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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
Amendment No. 1
(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, 2005
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 April 30, 2006, there were 71,063,910 shares of Registrant's Common
Stock outstanding.
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EXPLANATORY NOTE
This amendment to the Quarterly Report on Form 10-Q/A for the quarter
ended December 31, 2005, of Ashland Inc. ("Ashland") is being filed to
include properly dated Exhibits 31.1, 31.2 and 32. The remaining portions
of the Form 10-Q as originally filed are set forth in their entirety.
2
PART I - FINANCIAL INFORMATION
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
------------------------
(In millions except per share data) 2005 2004
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REVENUES
Sales and operating revenues $ 2,412 $ 2,177
Equity income 2 146
Other income 15 17
---------- -----------
2,429 2,340
COSTS AND EXPENSES
Cost of sales and operating expenses 2,029 1,849
Selling, general and administrative expenses 305 311
---------- -----------
2,334 2,160
---------- -----------
OPERATING INCOME 95 180
Gain on the MAP Transaction (a) 2 -
Loss on early retirement of debt - (2)
Net interest and other financial costs 10 (29)
---------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 107 149
Income taxes (40) (55)
---------- -----------
INCOME FROM CONTINUING OPERATIONS 67 94
Results from discontinued operations (net of income taxes) (1) -
---------- -----------
NET INCOME $ 66 $ 94
========== ===========
BASIC EARNINGS PER SHARE - Note F
Income from continuing operations $ .92 $ 1.30
Results from discontinued operations - -
---------- -----------
Net income $ .92 $ 1.30
========== ===========
DILUTED EARNINGS PER SHARE - Note F
Income from continuing operations $ .91 $ 1.28
Results from discontinued operations - -
---------- -----------
Net income $ .91 $ 1.28
========== ===========
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.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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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) 2005 2005 2004
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ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 601 $ 985 $ 146
Available-for-sale securities 479 403 -
Accounts receivable 1,559 1,642 1,252
Allowance for doubtful accounts (45) (43) (40)
Inventories - Note D 582 527 538
Deferred income taxes 78 122 95
Other current assets 156 121 106
-------------- -------------- --------------
3,410 3,757 2,097
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) - - 2,856
Goodwill and other intangibles 643 650 624
Asbestos insurance receivable (noncurrent portion) 363 370 396
Deferred income taxes 164 175 -
Other noncurrent assets 499 441 313
-------------- -------------- --------------
1,669 1,636 4,189
PROPERTY, PLANT AND EQUIPMENT
Cost 3,254 3,274 3,166
Accumulated depreciation, depletion and amortization (1,851) (1,852) (1,889)
-------------- -------------- --------------
1,403 1,422 1,277
-------------- -------------- --------------
$ 6,482 $ 6,815 $ 7,563
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 12 $ 12 $ 575
Trade and other payables 1,228 1,520 1,197
Income taxes 2 13 69
-------------- -------------- --------------
1,242 1,545 1,841
NONCURRENT LIABILITIES
Long-term debt (less current portion) 77 82 1,087
Employee benefit obligations 394 358 438
Deferred income taxes - - 248
Reserves of captive insurance companies 183 182 177
Asbestos litigation reserve (noncurrent portion) 512 521 553
Other long-term liabilities and deferred credits 388 388 375
-------------- -------------- --------------
1,554 1,531 2,878
STOCKHOLDERS' EQUITY 3,686 3,739 2,844
-------------- -------------- --------------
$ 6,482 $ 6,815 $ 7,563
============== ============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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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) stock capital earnings loss Total
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BALANCE AT SEPTEMBER 30, 2004 $ 72 $ 478 $ 2,262 $ (106) $ 2,706
Total comprehensive income (a) 94 39 133
Cash dividends (20) (20)
Issued 505,385 common shares under
stock incentive and other plans 25 25
------------- ------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 2004 $ 72 $ 503 $ 2,336 $ (67) $ 2,844
============= ============= ============== ============= ==============
BALANCE AT SEPTEMBER 30, 2005 $ 1 $ 605 $ 3,251 $ (118) $ 3,739
Total comprehensive income (a) 66 (12) 54
Cash dividends (20) (20)
Issued 164,203 common shares under
stock incentive and other plans 9 9
Repurchase of 1,764,730 common shares (96) (96)
------------- ------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 2005 $ 1 $ 518 $ 3,297 $ (130) $ 3,686
============= ============= ============== ============= ==============
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(a) Reconciliations of net income to total comprehensive income follow.
Three months ended
December 31
----------------------------
(In millions) 2005 2004
-------------------------------------------------------------------------------------------------------------------
Net income $ 66 $ 94
Unrealized translation adjustments (11) 35
Related tax benefits - 2
Net unrealized gains (losses) on cash flow hedges (1) 2
------------- --------------
Total comprehensive income $ 54 $ 133
============= ==============
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At December 31, 2005, the accumulated other comprehensive loss of $130
million (after tax) was comprised of net unrealized translation gains
of $31 million, a minimum pension liability of $160 million and net
unrealized losses on cash flow hedges of $1 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Three months ended
December 31
-----------------------
(In millions) 2005 2004
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CASH FLOWS FROM OPERATIONS
Income from continuing operations $ 67 $ 94
Adjustments to reconcile to cash flows from operations
Depreciation, depletion and amortization 51 46
Deferred income taxes 54 17
Equity income from affiliates (2) (146)
Distributions from equity affiliates 1 1
Change in operating assets and liabilities (a) (312) (70)
Other items (3) 2
---------- ----------
(144) (56)
CASH FLOWS FROM FINANCING
Proceeds from issuance of common stock 4 20
Excess tax benefits related to share-based payments 1 2
Repayment of long-term debt (5) (98)
Repurchase of common stock (96) -
Increase in short-term debt - 211
Cash dividends paid (20) (20)
---------- ----------
(116) 115
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (50) (55)
Purchase of operations - net of cash acquired - (95)
Purchases of available-for-sale securities (227) -
Proceeds from sales and maturities of available-for-sale securities 152 -
Other - net 3 2
---------- ----------
(122) (148)
---------- ----------
CASH USED BY CONTINUING OPERATIONS (382) (89)
Cash used by discontinued operations (2) (8)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (384) (97)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 985 243
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 601 $ 146
========== ==========
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(a) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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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. Although such
statements are subject to any year-end audit adjustments which may
be necessary, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form
10-K for the fiscal year ended September 30, 2005. Results of
operations for the period ended December 31, 2005, are not
necessarily indicative of results to be expected for the year
ending September 30, 2006. Certain prior period data has been
reclassified in the consolidated financial statements and
accompanying footnotes to conform to 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, environmental remediation, and income
recognized under construction contracts. 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 STANDARD
In December 2004, the Financial Accounting Standards Board issued
Statement No. 123R (FAS 123R), which revised FAS 123, "Accounting
for Stock-Based Compensation," by requiring the expensing of
share-based compensation based on the grant-date fair value of the
award. FAS 123 had provided companies the option of expensing such
awards or merely disclosing the pro forma effects of such
expensing in the notes to financial statements. As of October 1,
2002, Ashland began expensing employee stock options in accordance
with FAS 123 and its related amendments. Ashland elected the
modified prospective method of adoption, under which compensation
costs recorded in the year ended September 30, 2003 were the same
as that which would have been recorded had the recognition
provisions of FAS 123 been applied from its original effective
date. Results for prior periods were not restated. FAS 123R also
required an additional caption in the financing section of the
Statements of Consolidated Cash Flows to present separately the
excess tax benefits related to share based-payments. The adoption
of FAS 123R during the December 2005 quarter did not have a
material effect on Ashland's financial position, results of
operations or cash flows.
NOTE C - 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.
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE D - 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 balance sheet
dates.
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December 31 September 30 December 31
(In millions) 2005 2005 2004
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Chemicals and plastics $ 497 $ 429 $ 449
Construction materials 75 80 69
Lubricants 88 68 69
Other products 55 67 53
Supplies 9 9 6
Excess of replacement costs over LIFO carrying values (142) (126) (108)
-------------- -------------- --------------
$ 582 $ 527 $ 538
============== ============== ==============
NOTE E - UNCONSOLIDATED AFFILIATES
On June 30, 2005, Ashland completed the transfer of its 38%
interest in MAP as well as its maleic anhydride business and 60
Valvoline Instant Oil Change centers in Michigan and northwest
Ohio to Marathon in a transaction valued at approximately $3.7
billion (the "MAP Transaction"). For further detailed information
on this transaction see Note D of Notes to Consolidated Financial
Statements in Ashland's Annual Report on Form 10-K for the fiscal
year ended September 30, 2005. Separate financial statements for
MAP required by Rule 3-09 of Regulation S-X will be filed as an
amendment to Ashland's Annual Report on Form 10-K within 90 days
after the end of MAP's fiscal year, which ended December 31, 2005.
Unaudited income statement information for MAP during the period
of ownership is shown below.
MAP was organized as a limited liability company that had elected
to be taxed as a partnership. Therefore, the parents were
responsible for income taxes applicable to their share of MAP's
taxable income. The net income reflected below for MAP did not
include any provision for income taxes that would have been
incurred by its parents.
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Three months ended
December 31
------------------------
(In millions) 2005 2004
-------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ - $ 12,516
Income from operations - 380
Net income - 386
Ashland's equity income - 142
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE F - EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (EPS).
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Three months ended
December 31
------------------------
(In millions except per share data) 2005 2004
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Numerator
Numerator for basic and diluted EPS - Income
from continuing operations $ 67 $ 94
=========== ==========
Denominator
Denominator for basic EPS - Weighted average
common shares outstanding 72 72
Common shares issuable upon exercise of stock options 1 1
----------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 73 73
=========== ==========
Earnings per share
Basic $ .92 $ 1.30
Diluted $ .91 $ 1.28
NOTE G - EMPLOYEE BENEFIT PLANS
Presently, Ashland anticipates contributing $126 million to its
U.S. pension plans and $6 million to its non-U.S. pension plans
during fiscal 2006. As of December 31, 2005, contributions of $75
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.
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Other postretirement
Pension benefits benefits
------------------------- -------------------------
(In millions) 2005 2004 2005 2004
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Three months ended December 31
Service cost $ 15 $ 13 $ 2 $ 2
Interest cost 21 20 3 5
Expected return on plan assets (25) (19) - -
Amortization of prior service credit - - (2) (2)
Amortization of net actuarial loss 10 8 - 1
---------- ----------- ----------- -----------
$ 21 $ 22 $ 3 $ 6
========== =========== =========== ===========
NOTE H - 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.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE H - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
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.
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Three months ended
December 31 Years ended September 30
--------------------------- ------------------------------------------
(In thousands) 2005 2004 2005 2004 2003
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Open claims - beginning of period 184 196 196 198 160
New claims filed 2 3 12 29 66
Claims settled (1) (3) (6) (7) (7)
Claims dismissed (4) (6) (18) (24) (21)
----------- ----------- ----------- ----------- -----------
Open claims - end of period 181 190 184 196 198
=========== =========== =========== =========== ===========
Since October 1, 2002, Riley has been dismissed as a defendant in
76% of the resolved claims. Amounts spent on litigation defense
and claim settlements averaged $1,961 per claim resolved in the
three months ended December 31, 2005, compared to $1,723 in the
three months ended December 31, 2004, and annual averages of
$1,985 in 2005, $1,655 in 2004 and $1,610 in 2003. A progression
of activity in the asbestos reserve is presented in the following
table.
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Three months ended
December 31 Years ended September 30
--------------------------- -------------------------------------------
(In millions) 2005 2004 2005 2004 2003
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Asbestos reserve - beginning of period $ 571 $ 618 $ 618 $ 610 $ 202
Expense incurred - - - 59 453
Amounts paid (9) (15) (47) (51) (45)
----------- ----------- ----------- ----------- ------------
Asbestos reserve - end of period $ 562 $ 603 $ 571 $ 618 $ 610
=========== =========== =========== =========== ============
During the December 2002 quarter, Ashland increased its reserve
for asbestos claims by $390 million to cover the litigation
defense and claim settlement costs for probable and reasonably
estimable future payments related to existing open claims, as well
as an estimate of those that may be filed in the future. Prior to
December 31, 2002, the asbestos reserve was based on the estimated
costs that would be incurred to settle existing open claims. A
range of estimates of future asbestos claims and related costs
using various assumptions was developed with the assistance of
Hamilton, Rabinovitz & Alschuler, Inc. (HR&A). The methodology
used by HR&A to project future asbestos costs was based largely on
Ashland's recent experience, including claim-filing and settlement
rates, disease mix, open claims, and litigation defense and claim
settlement costs. Ashland's claim experience was 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 estimated 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 recorded the amount it
believed to be the best estimate, which represented the expected
payments for litigation defense and claim settlement costs during
the next ten years. Subsequent updates to this estimate have been
made, with the assistance of HR&A, based on a combination of a
number of factors including the actual volume of new claims,
recent settlement costs, changes in the mix of alleged disease,
enacted legislative changes and other developments impacting
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE H - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
Ashland's estimate of future payments. Ashland's reserve for
asbestos claims on an undiscounted basis amounted to $562 million
at December 31, 2005, compared to $571 million at September 30,
2005 and $603 million at December 31, 2004.
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 that assumes
a run-out of claims through 2056. 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. The total future litigation defense and
claim settlement costs on an undiscounted basis has been estimated
within a reasonably possible range of $400 million to $1.9
billion, depending on the number of years those costs extend and
other combinations of assumptions selected. 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's management has estimated the value of reasonably
possible 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 is a disagreement with these
companies over the timing of recoveries. The resolution of this
disagreement could have a material effect on the value of
insurance recoveries from those companies. In estimating the value
of future recoveries, Ashland has 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. Ashland will
continue to apply this methodology until such time as the
disagreement is resolved. On July 21, 2004, Ashland filed a demand
for arbitration to resolve the dispute concerning the
interpretation of this agreement.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE H - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
At December 31, 2005, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers
amounted to $393 million, of which $65 million relates to costs
previously paid. Receivables from insurance companies amounted to
$400 million at September 30, 2005 and $432 million at December
31, 2004. About 40% of the estimated receivables from insurance
companies at December 31, 2005 are expected to be due from Equitas
and other London companies. Of the remainder, approximately 90% is
expected to come from companies or groups that are rated A or
higher by A. M. Best.
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, 2005, such
locations included 97 waste treatment or disposal sites where
Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, 96 current and former
operating facilities (including certain operating facilities
conveyed to MAP) and about 1,220 service station properties, of
which 214 are being actively remediated. Ashland's reserves for
environmental remediation amounted to $179 million at December 31,
2005, compared to $178 million at September 30, 2005 and $155
million at December 31, 2004, of which $147 million at December
31, 2005, $145 million at September 30, 2005 and $123 million at
December 31, 2004 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.
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. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation
expense amounted to $8 million for the three months ended December
31, 2005, compared to $7 million for the three months ended
December 31, 2004, and annual expense of $47 million in 2005, $2
million in 2004 and $22 million in 2003.
No individual remediation location is material to Ashland, as its
largest reserve for any site is less than 10% of the remediation
reserve. As a result, Ashland's exposure to adverse developments
with respect to any individual site is not expected to be
material, and these sites are in various stages of ongoing
remediation. Although environmental remediation could have a
material effect on results of operations if a series of adverse
developments occurs in a particular quarter or fiscal year,
Ashland believes that the chance of such developments occurring in
the same quarter or fiscal year is remote.
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.
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
-------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
------------------------
(In millions) 2005 2004
-------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
APAC $ 726 $ 611
Ashland Distribution 967 895
Ashland Specialty Chemical 449 400
Valvoline 310 309
Intersegment sales
Ashland Distribution (6) (6)
Ashland Specialty Chemical (33) (32)
Valvoline (1) -
---------- -----------
2,412 2,177
Equity income
APAC - 2
Ashland Specialty Chemical 2 2
Refining and Marketing - 142
---------- -----------
2 146
Other income
APAC 7 1
Ashland Distribution 1 2
Ashland Specialty Chemical 2 9
Valvoline 3 2
Refining and Marketing - 2
Unallocated and other 2 1
---------- -----------
15 17
---------- -----------
$ 2,429 $ 2,340
========== ===========
OPERATING INCOME (a)
APAC $ 39 $ 4
Ashland Distribution 34 20
Ashland Specialty Chemical 27 16
Valvoline 1 13
Refining and Marketing (b) - 136
Unallocated and other (6) (9)
---------- -----------
$ 95 $ 180
========== ===========
-------------------------------------------------------------------------------------------------------------------------
(a) In October 2005, Ashland refined its segment reporting to allocate
substantially all corporate expenses to Ashland's four operating
divisions, with the exception of certain legacy costs or items clearly
not associated with the operating divisions. Prior periods have been
conformed to the current period presentation.
(b) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP and other activities associated
with refining and marketing through June 30, 2005.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
--------------------------
(In millions) 2005 2004
------------------------------------------------------------------------------------------------------------------------------
OPERATING INFORMATION
APAC
Construction backlog at December 31 (a) $ 1,941 $ 1,730
Net construction job revenues (b) $ 423 $ 344
Hot-mix asphalt production (tons) 7.8 7.8
Aggregate production (tons) 8.1 7.8
Ashland Distribution (c)
Sales per shipping day $ 15.9 $ 14.4
Gross profit as a percent of sales 10.2% 9.6%
Ashland Specialty Chemical (c)
Sales per shipping day $ 7.4 $ 6.4
Gross profit as a percent of sales 27.4% 24.2%
Valvoline
Lubricant sales (gallons) 38.5 41.1
Premium lubricants (percent of U.S. branded volumes) 22.9% 21.8%
------------------------------------------------------------------------------------------------------------------------------
(a) Includes APAC's proportionate share of the backlog of unconsolidated
joint ventures.
(b) Total construction job revenues, less subcontract costs.
(c) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Ashland reported net income of $66 million for the quarter ended
December 31, 2005, compared to $94 million for the quarter ended
December 31, 2004. The comparison is affected by the June 2005
transfer of Ashland's former 38-percent interest in Marathon
Ashland Petroleum LLC (MAP) to Marathon Oil Corporation
(Marathon), the retirement of most of Ashland's debt and the
investment of the remaining proceeds. Net income in the 2004
quarter included $83 million of net income from the former
Refining and Marketing segment (which consisted primarily of
Ashland's equity income from MAP), as well as net, after-tax
interest expense of $18 million, for a net benefit of $65 million.
The 2005 quarter included $6 million of net, after-tax interest
income.
Three of Ashland's four businesses performed well during the
December 2005 quarter. The continued excellent performances of
Ashland Specialty Chemical and Ashland Distribution drove results
in the Chemical Sector. These businesses increased revenues and
expanded their profit margins in an environment of rising costs.
The quarter was disappointing for Valvoline, however, as declining
demand in the motor oil market, rising raw materials costs and
competitive price discounting adversely affected results. The
Transportation Construction Sector, commercially known as Ashland
Paving And Construction, Inc. (APAC), benefited from margin
improvement due to its efforts to incorporate higher material
values and energy costs into its bids, as well as more favorable
weather conditions in the quarter. An analysis of operating income
by industry segment follows.
Segment operating results reflect new methodology adopted in
October 2005 for allocating substantially all corporate expenses
to Ashland's four operating businesses, with the exception of
certain legacy costs or items clearly not associated with the
operating divisions. Accordingly, an additional $21 million was
allocated to the divisions for the December 2005 quarter. The
remaining $6 million expense is classified as "Unallocated and
other" in Ashland's segment reporting. Results for previously
reported periods have been reclassified to conform with the new
allocation methodology.
APAC
APAC reported operating income of $39 million for the December
2005 quarter, compared to $4 million for the December 2004
quarter. Results for the December 2005 quarter reflect APAC's
continuing focus on incorporating increases in raw material and
energy costs into its sales prices and more favorable weather
conditions. Results for the December 2005 quarter also included a
$10 million gain from the transfer of property subject to eminent
domain, as well as a $4 million loss on fuel hedges. APAC reported
sales and operating revenues of $726 million in the December 2005
quarter, a 19% increase over the $611 million recorded in the
December 2004 quarter. Net construction job revenues (total
construction job revenues, less subcontract costs) increased 23%.
Hot-mix asphalt production was even at 7.8 million tons, while
aggregate production increased 4% to 8.1 million tons. Margin
improvement reflected the efforts to incorporate higher
construction material values and energy costs into APAC's bids. In
addition, APAC continued to roll off older, fixed-price contracts
which contained substantially lower energy and raw material
estimated costs. While national weather data showed rainfall was
average for the December 2005 quarter, the precipitation patterns
were favorable for APAC, with rain occurring later in the quarter,
providing more dry, temperate days for production. At December 31,
2005, APAC's construction backlog, which consists of work awarded
and funded but not yet performed, was $1.9 billion, up 12% over
the same period last year.
15
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
ASHLAND DISTRIBUTION
Ashland Distribution achieved its eighth consecutive record
quarter, with operating income of $34 million in the December 2005
quarter, up 70% over the $20 million reported for the December
2004 quarter. Sales and operating revenues increased to $967
million, an 8% increase over the December 2004 quarter. The
division's performance reflects its ability to expand margins
despite rising costs of chemicals and plastics, by increasing
prices and managing expenses. Gross profit as a percent of sales
increased from 9.6% to 10.2%. Daily sales volume declined 4%, a
result of the sale of the ingestibles business in the March 2005
quarter and supply disruptions from hurricanes Katrina and Rita.
ASHLAND SPECIALTY CHEMICAL
Ashland Specialty Chemical achieved record operating income for
the December 2005 quarter of $27 million, up 69% over the $16
million reported in the prior-year quarter. The December 2004
quarter included approximately $4 million in net nonrecurring
gains, primarily from the termination of a product supply
contract. Sales and operating revenues grew to $449 million for
the December 2005 quarter, a 12% increase over the December 2004
quarter. Sales from the DERAKANE(R) resins business acquired in
December 2004 contributed approximately half of the growth, with
the remainder mainly attributable to higher selling prices. The
increase in operating income reflected a combination of revenue
and margin growth. Gross profit as a percent of sales increased
from 24.2% to 27.4%. Operating income from Composite Polymers, the
largest of the three Performance Materials business groups,
increased four-fold versus the year-ago quarter, while Casting
Solutions and Specialty Polymers and Adhesives, combined to
achieve a 26% increase in operating income. The Water Technologies
business reported weaker profits for the quarter, due in large
part to its investment in growth initiatives.
VALVOLINE
Valvoline reported operating income of $1 million in the December
2005 quarter, compared to $13 million in the December 2004
quarter. Declining demand in the motor oil market, rising raw
materials costs and competitive pricing adversely affected results
for Valvoline. Valvoline's lubricant sales volumes declined 6%,
reflecting a decline in demand for U.S. passenger-car motor oil
across the lubricant market. Higher energy prices, combined with
higher absolute product costs, have had a dampening effect on
consumers' spending for automotive preventive maintenance. The
rapid increase in material costs eroded Valvoline's margins due to
the lag in passing price increases into the marketplace.
Valvoline's ability to capture its full costs was hampered by the
competitive environment. Sales and operating revenues were $310
million for the quarter, essentially even with $309 million of
revenues in the December 2004 quarter.
REFINING AND MARKETING
On June 30, 2005, Ashland completed the transfer of its 38%
interest in MAP as well as its maleic anhydride business and 60
Valvoline Instant Oil Change centers in Michigan and northwest
Ohio to Marathon in a transaction valued at approximately $3.7
billion (the "MAP Transaction"). For further detailed information
on this transaction see Note D of Notes to Consolidated Financial
Statements in Ashland's Annual Report on Form 10-K for the fiscal
year ended September 30, 2005. Operating income from Refining and
Marketing, which consisted primarily of equity income from MAP,
amounted to $136 million for the December 2004 quarter.
16
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
UNALLOCATED AND OTHER
Unallocated and other costs, consisting of certain legacy costs or
items clearly not associated with the operating divisions,
amounted to $6 million in the December 2005 quarter, compared to
$9 million in the December 2004 quarter. The December 2005 quarter
included a $3 million increase in environmental remediation
reserves (net of estimated insurance recoveries) related to a
formerly-owned business. The December 2004 quarter included a $7
million charge for estimated future insurance premiums due Oil
Insurance Limited (OIL), the energy-industry mutual insurance
consortium in which Ashland participated. Ashland terminated its
participation in OIL effective December 31, 2005.
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 D in Ashland's
Annual Report on Form 10-K for the fiscal year ended September 30,
2005, for further explanation of this receivable.
LOSS ON EARLY RETIREMENT OF DEBT
In the December 2004 quarter, Ashland recorded a loss of $2
million on the early retirement of a capitalized lease obligation.
NET INTEREST AND OTHER FINANCIAL COSTS
Net interest and other financial costs amounted to income of $10
million in the December 2005 quarter, compared to expense of $29
million in the December 2004 quarter. The comparison reflects the
retirement of most of Ashland's debt from the proceeds of the MAP
Transaction in June 2005 and the investment of the remaining
proceeds in short-term, available-for-sale securities.
INCOME TAXES
Ashland's effective income tax rate of 37.4% for the December 2005
quarter was comparable to the effective rate of 36.9% for the
December 2004 quarter. The interim rate is reflective of Ashland's
estimated effective rate for the entire fiscal year.
DISCONTINUED OPERATIONS
Results of discontinued operations for the December 2005 quarter
included minor unreserved expenses of $1 million (net of income
taxes) associated with asbestos liabilities.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity,
amounted to a deficit of $144 million for the three months ended
December 31, 2005, compared to a deficit of $56 million for the
three months ended December 31, 2004. The deficit in the December
2005 quarter reflects a $312 million cash outflow resulting from a
net increase in operating assets and liabilities. The largest
component of this change was a $292 million decrease in trade and
other payables, which reflects a $75 million contribution to
Ashland's
17
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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LIQUIDITY (CONTINUED)
pension plan and a 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 2004 quarter had a
similar seasonal decline in accounts payable.
Ashland's financial position has enabled it to obtain capital for
its financing needs. 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 September 2005, Standard & Poor's lowered
Ashland's senior debt rating from BBB to BBB-, its lowest
investment grade rating, and lowered Ashland's commercial paper
rating from A-2 to A-3. Ratings downgrades below investment grade
can significantly increase a company's borrowing costs. 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 $103 million of
letters of credit outstanding at December 31, 2005. While the
revolving credit agreement contains a covenant limiting new
borrowings based on Ashland's stockholders' equity, the agreement
would have permitted an additional $5.4 billion of borrowings at
December 31, 2005. Additional permissible borrowings are increased
(decreased) by 150% of any increase (decrease) in stockholders'
equity.
At December 31, 2005, working capital (excluding debt due within
one year) amounted to $2,158 million, compared to $2,224 million
at September 30, 2005 and $831 million at December 31, 2004.
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 $142 million at December 31,
2005, compared to $126 million at September 30, 2005 and $108
million at December 31, 2004. Liquid assets (cash, cash
equivalents, available-for-sale securities and accounts
receivable) amounted to 209% of current liabilities at December
31, 2005, compared to 193% at September 30, 2005 and 74% at
December 31, 2004. The increases in liquidity since December 2004
reflect the cash proceeds from the MAP Transaction net of debt
retirements.
CAPITAL RESOURCES
On July 21, 2005, Ashland's Board of Directors authorized the
purchase of $270 million of Ashland common stock in the open
market. During the December 2005 quarter, Ashland repurchased 1.8
million shares for $96 million. Through December 31, 2005, Ashland
had repurchased 3.5 million shares at a cost of $196 million. On
January 25, 2006, Ashland's Board of Directors increased the
remaining authorization to $250 million, an increase of $176
million.
For the three months ended December 31, 2005, property additions
amounted to $50 million, compared to $55 million for the same
period last year. Ashland anticipates meeting its remaining 2006
capital requirements for property additions and dividends from
internally generated funds.
Ashland's debt level amounted to $89 million at December 31, 2005,
compared to $94 million at September 30, 2005, and $1.66 billion
at December 31, 2004. Debt as a percent of capital employed
amounted to 2.4% at December 31, 2005, compared to 2.5% at
September 30, 2005, and 36.9% at December 31, 2004. The decline
from December 31, 2004 reflects the retirement of most of
Ashland's debt with the proceeds from the MAP Transaction.
18
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
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, 2005. For a discussion of Ashland's asbestos-related
litigation and environmental remediation matters, see Note H to
the Condensed Consolidated Financial Statements.
OUTLOOK
APAC continues to implement its five-part improvement program. It
is making progress on capturing margin on materials, whether
through third-party sales or through intra-company sales to its
own construction services. A variety of ongoing programs are
improving the bidding and estimating process. APAC continues to
manage hydrocarbon exposure through a risk-analysis-driven hedging
program. Further, APAC continually strives to be a low-cost
competitor in its markets. As older, less profitable jobs roll
off, they are being replaced by contracts with better margins.
Approximately 73% of the current backlog has been awarded since
October 1, 2004. However, APAC typically operates at a loss during
the second quarter of the fiscal year--the winter quarter.
Excluding any unusual and unexpected events, a loss is expected
for the March 2006 quarter. The extent of the loss should be
primarily determined by the level of operations, especially in
March.
APAC continues to evaluate its operations market by market. In
January, APAC sold its Richmond, Virginia, and Shawnee, Oklahoma,
market areas and will report a small book gain in the March
quarter. Both of these businesses were unprofitable in 2005.
APAC's so-called "fix or exit" team's analysis of 75 markets will
be completed in the March 2006 quarter. While no other decisions
have been made, APAC is likely to exit several more markets this
year.
In the Chemical Sector, Ashland continues to make good progress on
its GlobalOne enterprise resource planning (ERP) system. Ashland's
Canadian operations are running under this system, and key
learnings from the "go live" in Canada are being applied to the
implementation in the United States and Mexico now planned for the
December 2006 quarter. The scope of GlobalOne is being expanded to
include new, additional functionalities in customer management and
pricing management. Because of this additional functionality, the
total cost of the project is expected to increase by approximately
$25 million, bringing the total planned expenditures for GlobalOne
to $115 million.
Both Ashland Distribution and Ashland Specialty Chemical's
profitability is a function of economic growth and their ability
to manage material cost increases. Ashland Distribution and the
Performance Materials business of Ashland Specialty Chemical
continue to focus on passing through rising costs and managing
expenses. In contrast, the Water Technologies business is focusing
on growth, not near-term profits. Sales engineers are being hired
and trained to sell Ashland's innovative Sonoxide ultrasound
technology and PathGuard pathogen control systems. As of December
31, there were 390 Sonoxide and more than 80 PathGuard units in
place around the world.
The market conditions that led to Valvoline's poor performance in
the December quarter continue. While Ashland is optimistic about
Valvoline's long-term prospects, profitability recovery is
unlikely to occur in the March quarter. Gradual improvement should
materialize in the latter half of this fiscal year moving into the
prime car-care months as marketing and pricing programs begin to
take effect.
19
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
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, 2005. Ashland undertakes no
obligation to subsequently update or revise these forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland's market risk exposure at December 31, 2005 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, 2005.
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) 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.
20
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
51,600 active lawsuits pending as of December 31, 2005. In these active
lawsuits, less than 0.3% 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;
approximately 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 H of "Notes to Condensed Consolidated
Financial Statements" in this quarterly report on Form 10-Q/A.
U.S. Department of Justice ("USDOJ") Antitrust Division Investigation
- In November 2003, Ashland received a subpoena from the USDOJ relating to
a foundry resins grand jury investigation. Ashland received a letter dated
January 18, 2006 from USDOJ advising it that this investigation has now
been closed. As is frequently the case when such investigations have been
initiated, a number of civil actions have been filed in multiple
jurisdictions, most of which are seeking class action status for classes of
customers of foundry resins. These cases have been consolidated for
pretrial purposes in the United States District Court, Southern District of
Ohio. Ashland will vigorously defend the actions.
Environmental Proceedings - (1) 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, 2005, Ashland had been named
a PRP at 97 waste treatment or disposal sites. These sites are currently
subject to ongoing investigation and remedial activities, overseen by the
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.
(2) St. Paul Park Criminal Investigation - The United States Attorney
in Minnesota conducted a criminal investigation of the May 16, 1997 fire at
the St. Paul Park refinery. The Assistant United States Attorney ("AUSA")
in charge alleged that the refinery sewer system was subject to and not in
compliance with Subpart QQQ of the regulations under the Clean Air Act. He
further alleged that the non-compliance was the cause of the fire that
severely burned employee Randy Danielson. The AUSA has stated that he
believed there were five separate criminal violations.
On May 13, 2002, Ashland entered into a plea agreement with the United
States Attorney's Office for the District of Minnesota and the
Environmental Crimes Section of the United States Department of Justice
regarding the May 16, 1997 sewer fire at the St. Paul Park refinery. As
part of the plea agreement, Ashland entered guilty
21
pleas to two federal misdemeanors, has paid a $5.4 million fine related to
violations of the Clean Air Act, has paid approximately $3.9 million as
restitution to the employees injured in the fire and other costs, and
funded approximately $9.4 million in upgrades to the St. Paul Park
refinery. The upgrade has been completed and was finished 2 1/2 years
earlier than required by the Court. In addition, as part of the plea
agreement, Ashland entered into a deferred prosecution agreement with
regard to a separate count charging Ashland with violating Subpart QQQ of
the New Source Performance Standards of the Clean Air Act. Ashland
satisfied the terms and conditions of the deferred prosecution agreement so
that the deferred prosecution was dismissed by the court on February 22,
2005. Ashland has paid the majority of the costs and has a reserve of $0.5
million to cover the remaining costs. Ashland was placed on five years
probation from December 23, 2002. On December 15, 2005, Ashland filed a
motion for Order for Early Release from Probation. On December 30, 2005,
the Judge stated that he would sign the order releasing Ashland from
probation on June 30, 2006, assuming Ashland remains in compliance with the
terms of probation.
(3) In 1990, contamination of groundwater at Ashland's former Canton,
Ohio refinery (now owned and operated by MAP) was first identified and
reported to Ohio's Environmental Protection Agency ("OEPA"). Since that
time, Ashland has voluntarily conducted investigation and remediation
activities and regularly communicated with OEPA regarding this matter.
Ashland and the State of Ohio have exchanged Consent Order drafts and have
met to negotiate the terms of such an order. The state filed a complaint in
February 2004, but simultaneously expressed an interest in continuing
Consent Order settlement discussions. Following the filing of the
complaint, Ashland, OEPA and Ohio's Office of the Attorney General have
continued to work to finalize a Consent Order. The state has advised that
it will assess a penalty as part of the overall settlement making an
initial request for $650,000.
For additional information regarding environmental matters and
reserves, see Note H of "Notes to Condensed Consolidated Financial
Statements" in this quarterly report on Form 10-Q/A.
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, there were no material
changes from the risk factors previously disclosed in Ashland's Form 10-K
for the year ended September 30, 2005.
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 2006.
Issuer Purchases of Equity Securities (1)
Maximum number (or
approximate dollar
value) of shares
Average price Total number of shares that may yet be
paid per share, purchased as part of 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 31 250,000 $52.61 250,000 $ 157,470,148
November 1 - November 30 937,700 $53.91 937,700 $ 106,916,493
December 1 - December 31 577,030 $56.74 577,030 $ 74,174,251
---------- --------- ---------- ------------------
Total 1,764,730 $54.65 1,764,730 $ 74,174,251
(1) The stock repurchase program was originally authorized in July 2005
in the amount of $270 million. Through December 31, 2005, $196
million of Ashland shares had been repurchased under the original
authorization. On January 25, 2006, the authorization was increased
by an additional $176 million to a total of $250 million.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 26, 2006, 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) Roger W. Hale, Patrick F. Noonan and George A. Schaefer, Jr. were
elected to a three-year term as directors with the vote totals
referenced below.
Votes
---------------------------
Affirmative Withheld
------------ -----------
Roger W. Hale 65,381,428 1,163,386
Patrick F. Noonan 64,623,970 1,920,844
George A. Schaefer, Jr. 64,128,926 2,415,888
Ernest H. Drew, Mannie L. Jackson, Theodore M. Solso, Michael J.
Ward, Bernadine P. Healy, M.D., Kathleen Ligocki and James J.
O'Brien continue to serve as directors.
2) The appointment of Ernst & Young LLP as independent auditors for
fiscal year ending September 30, 2006, was ratified by a vote of
65,556,830 shares voting for, 521,902 shares voting against, and
466,082 shares abstaining.
3) The 2006 Ashland Inc. Incentive Plan was approved by a vote of
41,947,266 shares voting for, 13,719,500 shares voting against,
and 912,233 shares abstaining.
ITEM 6. EXHIBITS
(a) Exhibits
--------
10 2006 Ashland Inc. Incentive Plan.
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.
23
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: May 23, 2006 /s/ J. Marvin Quin
---------------------------------------
J. Marvin Quin
Senior Vice President and Chief Financial
Officer (on behalf of the Registrant and
as principal financial officer)
24
EXHIBIT INDEX
Exhibit
No. Description
--------- -------------------------------------------------------------
10 2006 Ashland Inc. Incentive Plan.
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.
25