated A or higher
by A. M. Best.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
On October 20, 2006, Equitas announced an agreement in principle on a
structure in which National Indemnity Company, a member of the
Berkshire Hathaway group of insurance companies, will reinsure all of
Equitas's liabilities, provide up to a further $7 billion of
reinsurance coverage to Equitas, and take on the staff and operations
of Equitas and conduct the run-off of Equitas's liabilities. Ashland
is currently evaluating whether or not this transaction may have an
impact on the valuation assumptions for the receivable recorded from
Equitas.
ENVIRONMENTAL REMEDIATION
Ashland is subject to various federal, state and local environmental
laws and regulations that require environmental assessment or
remediation efforts (collectively environmental remediation) at
multiple locations. At December 31, 2006, such locations included 73
waste treatment or disposal sites where Ashland has been identified as
a potentially responsible party under Superfund or similar state laws,
115 current and former operating facilities (including certain
operating facilities conveyed to MAP) and about 1,230 service station
properties, of which 223 are being actively remediated. Ashland's
reserves for environmental remediation amounted to $200 million at
December 31, 2006 compared to $199 million at September 30, 2006 and
$179 million at December 31, 2005, of which $169 million at December
31, 2006, $168 million at September 30, 2006 and $147 million at
December 31, 2005 were classified in noncurrent liabilities on the
Condensed Consolidated Balance Sheets. The total reserves for
environmental remediation reflect Ashland's estimates of the most
likely costs that will be incurred over an extended period to
remediate identified conditions for which the costs are reasonably
estimable, without regard to any third-party recoveries. Engineering
studies, probability techniques, historical experience and other
factors are used to identify and evaluate remediation alternatives and
their related costs in determining the estimated reserves for
environmental remediation. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation expense
amounted to $4 million for the three months ended December 31, 2006
and $8 million for the three months ended December 31, 2005, and
annual expense was $57 million in 2006, $52 million in 2005 and $7
million in 2004.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of
the costs. Such uncertainties involve the nature and extent of
contamination at each site, the extent of required cleanup efforts
under existing environmental regulations, widely varying costs of
alternate cleanup methods, changes in environmental regulations, the
potential effect of continuing improvements in remediation technology,
and the number and financial strength of other potentially responsible
parties at multiparty sites. Although it is not possible to predict
with certainty the ultimate costs of environmental remediation,
Ashland currently estimates that the upper end of the reasonably
possible range of future costs for identified sites could be as high
as approximately $310 million. No individual remediation location is
material to Ashland, as its largest reserve for any site is less than
10% of the remediation reserve.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various claims,
lawsuits and administrative proceedings pending or threatened against
Ashland and its current and former subsidiaries. Such actions are with
respect to commercial matters, product liability, toxic tort
liability, and other environmental matters, which seek remedies or
damages, some of which are for substantial amounts. While these
actions are being contested, their outcome is not predictable.
14
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
---------------------------------------------------------------------------
Three months ended
December 31
---------------------------
(In millions - unaudited) 2006 2005
---------------------------------------------------------------------------
REVENUES
Sales and operating revenues
Performance Materials (a) $ 366 $ 352
Distribution 948 967
Valvoline 351 310
Water Technologies (a) 179 97
Intersegment sales
Performance Materials (a) (35) (33)
Distribution (5) (6)
Valvoline (1) (1)
------------ ------------
1,803 1,686
Equity income
Performance Materials (a) 3 2
Valvoline 1 -
------------ ------------
4 2
Other income
Performance Materials (a) 1 1
Distribution 1 1
Valvoline 2 3
Water Technologies (a) 1 1
Unallocated and other 1 2
------------ ------------
6 8
------------ ------------
$ 1,813 $ 1,696
============ ============
OPERATING INCOME
Performance Materials (a) $ 26 $ 26
Distribution 14 34
Valvoline 18 1
Water Technologies (a) 5 1
Unallocated and other (b) (5) (16)
------------ ------------
$ 58 $ 46
============ ============
---------------------------------------------------------------------------
(a) In June 2006, Ashland redefined its reportable business segments as it
continues to evolve into a diversified chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland
Specialty Chemical, have now been separately disclosed. Prior periods
have been conformed to the current period presentation.
(b) Includes corporate costs previously allocated to APAC of $10 million
for the three months ended December 31, 2005.
15
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
----------------------------------------------------------------------------------------
Three months ended
December 31
-----------------------------
(In millions) 2006 2005
----------------------------------------------------------------------------------------
PERFORMANCE MATERIALS (a) (b)
Sales per shipping day $ 6.0 $ 5.8
Pounds sold per shipping day 5.0 5.2
Gross profit as a percent of sales 21.1% 21.6%
DISTRIBUTION (a)
Sales per shipping day $ 15.5 $ 15.9
Pounds sold per shipping day 19.1 20.5
Gross profit as a percent of sales 8.6% 10.2%
VALVOLINE (a)
Lubricant sales (gallons) 38.5 38.5
Premium lubricants (percent of U.S. branded volumes) 21.9% 22.9%
Gross profit as a percent of sales 23.8% 22.1%
WATER TECHNOLOGIES (a) (b)
Sales per shipping day $ 2.9 $ 1.6
Gross profit as a percent of sales 40.4% 48.5%
----------------------------------------------------------------------------------------
(a) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
(b) In June 2006, Ashland redefined its reportable business segments as it
continues to evolve into a diversified chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland
Specialty Chemical, have now been separately disclosed. Prior periods
have been conformed to the current period presentation.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
RESULTS OF OPERATIONS
Ashland reported income from continuing operations of $53 million for
the quarter ended December 31, 2006 compared to $35 million for the
quarter ended December 31, 2005. The $18 million increase in the
current quarter was primarily due to increased operating income of $12
million and a $6 million increase in net interest and other financing
income. Ashland's net income decreased $17 million to $49 million for
the December 2006 quarter, compared to $66 million for the December
2005 quarter. The net income comparison is affected by the sale of
Ashland Paving And Construction, Inc. (APAC) on August 28, 2006, which
qualified as a discontinued operation in the Statements of
Consolidated Income. Net income for the December 2005 quarter included
$31 million of income from the discontinued APAC operations. Operating
income for both periods excludes income from discontinued operations
other than $10 million of corporate costs which had been allocated to
APAC in the December 2005 quarter. Much of these previously allocated
costs have been eliminated as of the December 2006 quarter,
contributing to the $12 million increase in operating income.
Compared to the prior year's quarter, operating income increased 26%
to $58 million driven by the recovery in Valvoline's results.
Valvoline achieved a significant rebound in earnings, benefiting from
stabilizing base oil costs and the effects of previously announced
price increases, along with reductions in selling, general and
administrative costs. Water Technologies recorded an 85% increase in
sales and operating revenues and operating income grew substantially,
both bolstered by the Environmental and Process Solutions (E&PS)
business acquired last May. However, softness in U.S. industrial
production adversely affected Distribution's results. Performance
Materials was also impacted by soft automotive, marine and housing
markets, but to a much lesser extent.
In the June 2006 quarter, Ashland redefined its reportable business
segments as it continues to evolve into a diversified chemical
company. Performance Materials and Water Technologies, formerly
combined under Ashland Specialty Chemical have now been separately
disclosed since these businesses serve different markets and recent
acquisitions have made Water Technologies a much larger and more
distinct part of Ashland.
PERFORMANCE MATERIALS
Performance Materials recorded operating income of $26 million for the
December 2006 quarter which was essentially flat versus its operating
income in the December 2005 quarter. Unit volume decreased 4% from 5.2
million pounds per shipping day in the December 2005 quarter to 5.0
million pounds per shipping day in the December 2006 quarter,
resulting in a $4 million decline in operating income. The decline was
primarily due to softness in the North American automotive, marine and
construction markets. However, a more favorable product mix during the
current quarter coupled with increased pricing led to a 4% increase in
sales and operating revenues to $366 million, from $352 million in the
December 2005 quarter. These factors plus reduced manufacturing costs
had an offsetting $4 million positive impact on operating income.
DISTRIBUTION
Distribution reported disappointing quarterly results as operating
income decreased 59% to $14 million compared to the December 2005
quarter, where hurricane-related product shortages and increased
demand resulted in strong margins and record operating income of $34
million. Sales and operating revenues declined 2% from $967 million in
the December 2005 quarter to $948 million in the December 2006
quarter, reflecting a 7% reduction in volume. Pounds sold per shipping
day decreased in the current quarter to 19.1 million pounds from 20.5
million pounds in the December 2005 quarter, resulting in a $7 million
decline in operating income. The month of December was particularly
difficult in the current quarter, where volume decreased 17% compared
to the prior December. This volume decrease in the month of December
accounted for nearly 75% of the quarter-versus-quarter volume decline,
as many customers elected to reduce
17
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
DISTRIBUTION (CONTINUED)
inventory levels in the last two weeks of December over the holiday
period. Gross profit as a percent of sales declined from 10.2% to
8.6%, primarily due to the negative effect of lower volume on unit
costs such as the fixed components of freight and warehousing. The
decline in margin lowered operating income by $10 million compared to
the December 2005 results. During the December 2006 quarter,
Distribution implemented Ashland's new SAP(TM) enterprise resource
planning (ERP) system which had a one-time negative impact of
approximately $3 to $4 million on operating income and was partially
the cause for a $3 million increase in selling, general and
administrative expenses.
VALVOLINE
Valvoline reported record operating income results of $18 million
during the current quarter compared to $1 million in the December 2005
quarter. Sales and operating revenues increased 13% over the December
2005 quarter to $351 million, reflecting increased pricing as volume
levels were flat at 38.5 million lubricant gallons for both quarters.
Gross profit as a percent of sales increased from 22.1% to 23.8%,
resulting in a $17 million increase in operating income. A stable base
oil market and the full effect of the September 2006 quarter price
increases, coupled with lower expenses, led to significant margin
recovery in the current quarter. Despite raising prices throughout
fiscal year 2006, these price increases were not able to be
implemented fast enough to offset rising feedstock costs. Lube oil
feedstock costs had been steadily increasing for the past two years,
but in the December 2006 quarter lubricant costs stabilized, with a
small price decline actually occurring in November.
WATER TECHNOLOGIES
Water Technologies recorded operating income of $5 million during the
December 2006 quarter compared to the $1 million reported in the
December 2005 quarter. Sales and operating revenues increased 85% to
$179 million in the current quarter compared to $97 million in the
prior year's quarter, primarily due to the $79 million in sales and
operating revenues contributed by the E&PS business, which was
acquired from Degussa AG last May. Gross profit as a percent of sales
decreased to 40.4% from 48.5%, reflecting the lower-margin E&PS
business as opposed to gross profit margin declines in the industrial
and marine businesses. Operating income for the December 2006 quarter
was impacted by a $1.4 million bad debt charge for an industrial
customer. Despite this charge, combined operating income for the
marine and industrial businesses nearly tripled compared to the
December 2005 quarter and combined revenues increased 5% compared to
the same period.
UNALLOCATED AND OTHER
Unallocated and other costs were $5 million in the December 2006
quarter compared to $16 million in the December 2005 quarter. The
December 2005 quarter included $10 million of corporate costs
previously allocated to APAC that were included in this caption to
reflect required generally accepted accounting principles presentation
within the Statements of Consolidated Income.
GAIN ON THE MAP TRANSACTION
Ashland recorded an increase in the gain on the MAP Transaction of $2
million in the December 2005 quarter as a result of an increase in the
discounted receivable from Marathon for the estimated present value of
future tax deductions. See Note E of Notes to Condensed Consolidated
Financial Statements in Ashland's Annual Report on Form 10-K for the
fiscal year ended September 30, 2006, for further explanation of this
receivable.
NET INTEREST AND OTHER FINANCING INCOME
Net interest and other financing income amounted to $16 million in the
December 2006 quarter, compared to $10 million in the December 2005
quarter. The increase in the current quarter is due to the investment
of the remaining proceeds from the APAC sale before these funds were
utilized in the quarter as part of the share repurchase program and
special shareholder dividend paid on October 25, 2006.
18
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
INCOME TAXES
Ashland's effective income tax rate was 28.6% for the December 2006
quarter, compared to 39.4% for the December 2005 quarter. The decline
from the prior year's quarter reflects an approximate 5% reduction due
to the effect of tax deductions for the special dividend paid in
October on shares held in Ashland's employee stock ownership plan. The
decline also reflects an approximate 1% reduction for research and
development credits, an approximate 2% decrease resulting from the
reclassification of APAC operating results in the December 2005
quarter to discontinued operations and an approximate 1% decline due
to an adjustment in tax reserves.
DISCONTINUED OPERATIONS (NET OF INCOME TAXES)
A loss from discontinued operations of $4 million was recorded in the
December 2006 quarter, reflecting post-closing adjustments to the gain
on the sale of APAC recorded in the September 2006 quarter. Income
from discontinued operations of $31 million in the December 2005
quarter reflects APAC's operating earnings, excluding the previously
allocated corporate costs, which were included in operating income
under "unallocated and other." For further information on the sale of
APAC and its classification as a discontinued operation see Note C to
the Condensed Consolidated Financial Statements.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operating activities from continuing operations, a
major source of Ashland's liquidity, amounted to a cash outflow of
$122 million for the three months ended December 31, 2006, compared to
a cash outflow of $211 million for the three months ended December 31,
2005. The cash outflow in the December 2006 quarter reflects a $212
million cash outflow resulting from a net increase in operating assets
and liabilities. The largest component of this change was a $204
million decrease in trade and other payables, which includes a $21
million contribution to Ashland's pension plans as well as the
seasonal decline in accounts payable. Ashland typically accelerates
payments to vendors at the end of December to coincide with their
fiscal year-ends, versus delaying some payments at the end of
September. The December 2005 quarter had a similar seasonal decline in
trade and other payables of $186 million.
Following shareholder approval of the MAP Transaction in June 2005,
Moody's lowered Ashland's senior debt rating from Baa2 to Ba1, their
highest non-investment grade rating, and also lowered Ashland's
commercial paper rating from P-3 to N-P (Not-Prime), citing the annual
cash flow lost from the operations sold. In August 2006, Standard &
Poor's lowered Ashland's senior debt rating from BBB- to BB+, their
highest non-investment grade rating, and lowered Ashland's commercial
paper rating from A-3 to B, citing Ashland's intention to distribute
the APAC proceeds to shareholders instead of using the proceeds for
business investment. Ashland has a revolving credit agreement that
expires on March 21, 2010, which provides for up to $350 million in
borrowings. The borrowing capacity under this facility was reduced by
$105 million of letters of credit outstanding at December 31, 2006.
The revolving credit agreement contains a covenant limiting the total
debt Ashland may incur from all sources as a function of Ashland's
stockholders' equity. The covenant's terms would have permitted
Ashland to borrow $4.2 billion at December 31, 2006, in addition to
the actual total debt incurred at that time. Permissible total Ashland
debt under the covenant's terms increases (or decreases) by 150% of
any increase (or decrease) in stockholders' equity.
At December 31, 2006, working capital (excluding debt due within one
year) amounted to $1,945 million, compared to $2,221 million at
September 30, 2006 and $1,889 million at December 31, 2005 (excluding
assets and liabilities of discontinued operations). Ashland's working
capital is affected by its use of the LIFO method of inventory
valuation. That method valued inventories below their replacement
costs by $144 million at December 31, 2006, $147 million at September
30, 2006 and $142 million at December 31, 2005. Liquid assets (cash,
cash equivalents, available-for-sale securities and accounts
receivable) amounted
19
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
LIQUIDITY (CONTINUED)
to 213% of current liabilities at December 31, 2006, compared to 175%
at September 30, 2006 and 218% at December 31, 2005 (excluding current
liabilities of discontinued operations). Ashland has defeased $39
million of its outstanding debt at December 31, 2006 with $44 million
recorded for both September 30, 2006 and December 31, 2005. See Note E
to the Condensed Consolidated Financial Statements for further
information on this debt defeasance.
CAPITAL RESOURCES
On September 14, 2006, Ashland's Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of
APAC to the Ashland Common Stock shareholders as a one-time special
dividend. Each shareholder of record as of October 10, 2006, received
$10.20 per share, for a total of $674 million. This amount was accrued
as "dividends payable" in the Condensed Consolidated Balance Sheet at
September 30, 2006. Substantially all of the remaining proceeds were
directed to be used to repurchase Ashland Common Stock in accordance
with the terms authorized by Ashland's Board of Directors. Ashland
repurchased 4.7 million shares for $288 million in the December 2006
quarter and 1.8 million shares for $96 million in the December 2005
quarter. See Note J to the Condensed Consolidated Financial Statements
for a description of Ashland's share repurchase programs.
For the three months ended December 31, 2006, property additions
amounted to $35 million, compared to $25 million for the same period
last year. Ashland anticipates meeting its remaining 2007 capital
requirements for property additions and dividends from internally
generated funds.
Ashland's debt level amounted to $77 million at December 31, 2006,
compared to $82 million at September 30, 2006 and $89 million at
December 31, 2005. Debt as a percent of capital employed amounted to
2.6% at December 31, 2006, compared to 2.6% at September 30, 2006 and
2.4% at December 31, 2005.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
There have been no material changes in the critical accounting
policies described in Management's Discussion and Analysis (MD&A) in
Ashland's Annual Report on Form 10-K for the fiscal year ended
September 30, 2006. For a discussion of Ashland's asbestos-related
litigation and environmental remediation matters, see Note K to the
Condensed Consolidated Financial Statements.
OUTLOOK
The December 2006 quarter marked the first full quarter for Ashland as
a singularly focused, diversified chemical company. Ashland continues
to be committed to growing, both organically and through acquisitions.
This balanced approach to growth, as well as Ashland's strong
financial position are intended to create value for its investors and
deliver needed solutions to its customers.
Performance Materials' results in 2007 across its three business
groups will, in large part, be determined by the pace of recovery in
the North American automotive, marine and construction markets. While
the timing or pace of this recovery cannot be predicted, the division
continues to focus on expense control management to maximize its
earnings potential in the near term despite sluggish volume levels, as
its U.S. operations prepare for the ERP system integration in February
2007.
With the ERP system implementation and depressed volume levels for the
last half of the month of December behind, Distribution's sales for
January 2007 rebounded to a level comparable to January 2006, although
softness in U.S. industrial production could continue to be an issue
throughout the fiscal year. In addition, Distribution's contract with
Dow Chemical to distribute its plastics in North America ends March 1,
2007. Ashland is working hard to transfer as much of this business as
possible to plastics
20
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
OUTLOOK (CONTINUED)
provided by other suppliers. During this transition phase the impact
on Distribution's profitability from the business lost is expected to
be approximately $4 to $5 million per quarter. However, Ashland is
diligently working to replace this lost volume and expects the
long-term impact to be less. As a result of this contract expiration
and the projected softness in U.S. industrial production previously
mentioned, operating income in the March 2007 quarter will likely fall
below the prior year's level.
Valvoline's recovery during the December quarter was highlighted by
its record first quarter earnings, though gross profit margins remain
below historical levels. While these margins have improved over prior
quarters, volume levels were flat and continue to be an area of focus.
Valvoline's efforts to reduce annual costs by $20 million have also
been successful, as targeted costs declined by roughly $5 million in
the quarter. This cost reduction as well as the gross profit margin
recovery have Valvoline well positioned for the upcoming prime car
care months. In addition, Valvoline Instant Oil Change, which opened
its 500th franchise store during the current quarter, recently
unveiled a new strategy of increasing customer satisfaction through
speed and concentrating services to those that deliver the greatest
customer value. This new strategy has been met with rising customer
satisfaction ratings, increasing 13 percentage points compared to the
prior year's quarter.
Water Technologies performance for the remainder of the year should
continue to benefit from its business model redesign as well as the
$10 million of cost reductions and a full year of the E&PS business.
However, raw material pricing is still a significant metric that will
continue to affect the margins and overall profitability within this
business segment. As Water Technologies' U.S. operations prepare for
the ERP system integration in February 2007, mitigating potential
business interruptions is a key focus.
When APAC was sold in the September 2006 quarter there were remaining
costs that had been previously allocated to this business. To help
address these costs and improve Ashland's overall competitiveness,
1,100 administrative and corporate employees were offered an enhanced
early retirement or voluntary severance opportunity in December 2006,
of which 236 employees subsequently applied for this package. In late
January 2007, Ashland completed its review of these applications and
has accepted 172 of the employee requests and currently expects to
record approximately a $25 million pretax reserve for these accepted
employee offers during the March 2007 quarter. However, since employee
termination dates will occur over the next several months, the
estimated cost savings of approximately $10 to $12 million pretax
annually will not begin to be fully realized until December 2007.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis (MD&A) contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These
statements include those that refer to Ashland's operating
performance, earnings, and benefits expected to be obtained through
the GlobalOne ERP implementation. These estimates are based upon a
number of assumptions, including those mentioned within MD&A. Such
estimates are also based upon internal forecasts and analyses of
current and future market conditions and trends, management plans and
strategies, weather, operating efficiencies and economic conditions,
such as prices, supply and demand, cost of raw materials, and legal
proceedings and claims (including environmental and asbestos matters).
Although Ashland believes its expectations are based on reasonable
assumptions, it cannot assure the expectations reflected herein will
be achieved. This forward-looking information may prove to be
inaccurate and actual results may differ significantly from those
anticipated if one or more of the underlying assumptions or
expectations proves to be inaccurate or is unrealized or if other
unexpected conditions or events occur. Other factors and risks
affecting Ashland are contained in its Annual Report on Form 10-K for
the fiscal year ended September 30, 2006. Ashland undertakes no
obligation to subsequently update or revise these forward-looking
statements.
21
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland's market risk exposure at December 31, 2006 is generally
consistent with the types and amounts of market risk exposures
presented in Ashland's Annual Report on Form 10-K for the fiscal year
ended September 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly report,
Ashland, under the supervision and with the participation of its
management, including Ashland's Chief Executive Officer and its
Chief Financial Officer, evaluated the effectiveness of Ashland's
disclosure controls and procedures pursuant to Rule 13a-15(b) and
15d-15(b) promulgated under the Securities Exchange Act of 1934,
as amended. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures were effective.
(b) During the quarter ended December 31, 2006, as part of an ongoing
SAP(TM) enterprise resource planning (ERP) project, the ERP
system was implemented for Valvoline's U.S. operations and
certain corporate functions in October 2006 and for Ashland
Distribution's U.S. operations in December 2006. As a result,
internal controls in the affected corporate functions and the
U.S. operations of Valvoline and Distribution related to user
security, account structure and hierarchy, system reporting and
approval procedures were modified and redesigned to conform with
and support the new ERP system. Although management believes
internal controls have been maintained or enhanced by the ERP
systems implemented during the quarter, the controls in the newly
upgraded environments have not been completely tested. As such
there is a risk that deficiencies may exist and not yet be
identified that could constitute significant deficiencies or in
the aggregate, a material weakness. Management will be performing
tests of controls relating to the new SAP(TM) environment in
these business units over the course of fiscal 2007. Otherwise,
there were no significant changes in Ashland's internal control
over financial reporting, or in other factors, that occurred
during the period covered by this quarterly report that have
materially affected, or are reasonably likely to materially
affect, Ashland's internal control over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos-Related Litigation - Ashland is subject to liabilities from
claims alleging personal injury caused by exposure to asbestos. Such claims
result primarily from indemnification obligations undertaken in 1990 in
connection with the sale of Riley Stoker Corporation ("Riley"), a former
subsidiary. Although Riley was neither a producer nor a manufacturer of
asbestos, its industrial boilers contained some asbestos-containing
components provided by other companies.
The majority of lawsuits filed involve multiple plaintiffs and
multiple defendants, with the number of defendants in many cases exceeding
100. The monetary damages sought in the asbestos-related complaints that
have been filed in state or federal courts vary as a result of
jurisdictional requirements and practices, though the vast majority of
these complaints either do not specify monetary damages sought or merely
recite that the monetary damages sought meet or exceed the required
jurisdictional minimum in which the complaint was filed. Plaintiffs have
asserted specific dollar claims for damages in approximately 5% of the
49,700 active lawsuits pending as of December 31, 2006. In these active
lawsuits, approximately 0.4% of the active lawsuits involve claims between
$0 and $100,000; approximately 1.6% of the active lawsuits involve claims
between $100,000 and $1 million; less than 1% of the active lawsuits
involve claims between $1 million and $5 million; less than 0.2% of the
active lawsuits involve claims between $5 million and $10 million; less
than 2% of the active lawsuits involve claims between $10 million and $15
million; and less than .02% of the active lawsuits involve claims between
$15 million and $100 million. The variability of requested damages, coupled
with the actual experience of resolving claims over an extended period,
demonstrates that damages requested in any particular lawsuit or complaint
bear little or no relevance to the merits or disposition value of a
particular case. Rather, the amount potentially recoverable by a specific
plaintiff or group of plaintiffs is determined by other factors such as
product identification or lack thereof, the type and severity of the
disease alleged, the number and culpability of other defendants, the impact
of bankruptcies of other companies that are co-defendants in claims,
specific defenses available to certain defendants, other potential
causative factors and the specific jurisdiction in which the claim is made.
For additional information regarding liabilities arising from
asbestos-related litigation, see Note K of "Notes to Condensed Consolidated
Financial Statements" in this quarterly report on Form 10-Q.
Foundry Class Action - In response to an investigation by the United
States Department of Justice that was closed in 2006 without criminal or
civil allegations being made by the government, several foundry owners have
filed lawsuits seeking class action status for classes of customers of
foundry resins manufacturers such as Ashland. These cases have been
consolidated for pretrial purposes in the United States District Court,
Southern District of Ohio. Ashland will vigorously defend these civil
actions.
Environmental Proceedings - Under the federal Comprehensive
Environmental Response Compensation and Liability Act (as amended) and
similar state laws, Ashland may be subject to joint and several liability
for clean-up costs in connection with alleged releases of hazardous
substances at sites where it has been identified as a "potentially
responsible party" ("PRP"). As of December 31, 2006, Ashland had been named
a PRP at 73 waste treatment or disposal sites. These sites are currently
subject to ongoing investigation and remedial activities, overseen by the
United States Environmental Protection Agency ("USEPA") or a state agency,
in which Ashland is typically participating as a member of a PRP group.
Generally, the type of relief sought includes remediation of contaminated
soil and/or groundwater, reimbursement for past costs of site clean-up and
administrative oversight and/or long-term monitoring of environmental
conditions at the sites. The ultimate costs are not predictable with
assurance.
For additional information regarding environmental matters and
reserves, see Note K of "Notes to Condensed Consolidated Financial
Statements" in this quarterly report on Form 10-Q.
23
MTBE Litigation - Ashland is a defendant along with many other
companies in approximately 30 cases alleging methyl tertiary-butyl ether
("MTBE") contamination in groundwater. All of these cases have been
consolidated in a multi-district litigation in the Southern District of New
York for preliminary proceedings. The plaintiffs generally are water
providers or governmental authorities and they allege that refiners,
manufacturers and sellers of gasoline containing MTBE are liable for
manufacturing a defective product and that owners and operators of retail
gasoline sites have allowed MTBE to be discharged into the groundwater.
Ashland's involvement in these cases relates to gasoline containing MTBE
allegedly produced and sold by Ashland, or one or more of its subsidiaries,
in the period prior to the formation of Marathon Ashland Petroleum LLC
("MAP"). Ashland only distributed MTBE or gasoline containing MTBE in a
limited number of states and has been dismissed in a number of cases in
which it was established that Ashland did not market MTBE or gasoline
containing MTBE in the state or region at issue. Many MTBE cases allege
class action status and seek punitive damages or treble damages under a
variety of statutes and theories. The potential impact of these cases and
any future similar cases is uncertain. Ashland will vigorously defend these
actions.
Other Legal Proceedings - In addition to the matters described above,
there are various claims, lawsuits and administrative proceedings pending
or threatened against Ashland and its current and former subsidiaries. Such
actions are with respect to commercial matters, product liability, toxic
tort liability and other environmental matters, which seek remedies or
damages, some of which are for substantial amounts. While these actions are
being contested, their outcome is not predictable.
ITEM 1A. RISK FACTORS
During the period covered by this report, two of the risk factors
previously disclosed in Ashland's Form 10-K for the year ended September
30, 2006 materially changed. The risk factor regarding the implementation
of an enterprise resource planning project and the risk factor regarding
increases in raw material costs are now amended to read in their entirety
as set forth below.
ASHLAND'S IMPLEMENTATION OF ITS SAP(TM) ENTERPRISE RESOURCE PLANNING
("ERP") PROJECT HAS THE POTENTIAL FOR BUSINESS INTERRUPTION AND ASSOCIATED
ADVERSE IMPACT ON OPERATING RESULTS AS WELL AS INTERNAL CONTROLS.
In 2004, Ashland initiated a multi-year ERP project that is expected
to achieve increased efficiency and effectiveness in supply chain,
financial and environmental, health and safety processes. The ERP system
was implemented in Canada in 2005. During the first fiscal quarter of 2007,
the ERP system was implemented in the U.S. operations of Valvoline and
Distribution. The ERP system was implemented in February 2007 for the U.S.
operations of Performance Materials and Water Technologies. In late fiscal
2007, Ashland will begin the first phase of implementing the ERP system in
its European operations. In fiscal 2008, Ashland will begin implementing
the ERP system for most of its remaining operations.
Extensive planning has occurred to support effective implementation of
the ERP system; however, such implementations carry certain risks,
including potential for business interruption with the associated adverse
impact on operating income. In addition, internal controls that are
modified or redesigned to support the new ERP system may not have been
completely tested. As a result, there is a risk that deficiencies may or
will exist in the future, and could constitute significant deficiencies, or
in the aggregate, a material weakness. The first phase of the European
implementation poses increased risk related to the testing of controls as
of the end of the fiscal year due to its timing late in the year. While
that risk could be reduced by deferring the ERP implementation into 2008,
Ashland's management believes the ERP provides for a stronger control
environment and, thus, its implementation should proceed as scheduled.
24
CERTAIN OF ASHLAND'S SUPPLY ARRANGEMENTS SUBJECT THE COMPANY TO THE RISK
THAT IT MAY NOT BE ABLE TO PASS THROUGH INCREASES IN RAW MATERIALS COSTS.
IN ADDITION, CERTAIN OF ASHLAND'S SUPPLIERS MAY BE UNABLE TO DELIVER
PRODUCTS OR RAW MATERIALS OR MAY WITHDRAW FROM CONTRACTUAL ARRANGEMENTS.
THE OCCURRENCE OF EITHER EVENT COULD ADVERSELY AFFECT ASHLAND'S RESULTS OF
OPERATIONS.
Rising and volatile raw material prices, especially those of
hydrocarbon derivatives, may negatively impact Ashland's costs. Ashland is
not always able to raise prices in response to such increased costs, and
its ability to pass on the costs of such price increases is dependent upon
market conditions. Likewise, Ashland purchases certain products and raw
materials from suppliers, often pursuant to written supply contracts. If
those suppliers are unable to timely meet Ashland's orders or choose to
terminate or otherwise avoid contractual arrangements, Ashland may not be
able to make alternative supply arrangements. If Ashland is unable to
obtain and retain qualified suppliers under commercially acceptable terms,
its ability to manufacture and deliver products in a timely, competitive
and profitable manner could be adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information regarding purchases of
Ashland Common Stock by Ashland during the first quarter of fiscal 2007.
Issuer Purchases of Equity Securities (1)
Maximum number
(or approximate
dollar value) of
Average price Total number of shares shares that may yet
paid per share, purchased as part of be purchased under
Total number of including publicly announced the plans or
Period shares purchased commission plans or programs programs
------ ---------------- --------------- ---------------------- -------------------
(a) (b) (c) (d)
October 1 - October 31 2,664,500 $58.22 2,664,500 $132,722,734.61
November 1 - November 30 1,252,500 $62.87 1,252,500 $ 53,972,668.36
December 1 - December 31 795,000 $67.84 795,000 $ 43,107.86
---------- ------ --------- ---------------
Total 4,712,000 $61.08 4,712,000 $ 43,107.86
(1) During the quarter ended December 31, 2006, Ashland repurchased shares
of Ashland Common Stock (the "Shares") pursuant to a repurchase
program publicly announced on September 14, 2006. Under the program,
Ashland was authorized to repurchase up to 7 million Shares or the
dollar amount represented by the after-tax proceeds of the APAC
Transaction remaining after payment of the special dividend on October
25, 2006, and the completion of a prior Share repurchase
authorization, whichever was first exhausted. The dollar amount was
substantially exhausted on December 22, 2006, and Ashland does not
intend to make further repurchases under the program.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 25, 2007, Ashland's Annual Meeting of Shareholders was held
at the Metropolitan Club, 50 E. RiverCenter Boulevard, Covington, Kentucky
at 10:30 a.m. The following are the results of the shareholder vote at the
meeting:
(1) Ernest H. Drew, Mannie L. Jackson, Theodore M. Solso and Michael
J. Ward were elected as Class III directors to a three-year term
and John F. Turner was elected as a Class II director to a
two-year term with the vote totals referenced below.
Votes
---------------------------
Affirmative Withheld
----------- ---------
Ernest H. Drew 51,090,798 2,013,067
Mannie L. Jackson 49,737,295 3,366,570
Theodore M. Solso 48,824,422 4,279,443
John F. Turner 51,074,703 2,029,162
Michael J. Ward 50,269,753 2,834,112
Bernadine P. Healy, M.D., Kathleen Ligocki, James J. O'Brien,
Roger W. Hale and George A. Schaefer, Jr. continue to serve as
directors. In addition, subsequent to the Annual Meeting, the
Board of Directors met and approved the appointment of Barry W.
Perry as a Class I director for a one-year term.
2) The appointment of Ernst & Young LLP as independent auditors for
fiscal year ending September 30, 2007, was ratified by a vote of
51,114,946 shares voting for, 1,501,269 shares voting against,
and 487,649 shares abstaining.
3) A shareholder proposal to initiate the appropriate process to
implement majority voting for election of directors was rejected
by Ashland's shareholders by a vote of 19,120,852 shares voting
for, 24,724,656 shares voting against, and 943,845 shares
abstaining.
ITEM 6. EXHIBITS
(a) Exhibits
4 Agreement of Resignation, Appointment and Acceptance, dated as of
November 30, 2006, by and among Ashland, Wilmington Trust Company
("Wilmington") and Citibank, N.A. ("Citibank") whereby Wilmington
replaced Citibank as Trustee under the Indenture, dated as of August
15, 1989, as amended and restated as of August 15, 1990, between
Ashland and Citibank.
10.1 Separation Agreement and General Release between Ashland Inc. and
Gary A. Cappeline, effective January 10, 2007.
10.2 Amended and Restated Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (2005).
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer of Ashland
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer of Ashland,
and J. Marvin Quin, Chief Financial Officer of Ashland pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Ashland Inc.
-------------------------------------------------
(Registrant)
Date: February 7, 2007 /s/ J. Marvin Quin
-------------------------------------------------
J. Marvin Quin
Senior Vice President and Chief Financial Officer
(on behalf of the Registrant and as principal
financial officer)
27
EXHIBIT INDEX
Exhibit
No. Description
------- ------------------------------------------------------------------
4 Agreement of Resignation, Appointment and Acceptance, dated as of
November 30, 2006, by and among Ashland, Wilmington Trust Company
("Wilmington") and Citibank, N.A. ("Citibank") whereby Wilmington
replaced Citibank as Trustee under the Indenture, dated as of
August 15, 1989, as amended and restated as of August 15, 1990,
between Ashland and Citibank.
10.1 Separation Agreement and General Release between Ashland Inc. and
Gary A. Cappeline, effective January 10, 2007.
10.2 Amended and Restated Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (2005).
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland, and J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
28