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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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.
Kentucky 20-0865835
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.01 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes |X| No |_|
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
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 March 31, 2005, the aggregate market value of voting stock held by
non-affiliates of the Registrant was approximately $4,905,417,887. In
determining this amount, the Registrant has assumed that its directors and
executive officers are affiliates. Such assumption shall not be deemed
conclusive for any other purpose.
At November 30, 2005, there were 71,769,255 shares of Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement (the "Proxy
Statement") for its January 26, 2006 Annual Meeting of Shareholders are
incorporated by reference into Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................... 1
Corporate Developments....................................... 2
APAC......................................................... 2
Ashland Distribution......................................... 3
Ashland Specialty Chemical................................... 3
Valvoline.................................................... 4
Refining and Marketing....................................... 5
Miscellaneous................................................ 6
Item 1A. Risk Factors................................................... 9
Item 1B. Unresolved Staff Comments...................................... 11
Item 2. Properties..................................................... 11
Item 3. Legal Proceedings.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item X. Executive Officers of Ashland ................................. 14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 15
Item 6. Selected Financial Data........................................ 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 15
Item 8. Financial Statements and Supplementary Data.................... 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 16
Item 9A. Controls and Procedures........................................ 16
Item 9B. Other Information.............................................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant............. 16
Item 11. Executive Compensation......................................... 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............. 16
Item 13. Certain Relationships and Related Transactions................. 17
Item 14. Principal Accountant Fees and Services......................... 17
PART IV
Item 15. Exhibits and Financial Statement Schedules..................... 18
PART I
ITEM 1. BUSINESS
Ashland Inc. is a Kentucky corporation, with its principal executive
offices located at 50 E. RiverCenter Boulevard, Covington, Kentucky 41011
(Mailing Address: 50 E. RiverCenter Boulevard, P.O. Box 391, Covington,
Kentucky 41012-0391) (Telephone: (859) 815-3333). The Company was
originally organized on March 15, 2004, as New EXM Inc., an indirect
wholly-owned subsidiary of Ashland Inc. ("Old Ashland"), a Kentucky
corporation organized on October 22, 1936. On June 30, 2005, Old Ashland
transferred its 38% interest in Marathon Ashland Petroleum LLC, now known
as Marathon Petroleum Company LLC ("MAP"), a former joint venture with
Marathon Oil Corporation ("Marathon") to Marathon. As a result of this
transaction, which is described in more detail in "Item 1. Business -
Corporate Developments," the Company changed its name to "Ashland Inc." and
the existing businesses of Old Ashland, other than those transferred to
Marathon, are owned by the Company, the successor to Old Ashland through a
series of mergers. The accompanying consolidated financial statements
reflect Ashland Inc. and its subsidiaries as the continuation of the
consolidated enterprise. The terms "Ashland" and the "Company" as used
herein include Ashland Inc., its predecessors and its consolidated
subsidiaries, except where the context indicates otherwise.
Ashland's businesses are managed as two sectors: the "Chemical
Sector", comprised of the Ashland Distribution, Ashland Specialty Chemical
and Valvoline segments, and the "Transportation Construction Sector",
comprised of the APAC segment. Ashland also held a 38% interest in MAP,
which was the primary component of its refining and marketing segment
through June 30, 2005. Financial information about these segments for the
three fiscal years ended September 30, 2005, is set forth on pages F-30 and
F-31 of this annual report on Form 10-K.
APAC performs asphalt and concrete contract construction work,
including highway paving and repair, excavation and grading and bridge
construction, and produces asphaltic and ready-mix concrete, crushed stone
and other aggregate in the southern and mid-continent United States.
Ashland Distribution distributes chemicals, plastics and resins in
North America and plastics in Europe. Ashland Distribution also provides
environmental services.
Ashland Specialty Chemical is focused on two primary businesses:
performance materials and water technologies. It is a worldwide supplier of
specialty chemicals and customized services for industries including
building and construction; metal casting; packaging and converting;
chemical processing; power generation; automotive, commercial and
institutional facility management; food processing; mining; pulp and paper;
paint and coatings; merchant marine; recreational marine and
transportation.
Valvoline is a producer and marketer of premium packaged motor oil and
automotive chemicals, including appearance products, antifreeze, filters
and automotive fragrances. In addition, Valvoline is engaged in the "fast
oil change" business through outlets operating under the Valvoline Instant
Oil Change(R) name.
Ashland's Refining and Marketing operations consisted primarily of
equity income from Ashland's 38% interest in MAP, which operates seven
refineries with a total crude oil refining capacity of 948,000 barrels per
day. As described in more detail in "Item 1. Business - Corporate
Developments," Ashland transferred its 38% interest in MAP to Marathon on
June 30, 2005.
At September 30, 2005, Ashland and its consolidated subsidiaries had
approximately 20,900 employees (excluding contract employees).
Available Information - Ashland's Internet address is
http://www.ashland.com. There, Ashland makes available, free of charge, its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports as well as any
beneficial ownership reports of officers and directors filed electronically
on Forms 3, 4 and 5. All such reports will be available as soon as
reasonably practicable after Ashland electronically files such material
with, or furnishes such material to, the Securities and Exchange Commission
("SEC"). Ashland also makes available free of charge on its website, its
Corporate Governance Guidelines; Board Committee Charters; Director
Independence Standards; and its code of business conduct entitled "Business
Responsibilities of an Ashland Employee" which applies to Ashland's
directors, officers and employees. These documents are also available in
print to any shareholder who requests them. Information contained on
Ashland's website is not part of this annual report on Form 10-K and is not
incorporated by reference in this document.
CORPORATE DEVELOPMENTS
On June 30, 2005, Ashland completed its previously announced agreement
with Marathon to transfer Ashland's 38% interest in MAP and two other
businesses to Marathon in a transaction valued at approximately $3.7
billion (the "MAP Transaction"). The two other businesses were Ashland's
maleic anhydride business and 60 Valvoline Instant Oil Change centers in
Michigan and northwest Ohio.
As a result of the transaction, Old Ashland shareholders of record as
of the close of business on June 30, 2005, received .2364 Marathon shares
and one Ashland share per Old Ashland share.
Additionally, the transaction resulted in Ashland's receipt of $2,679
million in cash and MAP accounts receivable of $913 million, which totaled
$3,592 million. This amount included $518 million of cash and accounts
receivable representing 38% of MAP's deferred distribution.
APAC
The Ashland Paving And Construction, Inc. group of companies ("APAC")
is one of the nation's largest transportation construction contractors and
is a major supplier of construction materials. APAC performs construction
work, such as paving, repairing and resurfacing highways, streets,
airports, residential and commercial developments, sidewalks and driveways,
and grading and base work. In addition, it performs a number of services
such as excavation and site work for the construction of bridges, other
structures, drainage facilities and underground utilities for public and
private projects. APAC conducts its business through 25 market-focused
business units and a Major Projects Group operating in 14 southern and
mid-continent states. These business units provide construction services
and materials throughout the regions in which they operate.
APAC currently has 92 aggregate production facilities, including 41
permanent operating quarry locations; 24 ready-mix concrete plants; 227
hot-mix asphalt plants; and a fleet of over 13,000 mobile equipment units,
including construction equipment, on-highway construction support assets
and vehicles. In certain market areas, APAC is vertically integrated with
asphalt, aggregate and ready-mix operations, all complementing each other.
Raw materials and aggregate generally consist of sand, gravel,
granite, limestone and sandstone. About 30% of the aggregate produced by
APAC is used in APAC's own contract construction work and the production of
various processed construction materials. The remainder is sold to third
parties. APAC also purchases substantial quantities of raw aggregate from
other producers whose proximity to the job site renders these purchases
economically attractive. Most other materials, such as liquid asphalt,
Portland cement and reinforcing steel, are purchased from third parties.
Approximately 77% of APAC's sales and operating revenues are
construction revenues, with the remaining 23% coming from sales of
construction materials. Approximately 82% of APAC's construction revenues
are derived directly from highway and other public sector sources, with the
remaining 18% coming from industrial and commercial customers and private
developers.
Climate and weather significantly affect revenues and margins in the
construction business. Due to its location, APAC tends to enjoy a
relatively long construction season. Most of APAC's operating income is
generated during the construction period of May to October.
Total backlog at September 30, 2005, was $2,038 million, compared to
$1,746 million at September 30, 2004. APAC includes a construction project
in its backlog when a contract is awarded or a firm letter of commitment is
obtained and funding is in place. The backlog at September 30, 2005, is
considered firm, and a major portion of the backlog is expected to be
completed during fiscal 2006.
OTHER MATTERS
For information on APAC and federal, state and local statutes and
regulations governing releases into, or protection of, the environment, see
"Item 1. Business - Miscellaneous - Environmental Matters" and "Item 3.
Legal Proceedings - Environmental Proceedings" in this annual report on
Form 10-K.
2
ASHLAND DISTRIBUTION
Ashland Distribution distributes chemicals, plastics and resins in
North America and plastics in Europe. Suppliers include many of the world's
leading chemical manufacturers. Ashland Distribution specializes in
providing mixed truckloads and less-than-truckload quantities to customers
in a wide range of industries. Deliveries are facilitated through a network
of owned or leased facilities including 126 locations in North America.
Distribution of thermoplastic resins in Europe is conducted in 13 countries
primarily through 17 third-party warehouses and one owned warehouse.
Ashland Distribution operates in the following major market segments:
Chemicals - Ashland Distribution distributes specialty and industrial
chemicals, additives and solvents to industrial users in the United States,
Canada, Mexico and Puerto Rico as well as some export operations. Markets
served include the paint and coatings, personal care, inks, adhesives,
polymer, rubber, industrial and institutional compounding, automotive,
appliance and paper industries.
Plastics - Ashland Distribution offers a broad range of thermoplastic
resins and specialties to processors in the United States, Canada, Mexico
and Puerto Rico as well as some export operations. Processors include
injection molders, extruders, blow molders and rotational molders. Ashland
Distribution also provides plastic material transfer and packaging services
and less-than-truckload quantities of packaged thermoplastics.
Additionally, Ashland Distribution markets a broad range of thermoplastics
to processors in Europe via distribution centers located in Belgium,
Denmark, England, Finland, France, Germany, Ireland, Italy, the
Netherlands, Norway, Poland, Portugal, Spain and Sweden.
Composites - Ashland Distribution supplies mixed truckload and
less-than-truckload quantities of polyester thermoset resins, fiberglass
and other specialty reinforcements, catalysts and allied products to
customers in the reinforced plastics and cultured marble industries through
distribution facilities located throughout North America.
Environmental Services - Working in cooperation with chemical waste
service companies, Ashland Distribution provides customers with collection,
disposal and recycling of hazardous and non-hazardous waste streams.
Services are offered through a North American network of more than 30
distribution centers, including 10 storage facilities that have been fully
permitted by the United States Environmental Protection Agency ("USEPA").
Ashland Distribution sold its U.S. ingestibles line of business, which
included food and beverage additives and pharmaceutical actives and
excipients, in January 2005. The Canadian ingestibles business was sold in
May 2005.
OTHER MATTERS
For information on Ashland Distribution and federal, state and local
statutes and regulations governing releases into, or protection of, the
environment, see "Item 1. Business - Miscellaneous - Environmental Matters"
and "Item 3. Legal Proceedings - Environmental Proceedings" in this annual
report on Form 10-K.
ASHLAND SPECIALTY CHEMICAL
Ashland Specialty Chemical is focused on two primary businesses:
performance materials and water technologies. It is a worldwide supplier of
specialty chemicals and customized services for industries including
building and construction; metal casting; packaging and converting;
chemical processing; power generation; automotive, commercial and
institutional facility management; food processing; mining; pulp and paper;
paint and coatings; merchant marine; recreational marine and
transportation. Ashland Specialty Chemical owns and operates 38
manufacturing facilities and participates in 12 manufacturing joint
ventures in 19 countries.
PERFORMANCE MATERIALS
Composite Polymers - This business group manufactures and sells a
broad range of corrosion-resistant, fire-retardant, general-purpose and
high-performance marine grades of unsaturated polyester and vinyl ester
resins and gelcoats for the reinforced plastics industry. Key markets
include the transportation, construction and marine industries. This
business group has manufacturing plants in Jacksonville and Fort Smith,
Arkansas; Los Angeles, California; Bartow, Florida; Pittsburgh and
Philadelphia, Pennsylvania; Johnson Creek, Wisconsin; Kelowna, British
Columbia, Canada; Kunshan, China; Porvoo and Lahti, Finland; Sauveterre,
France; Miszewo, Poland; Benicarlo, Spain; and, through separate joint
ventures has manufacturing plants in Sao Paolo, Brazil and Jeddah, Saudi
Arabia. This business group also manufactures products through Ashland
Specialty Chemical facilities located
3
in Mississauga, Ontario, Canada and Changzhou, China. On December 29, 2004,
Ashland purchased Dow Chemical's DERAKANE(TM) epoxy vinyl ester resin
business (which includes the DERAKANE MOMENTUM(TM) product line) from The
Dow Chemical Company in a cash transaction valued at approximately $90
million. That business is now part of the Composite Polymers business
group. In June 2005, Composite Polymers' maleic anhydride business was
transferred to Marathon as part of the MAP Transaction previously
described.
Casting Solutions - This business group manufactures and sells metal
casting chemicals worldwide, including sand-binding resin systems,
refractory coatings, release agents, engineered sand additives and riser
sleeves. This group also provides casting process modeling, core making
process modeling and rapid prototyping services. This business group serves
the global metal casting industry from nine owned and operated
manufacturing sites located in Campinas, Brazil; Mississauga, Ontario,
Canada; Changzhou, China; Milan, Italy; Alava, Cantabria, Spain;
Kidderminster, England and Cleveland East and Cleveland West, Ohio. Casting
Solutions also has eight joint venture manufacturing facilities located in
Vienna, Austria; Pons and Le Goulet, France; Bendorf and Wuelfrath,
Germany; Ulsan, South Korea; Alvsjo, Sweden and St. Gallen, Switzerland.
Specialty Polymers and Adhesives - This business group manufactures
and sells adhesive solutions to the building and construction,
transportation and packaging and converting markets. Key technologies and
markets include: emulsion polymer isocyanate adhesives for structural wood
bonding; elastomeric polymer adhesives and butyl rubber roofing tapes for
commercial roofing applications; polyurethane and epoxy structural
adhesives for bonding fiberglass reinforced plastics, composites,
thermoplastics and metals in automotive, recreational and industrial
applications; specialty phenolic resins for paper impregnation and friction
material bonding; induction bonding systems for thermoplastic materials;
acrylic polymers for pressure-sensitive adhesives; urethane adhesives for
flexible packaging applications; and hot melt adhesives for various
packaging applications. It has manufacturing plants in Calumet City,
Illinois; Norwood and Totowa, New Jersey; Ashland and Columbus, Ohio; White
City, Oregon; and Kidderminster, England.
WATER TECHNOLOGIES
Drew Industrial - This business group provides specialized chemicals
and consulting services for the treatment of boiler water, cooling water,
steam, fuel and waste streams. It also supplies process chemicals and
technical services to the pulp and paper, food and mining industries and
additives to manufacturers of paint and latex. It conducts operations
throughout North America, Europe and the Far East and has manufacturing
plants in Kearny, New Jersey; Houston, Texas; Ajax, Ontario, Canada;
Viiala, Finland; Somercotes, England; Chester Hill, Australia; and
Singapore; and, through separate joint ventures, has production facilities
in Seoul, South Korea and Navi Mumbai, India.
Drew Marine - This business group provides technical products and
shipboard services for the world's merchant marine fleet. Comprehensive
programs include water and fuel treatment; maintenance, including
specialized cleaners, welding and refrigerant products and sealants, and
fire fighting, safety and rescue products and services.
OTHER MATTERS
For information on Ashland Specialty Chemical and federal, state and
local statutes and regulations governing releases into, or protection of,
the environment, see "Item 1. Business - Miscellaneous - Environmental
Matters" and "Item 3. Legal Proceedings - Environmental Proceedings" in
this annual report on Form 10-K.
VALVOLINE
Valvoline is a marketer of premium-branded automotive and commercial
lubricants, automotive chemicals, automotive appearance products and
automotive services, with sales in more than 100 countries. The
Valvoline(R) trademark was federally registered in 1873 and is the oldest
trademark for lubricating oil in the United States.
Valvoline markets the following key brands of products and services to
the private passenger car, light truck and heavy duty markets. Valvoline(R)
lubricants; Valvoline Professional Series(R) automotive chemicals;
EagleOne(R) automotive appearance products; AroMetrics(TM) automotive air
freshening products; Zerex(R) antifreeze; Pyroil(R) automotive chemicals;
MaxLife(R) automotive products for vehicles with 75,000 miles or more; Car
Brite(R) automotive reconditioning products; Premium Blue(R) commercial
lubricants and Valvoline Instant Oil Change(R) automotive services.
4
In North America, Valvoline is comprised of the following three core
business groups:
Do It Yourself ("DIY") - The DIY business group sells Valvoline
products to consumers who perform their own auto maintenance through retail
auto parts stores, mass merchandisers and warehouse distributors and their
affiliated jobber stores such as NAPA and Carquest.
Do It For Me ("DIFM") - The DIFM business unit sells branded products
and services to installers (such as car dealers and quick lubes) and to
auto auctions through a network of independent distributors and
company-owned and operated "direct market" operations. This business also
includes distribution to quick lubes branded "Valvoline Express Care(R),"
which consists of 383 independently owned and operated stores. The DIFM
business group also has a strategic alliance with Cummins Inc. ("Cummins")
to distribute heavy duty lubricants to the commercial market.
Valvoline Instant Oil Change(R) Chain ("VIOC")- VIOC is one of the
largest competitors in the U.S. "fast oil change" service business,
providing Valvoline with a significant presence in the DIFM segment of the
passenger car and light truck motor oil market. As of September 30, 2005,
300 company-owned and 473 franchised service centers were operating in 40
states. In June 2005, 60 company-owned VIOC locations in Michigan and
northwest Ohio were transferred to Marathon as part of the MAP Transaction
previously described. VIOC has continued its customer service innovation
through its upgraded and enhanced preventive maintenance tracking system
for consumers and fleet operators. This computer-based system maintains
service records on all customer vehicles and contains a database on most
car models, which allows service technicians to make service
recommendations based primarily on manufacturer's recommendations.
Outside North America, Valvoline is comprised of one core business
group:
Valvoline International - Valvoline International markets Valvoline
and EagleOne branded products through wholly-owned affiliates, joint
ventures, licensees and independent distributors in more than 100
countries. The profitability of the business is dispersed geographically,
with more than half of the profit coming from mature markets in Europe and
Australia. There are smaller, rapidly growing businesses in the emerging
markets of China, India and Mexico, including joint ventures with Cummins
in India and China. During 2005, Valvoline International opened its first
"fast oil change" outlet in Shanghai, China. Valvoline International
markets lubricants for consumer vehicles and heavy duty engines and
equipment and is served by company-owned plants in the United States,
Australia and the Netherlands and by toll manufacturers.
OTHER MATTERS
For information on Valvoline and federal, state and local statutes and
regulations governing releases into, or protection of, the environment, see
"Item 1. Business - Miscellaneous - Environmental Matters" and "Item 3.
Legal Proceedings - Environmental Proceedings" in this annual report on
Form 10-K.
REFINING AND MARKETING
Ashland's equity income from its Refining and Marketing operations,
which were primarily conducted by MAP and its subsidiaries, ceased as of
June 30, 2005, upon the transfer of its 38% interest in MAP to Marathon. As
described in Note D to the Consolidated Financial Statements, the
disposition of Ashland's interest in MAP does not qualify for discontinued
operations presentation in the financial statements. Because MAP qualified
for segment reporting and was presented in all segment disclosures in
accordance with applicable accounting guidance in prior periods, Ashland
will continue to include MAP's financial results through June 30, 2005, in
the Refining and Marketing segment for the year ended September 30, 2005.
For information on the transfer of Ashland's 38% interest in MAP to
Marathon, see "Item 1. Business - Corporate Developments" in this annual
report on Form 10-K.
Refining - Until June 30, 2005, the Refining and Marketing operations
included MAP's seven refineries located at Garyville, Louisiana;
Catlettsburg, Kentucky; Robinson, Illinois; Detroit, Michigan; Canton,
Ohio; Texas City, Texas; and St. Paul Park, Minnesota. These refineries had
an aggregate refining capacity of 948,000 barrels of crude oil per calendar
day (1 barrel = 42 United States gallons) and included crude oil
atmospheric and vacuum distillation, fluid catalytic cracking, catalytic
reforming, desulfurization and sulfur recovery units. In addition to
typical refinery products, including reformulated gasoline, the
Catlettsburg refinery, an ISO-9000 certified facility, manufactured base
lube oil stocks and a wide range of petrochemicals. For the period from
October 1, 2004 to June 30, 2005, 12% of MAP's base lube oil production was
purchased by Valvoline and Ashland Distribution, and 37% of MAP's
petrochemical production (excluding propylene) was purchased by Ashland
Distribution.
5
Marketing - Until June 30, 2005, the Refining and Marketing operations
included MAP's principal marketing areas for gasoline and distillates in
the Midwest, the upper Great Plains and the southeastern United States.
Gasoline and distillates were sold in 21 states. Gasoline was sold at
wholesale primarily to independent marketers, jobbers and chain retailers
who resold these products through several thousand retail outlets. MAP also
supplied more than 3,900 jobber-dealer, open-dealer and lessee-dealer
locations using the Marathon(R) and Ashland(R) brand names.
Gasoline, distillates and aviation products were also sold to
utilities, railroads, river towing companies, commercial fleet operators,
airlines and governmental agencies. About one-half of MAP's propane was
sold into the home heating markets and the balance was purchased by
industrial consumers. Propylene and petrochemicals were marketed to
customers in the chemical industry. Base lube oils, slack wax and extract
are sold throughout the United States.
Retail sales of gasoline and diesel fuel were made through MAP's
wholly-owned subsidiary, Speedway SuperAmerica LLC ("SSA"). As of June 30,
2005, SSA had over 1,600 retail outlets in 9 states in the Midwest that
sold petroleum products and convenience store merchandise primarily under
the brand names Speedway(R) and SuperAmerica(R). Several locations also
have on-premises brand-name restaurants.
Pilot Travel Centers LLC ("PTC"), a joint venture with Pilot
Corporation ("Pilot"), is the largest operator of travel centers in the
United States with approximately 255 locations in 37 states. The travel
centers offer diesel fuel, gasoline and a variety of other services
associated with such locations, including on-premises brand-name
restaurants. Pilot and MAP each own a 50% interest in PTC.
Supply and Transportation - Until June 30, 2005, the crude oil
processed in MAP's refineries was obtained from negotiated contract and
spot purchases or exchanges. For the period from October 1, 2004 to June
30, 2005, MAP's negotiated contract and spot purchases for refinery input
of crude oil produced in the United States averaged 435,900 barrels per
day, including an average of 13,400 net barrels per day acquired from
Marathon. During the same period, MAP's foreign crude oil requirements were
met largely through purchases from various foreign national oil companies,
producing companies and traders. Purchases of foreign crude oil represented
55% of MAP's crude oil requirements for the period.
MAP's ownership or interest in domestic pipeline systems in its
refining and marketing areas was significant as of June 30, 2005. As of
that date, MAP owned, leased or had an ownership interest in over 6,600
miles of pipelines in 13 states. This network transported crude oil and
refined products to and from terminals, refineries and other pipelines and
included 2,774 miles of crude oil trunk lines and 3,850 miles of refined
product lines.
OTHER MATTERS
For information on Refining and Marketing and federal, state and local
statutes and regulations governing releases into, or protection of, the
environment, see "Item 1. Business - Miscellaneous - Environmental Matters"
and "Item 3. Legal Proceedings - Environmental Proceedings" in this annual
report on Form 10-K.
MISCELLANEOUS
ENVIRONMENTAL MATTERS
Ashland has implemented a companywide environmental policy overseen by
the Environmental, Health and Safety Committee of Ashland's Board of
Directors. Ashland's Environmental, Health and Safety ("EH&S") department
has the responsibility to ensure that Ashland's operating groups worldwide
maintain environmental compliance in accordance with applicable laws and
regulations. This responsibility is carried out via training; widespread
communication of EH&S policies; information and regulatory updates;
formulation of relevant policies, procedures and work practices; design and
implementation of EH&S management systems; internal auditing by an
independent auditing group within the EH&S department; monitoring of
legislative and regulatory developments that may affect Ashland's
operations; assistance to the operating divisions in identifying compliance
issues and opportunities for voluntary actions that go beyond compliance;
and incident response planning and implementation.
Federal, state and local laws and regulations relating to the
protection of the environment have a significant impact on how Ashland
conducts its businesses. Ashland's operations outside the United States are
subject to the environmental laws of the countries in which they are
located. These laws include regulation of air emissions and water
discharges, waste handling, remediation and product
inventory/registration/regulation. New laws are being enacted and
regulations are being adopted by various regulatory agencies globally, and
the costs of compliance with
6
these new rules cannot be estimated until the manner in which they will be
implemented has been more precisely defined.
At September 30, 2005, Ashland's reserves for environmental
remediation amounted to $178 million, reflecting 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 $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 total 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.
In connection with the formation of MAP, Marathon and Ashland each
retained responsibility for certain environmental costs arising out of
their respective prior ownership and operation of the facilities
transferred to MAP (the "Transferred Assets"). In connection with Ashland's
transfer of its 38% interest in MAP to Marathon, the parties agreed that
Ashland would not be liable for environmental costs related to the
Transferred Assets incurred on or after January 1, 2004 in excess of $50
million. In certain situations, various threshold provisions apply,
eliminating or reducing Ashland's financial responsibility in connection
with the Transferred Assets until certain levels of expenditures have been
reached. In other situations, sunset provisions gradually diminish the
level of Ashland's financial responsibility over time.
Air - In the United States, the Clean Air Act (the "CAA") imposes
stringent limits on air emissions, establishes a federally mandated
operating permit program, and allows for civil and criminal enforcement
actions. Additionally, it establishes air quality attainment deadlines and
control requirements based on the severity of air pollution in a given
geographical area. Various state clean air acts implement, complement and,
in some instances, add to the requirements of the federal CAA. The
requirements of the CAA and its state counterparts have a significant
impact on the daily operation of Ashland's businesses and, in many cases,
on product formulation and other long-term business decisions. Other
countries where Ashland operates also have laws and regulations relating to
air quality. Ashland's businesses maintain numerous permits pursuant to
these clean air laws and have systems to oversee ongoing compliance
efforts.
The USEPA has begun to implement more stringent ozone and particulate
matters standards, and is requiring state and local air agencies to submit
their plans to meet the ozone and particulate matters standards by 2007 and
2008, respectively. Until the state and local air agencies determine what
strategies they will use to meet these standards, it is not possible to
estimate any potential financial impact that the revised standards may have
on Ashland's operations. Ashland has systems to oversee compliance efforts
when these standards are eventually implemented.
Water - Ashland's businesses maintain numerous discharge permits. In
the United States, such permits may be required by the National Pollutant
Discharge Elimination System of the Clean Water Act and similar state
programs. Other countries have similar laws and regulations requiring
permits and controls. Ashland's businesses have systems to maintain
compliance with these permits and control regulations.
Solid Waste - Ashland's businesses are subject to various laws around
the world relating to and establishing standards for the management of
hazardous and solid waste. In the United States, the Resource Conservation
and Recovery Act ("RCRA") applies. While many U.S. facilities are subject
to the RCRA rules governing generators of hazardous waste, certain
facilities also have hazardous waste storage permits. Ashland has
implemented systems to oversee compliance with the RCRA regulations and,
where applicable, permit conditions. In addition to regulating current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal
7
operations, the recycling of wastes and the storage of regulated substances
in underground tanks. Other countries where Ashland operates also have laws
and regulations relating to hazardous and solid waste. Ashland's businesses
have systems to oversee compliance with waste management regulations in the
jurisdictions where they operate.
Remediation - Ashland currently operates, and in the past has
operated, various facilities where, during the normal course of business,
releases of hazardous substances have occurred. Federal and state laws,
including but not limited to RCRA and various remediation laws, require
that contamination caused by such releases be assessed and, if necessary,
remediated to meet applicable standards. Laws in other jurisdictions where
Ashland operates require that contamination caused by such releases at
these sites be assessed and, if necessary, remediated to meet applicable
standards.
Product Control, Registration and Inventory - Many of Ashland's
products and operations in the United States are subject to the Toxic
Substance Control Act, the Food, Drug and Cosmetics Act, the Chemical
Diversion and Trafficking Act, the Chemical Weapons Convention and other
product-related regulations. Other countries have similar laws. Ashland's
businesses have systems to oversee compliance with these various laws and
regulations.
RESEARCH
Ashland conducts a program of research and development to invent and
improve products and processes and to improve environmental controls for
its existing facilities. It maintains research facilities in Dublin, Ohio;
Lexington, Kentucky; Boonton, New Jersey; and Atlanta, Georgia. Research
and development costs are expensed as they are incurred and totaled $45
million in fiscal 2005 ($43 million in fiscal 2004 and $36 million in
2003).
COMPETITION
In all its current operations, Ashland is subject to intense
competition both from companies in the industries in which it operates and
from products of companies in other industries.
The majority of the business for which APAC competes is obtained by
competitive bidding. There are a substantial number of competitors in the
markets in which APAC operates and, as a result, all of APAC's goods and
services are marketed under highly competitive conditions. Factors which
influence APAC's competitiveness are price, reputation for quality, the
availability of aggregate materials, the geographic location of plants and
aggregate materials, machinery and equipment, knowledge of local market
conditions and estimating abilities.
Each of Ashland Distribution's lines of business (chemicals, plastics,
composites and environmental services) competes with national, regional and
local companies throughout North America. The plastics distribution
business also competes in Europe. Competition within each line of business
is based primarily on price and reliability of supply.
Ashland Specialty Chemical's businesses compete globally in selected
niche markets, largely on the basis of technology and service. The number
of competitors in the specialty chemical business varies from product to
product, and it is not practical to identify such competitors because of
the broad range of products and markets served by those products. However,
many of Ashland Specialty Chemical's businesses hold proprietary
technology, and Ashland believes it has a leading or strong market position
in many of its specialty chemical products.
Valvoline competes in the highly competitive automotive lubricants and
consumer products car care businesses, principally through offering premium
products and services, coupled with a focused brand strategy, advertising,
sales promotion and superior distribution capabilities. Some of the major
brands of motor oils and lubricants Valvoline competes with globally are
Havoline(R), Castrol(R), Pennzoil(R) and Quaker State(R). In the "fast oil
change" business, Valvoline competes with other leading independent fast
lube chains on a national, regional or local basis as well as automobile
dealers and service stations. Important competitive factors for Valvoline
in the "fast oil change" market include Valvoline's brand recognition;
maintaining market presence through Valvoline Instant Oil Change(R) and
Valvoline Express Care(R) outlets; as well as quality of service, speed,
location, convenience and sales promotion.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K 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. Words such as "anticipates,"
"believes," "estimates," "expects," "is likely," "predicts," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. Although Ashland believes that its expectations
are based on
8
reasonable assumptions, it cannot assure that the expectations contained in
such statements will be achieved. Important factors that could cause actual
results to differ materially from those contained in such statements are
discussed under "Use of estimates, risks and uncertainties" in Note A of
"Notes to Consolidated Financial Statements" in this annual report on Form
10-K. For a discussion of other factors and risks affecting Ashland's
operations see "Item 1A. Risk Factors" in this annual report on Form 10-K.
ITEM 1A. RISK FACTORS
Set forth below are the most significant risks and uncertainties that
affect Ashland and its businesses:
ASHLAND MAY NOT BE ABLE TO SUCCESSFULLY EMPLOY THE PROCEEDS OF THE MAP
TRANSACTION IN A MANNER THAT WOULD REPLACE THE CASH FLOW AND THE VALUE
PROVIDED BY THE ASSETS THAT WERE TRANSFERRED TO MARATHON.
Ashland may not successfully identify uses for the MAP Transaction
proceeds that will generate value for Ashland and its shareholders. In
addition, those uses may not generate the cash flow previously generated by
Ashland's interest in the assets that were transferred to Marathon.
Distributions from MAP in the nine-month period ended June 30, 2005, and
the two full fiscal years prior to this fiscal year have represented a
majority of Ashland's operating cash flow. If Ashland's use of the proceeds
of the MAP Transaction does not generate cash flow in an amount equal to
the cash flow from the assets that were transferred to Marathon, this could
have an adverse impact on Ashland's valuation or long-term liquidity.
To the extent that the proceeds of the MAP Transaction are used for
future business acquisitions, the process of integrating acquired
operations into Ashland's existing operations may result in unforeseen
difficulties. Those difficulties might reduce Ashland's profitability and
delay the expected benefits of integrating any acquisition.
SEVERAL OF ASHLAND'S BUSINESSES ARE CYCLICAL IN NATURE, AND ECONOMIC
DOWNTURNS OR DECLINES IN DEMAND FOR CERTAIN DURABLE GOODS MAY REDUCE ITS
PROFITABILITY AND LIMIT ITS ABILITY TO GENERATE REVENUES.
The profitability of Ashland's businesses is susceptible to downturns
in the economy, particularly downturns in the segments of the U.S. economy
related to the purchase and sale of durable goods, including the housing,
construction, automotive and marine industries. Both overall demand for
Ashland's products and services and its profitability may decline as a
direct result of an economic recession, inflation, changes in the prices of
hydrocarbons and other raw materials, consumer confidence, interest rates
or governmental fiscal policies.
ADVERSE CHANGES IN PREVAILING CLIMATE OR WEATHER MAY NEGATIVELY AFFECT THE
PERFORMANCE OF SOME OF ASHLAND'S OPERATIONS, WHICH COULD REDUCE ASHLAND'S
RESULTS OF OPERATIONS AND PROFITABILITY.
Extreme variations from normal climatic conditions could have a
significant effect on the operating results of APAC's construction
operations. In particular, unfavorable weather conditions could delay the
completion of construction projects and may require the use of additional
resources. In addition, certain of the products sold by Valvoline are
seasonal in nature, and thus demand for those products may decline due to
significant changes in prevailing climate and weather conditions such as
floods, frozen rivers and hurricanes.
FAILURE TO SUCCESSFULLY IMPLEMENT ASHLAND'S CHEMICAL SECTOR SUPPLY CHAIN
OPTIMIZATION PROJECT COULD ADVERSELY IMPACT ASHLAND'S RESULTS OF OPERATIONS
AND CASH FLOWS.
Ashland is undergoing a major process initiative designed to optimize
the supply chain function in Ashland's Chemical Sector. By integrating the
supply chain function of the Chemical Sector's business units and creating
more efficient, customer responsive processes including source-to-pay,
plan-to-deliver and order-to-cash, Ashland can lower costs, while
increasing service levels and customer satisfaction. While extensive
planning is underway to support the optimization of the Chemical Sector's
Supply Chain, such implementations carry substantial project risk,
including the potential for business interruption and associated adverse
impacts on operating results.
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.
In 2004, Ashland initiated a multi-year ERP project that is expected
to be implemented worldwide across the Chemical Sector to achieve increased
efficiency and effectiveness in supply chain, financial and environmental,
health and safety processes. In October 2005, Ashland successfully
completed the implementation of the ERP
9
system in Canada. While extensive planning is underway to support a smooth
implementation of the ERP system worldwide, such implementations carry
substantial project risk, including the potential for business interruption
and associated adverse impacts on operating results.
ASHLAND IS RESPONSIBLE FOR, AND HAS FINANCIAL EXPOSURE TO, LIABILITIES FROM
PENDING AND THREATENED CLAIMS, INCLUDING THOSE ALLEGING PERSONAL INJURY
CAUSED BY EXPOSURE TO ASBESTOS, WHICH COULD REDUCE ASHLAND'S CASH FLOWS AND
PROFITABILITY AND COULD IMPAIR ITS FINANCIAL CONDITION.
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 matter which seek
remedies or damages, some of which are for substantial amounts. While these
actions are being contested, their outcome is not predictable.
In addition, 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 of
Ashland. Although Riley was neither a producer nor a manufacturer of
asbestos, its industrial boilers contained some asbestos-containing
components provided by other companies. As a result of the transactions,
Ashland is responsible for, and has financial exposure to, these
liabilities, which could reduce Ashland's cash flows and profitability and
impair its financial condition.
ASHLAND HAS INCURRED AND WILL INCUR SUBSTANTIAL OPERATING COSTS AND CAPITAL
EXPENDITURES AS A RESULT OF ENVIRONMENTAL AND HEALTH AND SAFETY LIABILITIES
AND REQUIREMENTS, PARTICULARLY RELATING TO ITS CHEMICAL SECTOR, WHICH COULD
REDUCE ASHLAND'S RESULTS OF OPERATIONS AND PROFITABILITY.
Ashland is subject to various U.S. and foreign laws and regulations
relating to environmental protection and worker health and safety. These
laws and regulations regulate discharges of pollutants into the air and
water, the management and disposal of hazardous substances and the cleanup
of contaminated properties. The costs of complying with these laws and
regulations can be substantial and may increase as applicable requirements
become more stringent and new rules are implemented. If Ashland violates
the requirements of these laws and regulations, it may be forced to pay
substantial fines, to complete additional costly projects, or to modify or
curtail its operations to limit contaminant emissions.
Ashland is responsible for, and has financial exposure to,
substantially all of the environmental liabilities and other liabilities of
Ashland and its subsidiaries. However, in connection with Ashland's
transfer of its 38% interest in MAP to Marathon, the parties agreed that
Ashland would not be liable for environmental costs related to the
Transferred Assets incurred on or after January 1, 2004 in excess of $50
million. Ashland has investigated and remediated a number of its current
and former properties. 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 remediation continues.
ASHLAND HAS LIMITED USE OF THE PROCEEDS FROM THE MAP TRANSACTION TO PAY
DIVIDENDS OR REPURCHASE SHARES WHICH COULD HAVE AN ADVERSE IMPACT ON
ASHLAND'S STOCK PRICE.
Ashland has made certain representations of its intent with regard to
the use of the proceeds from the MAP Transaction to the Internal Revenue
Service and to Marathon. These representations include one to the effect
that Ashland intends to comply with Internal Revenue Service Revenue
Procedure 96-30, which generally requires that (i) any share repurchase be
done in the open market and (ii) Ashland does not intend to repurchase more
than 20% of its outstanding shares. Ashland's limited use of the proceeds
from the MAP Transaction could have an adverse impact on Ashland's stock
price.
10
THE AVAILABILITY AND COSTS OF FINANCINGS MAY BE ADVERSELY IMPACTED BY THE
MAP TRANSACTION DUE TO CONCURRENT OR SUBSEQUENT REDUCTIONS IN DEBT RATINGS.
Concurrent with the closing of the MAP Transaction, Moody's Investors
Service reduced Ashland's long term debt rating to Ba1, a non-investment
grade rating. On September 22, 2005, Standard & Poor's reduced Ashland's
long term debt rating to BBB- with a negative outlook. Ashland's access to
debt markets at times may be limited due to these reduced ratings, and
Ashland is likely to incur higher costs for debt financings.
PROVISIONS OF ASHLAND'S ARTICLES OF INCORPORATION AND BY-LAWS, ITS RIGHTS
AGREEMENT AND KENTUCKY LAW COULD DETER TAKEOVER ATTEMPTS THAT SOME
SHAREHOLDERS MAY CONSIDER DESIRABLE, WHICH COULD ADVERSELY AFFECT ASHLAND'S
STOCK PRICE.
Provisions of Ashland's articles of incorporation and by-laws make
acquiring control of Ashland without the support of its Board of Directors
difficult for a third party, even if the change of control might be
beneficial to Ashland shareholders. Ashland's articles of incorporation and
by-laws contain:
- provisions relating to the classification, nomination and
removal of its directors;
- provisions limiting the right of shareholders to call special
meetings of its Board of Directors and shareholders;
- provisions regulating the ability of its shareholders to bring
matters for action at annual meetings of its shareholders; and
- the authorization given to its Board of Directors to issue and
set the terms of preferred stock.
In addition, Ashland's shareholder rights agreement could cause
extreme dilution to any person or group who attempts to acquire a
significant interest in Ashland without advance approval of its Board of
Directors. Ashland's articles of incorporation and the laws of Kentucky
impose some restrictions on mergers and other business combinations between
Ashland and any beneficial owner of 10% or more of the voting power of its
outstanding common stock. The existence of these provisions may deprive
shareholders of any opportunity to sell their shares at a premium over the
prevailing market price for Ashland common stock. The potential inability
of Ashland shareholders to obtain a control premium could adversely affect
the market price for its common stock.
ASHLAND MAY ISSUE PREFERRED STOCK WHOSE TERMS COULD ADVERSELY AFFECT THE
VOTING POWER OR VALUE OF ITS COMMON STOCK.
Ashland's articles of incorporation authorizes it to issue, without
the approval of its shareholders, one or more classes or series of
preferred stock having such preferences, powers and relative,
participating, optional and other rights, including preferences over its
common stock respecting dividends and distributions, as its Board of
Directors generally may determine. The terms of one or more classes or
series of preferred stock could adversely impact the voting power or value
of Ashland's common stock. For example, Ashland could grant holders of
preferred stock the right to elect some number of its directors in all
events or on the happening of specified events or the right to veto
specified transactions. Similarly, the repurchase or redemption rights or
liquidation preferences Ashland could assign to holders of preferred stock
could affect the residual value of its common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Ashland's corporate headquarters, which is leased, is located in
Covington, Kentucky. Principal offices of other major operations are
located in Atlanta, Georgia (APAC); Dublin, Ohio (Ashland Distribution and
Ashland Specialty Chemical); Boonton, New Jersey (Ashland Specialty
Chemical); Lexington, Kentucky (Valvoline); and Russell, Kentucky
(Administrative Services). All of these offices are leased, except for the
Russell office and two buildings in Dublin, Ohio, which are owned.
Principal manufacturing, marketing and other materially important physical
properties of Ashland and its subsidiaries are described under the
appropriate segment under "Item 1" in this annual report on Form 10-K.
Additional information concerning certain leases may be found in Note H of
"Notes to Consolidated Financial Statements" in this annual report on Form
10-K.
11
ITEM 3. 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
51,900 active lawsuits pending as of September 30, 2005. In these active
lawsuits, less than 0.2% 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 0.2% 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 "Management's Discussion and Analysis -
Application of Critical Accounting Policies - Asbestos-related litigation"
and Note O of "Notes to Consolidated Financial Statements" in this annual
report on Form 10-K.
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 has cooperated with the
USDOJ by providing all documents and access to all witnesses requested. As
is frequently the case when such investigations are in progress, a number
of civil actions have since 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 September 30, 2005, Ashland had been
named a PRP at 102 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. For additional
information regarding environmental matters and reserves, see "Management's
Discussion and Analysis - Application of Critical Accounting Policies -
Environmental remediation" and Note O of "Notes to Consolidated Financial
Statements" in this annual report on Form 10-K.
(2) On May 13, 2002, Ashland entered into a plea agreement with the
U.S. Attorney's Office for the District of Minnesota and the USDOJ
regarding a May 16, 1997, sewer fire at the St. Paul Park, Minnesota
refinery, which is now owned and operated by MAP. As part of the plea
agreement, Ashland entered guilty pleas to two misdemeanors, paid a $3.5
million fine related to violations of the CAA, paid $3.55 million as
restitution to the employees injured in the fire, and paid $200,000 as
restitution to the responding rescue units. Ashland also agreed to complete
certain upgrades to the St. Paul Park refinery's process sewers, junction
boxes and drains to meet standards
12
established by Subpart QQQ of the New Source Performance Standards of the
CAA (the "Refinery Upgrades"). The Refinery Upgrades, completed in 2004,
have been acknowledged and accepted by the appropriate agencies. As part of
the plea agreement, Ashland entered into and satisfied the terms and
conditions of a deferred prosecution agreement, and as a result the
deferred prosecution was dismissed by the court on February 22, 2005.
As part of its sentence, Ashland was placed on probation for five
years. The primary condition of probation is an obligation not to commit
future federal, state, or local crimes. If Ashland were to commit such a
crime, not only would it be subject to prosecution for that new violation,
but the government could also seek to revoke Ashland's probation. The
probation office has retained an independent environmental consultant to
review and monitor Ashland's compliance with applicable environmental
requirements and the terms and conditions of probation. The court also
included other customary terms and restrictions of probation in its
probation order.
(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 and has made an
initial request for $650,000.
Class Action Lawsuit Related to MAP Transaction - On April 8, 2005,
Shiva Singh filed a complaint in the Supreme Court of the State of New York
in New York County, individually and on behalf of others similarly
situated, against Ashland and the individual members of Ashland's Board of
Directors. The complaint also names Marathon, MAP and Credit Suisse First
Boston LLC ("CSFB") as defendants. On May 19, 2005, Ashland and the
director defendants removed the action to the United States District Court
for the Southern District of New York. The lawsuit arose out of the MAP
Transaction, which was announced on March 19, 2004, and was valued at
approximately $3 billion. The complaint alleged breach of fiduciary duties
against Ashland, its directors, Marathon and MAP as well as negligence and
breach of fiduciary duties against CSFB. The complaint also alleged aiding
and abetting breach of fiduciary duties and/or negligence against each of
the defendants.
The plaintiff sought to recover from defendants an unspecified amount
of damages. The plaintiff also sought to enjoin the proposed transaction
between Ashland and Marathon (and any related shareholder vote); to require
defendants to make a full and fair disclosure of all material facts before
completion of the transaction; and to require defendants to obtain a
current, independent fairness opinion concerning the transaction. In the
event that the proposed transaction was consummated prior to the entry of
the court's final judgment, an event that has now occurred, the plaintiff
sought to rescind the transaction as well as damages. The plaintiff also
sought reimbursement of its costs and disbursements in the action,
including reasonable fees and expenses of plaintiff's attorneys and
experts. Ashland believes the lawsuit was without merit.
On April 27, 2005, Ashland signed an amendment to its agreement to
transfer its 38% interest in MAP and two other businesses to Marathon.
Under the amended agreement, Ashland's interest in these businesses was
valued at approximately $3.7 billion (compared to $3 billion in the
original proposed transaction). As noted in "Item 1. Business - Corporate
Developments" to this annual report on Form 10-K, Ashland transferred its
38% interest in MAP and two other businesses to Marathon on June 30, 2005.
On September 20, 2005, the federal judge entered an order dismissing
plaintiff's negligence claims against CSFB and the aiding and abetting
claims against all defendants and directed the court clerk to "mark the
case closed". As of that date the action is no longer pending against
Ashland, the individual members of Ashland's Board of Directors or any
other defendant.
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.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September
30, 2005.
ITEM X. EXECUTIVE OFFICERS OF ASHLAND
The following is a list of Ashland's executive officers, their ages
and their positions and offices during the last five years (listed
alphabetically after the Chief Executive Officer as to current members of
Ashland's Executive Committee and other executive officers).
JAMES J. O'BRIEN (age 51) is Chairman of the Board, Chief Executive
Officer and Director of Ashland, and has served in such capacities since
2002. During the past five years, he has also served as President, Chief
Operating Officer, Senior Vice President and Group Operating Officer of
Ashland, and as President of Valvoline.
GARY A. CAPPELINE (age 56) is Senior Vice President of Ashland and
President and Chief Operating Officer, Chemical Sector, and has served in
such capacities since 2004. During the past five years, he has also served
as Group Operating Officer and Vice President of Ashland and President of
Ashland Specialty Chemical Company, as a chemical industry partner at Bear
Stearns Merchant Bank and as President of AlliedSignal Specialty Chemicals.
DAVID L. HAUSRATH (age 53) is Senior Vice President, General Counsel
and Secretary of Ashland and has served in such capacities since 2004, 1999
and 2004, respectively. During the past five years, he has also served as
Vice President of Ashland.
J. MARVIN QUIN (age 58) is Senior Vice President and Chief Financial
Officer of Ashland and has served in such capacities since 1992.
GARRY M. HIGDEM (age 52) was Senior Vice President of Ashland,
President and Chief Operating Officer, Transportation Construction Sector,
and President of Ashland Paving And Construction, Inc. and served in such
capacities since 2004. During the past five years, he has also served as
Vice President for Granite Construction Incorporated, Heavy Construction
Division. Mr. Higdem resigned from Ashland effective September 14, 2005.
LAMAR M. CHAMBERS (age 50) is Vice President and Controller of Ashland
and has served in such capacities since 2004. During the past five years,
he has also served as Senior Vice President - Finance & Administration of
Ashland Paving And Construction, Inc., and Auditor of Ashland.
SUSAN B. ESLER (age 44) is Vice President - Human Resources of Ashland
and has served in such capacity since 2004. During the past five years, she
has also served as Vice President - Human Resources Programs & Services,
Director of Corporate Human Resources and Manager of Executive Compensation
of Ashland.
SAMUEL J. MITCHELL (age 44) is Vice President of Ashland and President
of Valvoline and has served in such capacities since 2002. During the past
five years, he has also served as Vice President and General Manager of
Retail Business and Vice President of Marketing.
R. KIRK RANDOLPH (age 42) is Vice President of Ashland and President
of Ashland Paving And Construction, Inc., and has served in such capacities
since September 2005. During the past five years, he has also served as
Vice President - Design/Build, Vice President of Operations Support, and
Regional Vice President of Ashland Paving And Construction, Inc.
FRANK L. WATERS (age 44) is Vice President of Ashland and President of
Ashland Distribution Company and has served in such capacities since 2002.
During the past five years, he has also served as Vice President and
General Manager of Ashland Plastics - Europe.
Each executive officer is elected by the Board of Directors of Ashland
to a term of one year, or until a successor is duly elected, at the annual
meeting of the Board of Directors, except in those instances where the
officer is elected other than at an annual meeting of the Board of
Directors, in which case his or her tenure will expire at the next annual
meeting of the Board of Directors unless the officer is re-elected.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
For information relating to equity compensation plans required by Item
201(d) of Regulation S-K, see Item 12 in this annual report on Form 10-K.
See Quarterly Financial Information on page F-32 for information
relating to market price and dividends of Ashland's Common Stock.
At November 21, 2005, there were approximately 14,700 holders of
record of Ashland's Common Stock. Ashland Common Stock is listed on the New
York and Chicago stock exchanges (ticker symbol ASH) and has trading
privileges on the Boston, National (formerly Cincinnati Stock Exchange),
Pacific and Philadelphia stock exchanges.
There were no sales of unregistered securities required to be reported
under Item 701 of Regulation S-K.
The following table summarizes information regarding purchases of
Ashland Common Stock by Ashland during the fourth quarter of fiscal 2005.
Issuer Purchases of Equity Securities (1)
Maximum number
(or approximate
Total number of dollar value) of
shares purchased shares that may
Average price as part of publicly yet be purchased
Total number of paid per share, announced plans under the plans
Period shares purchased including commission or programs or programs
---------- ----------------- --------------------- ------------------- -----------------
(a) (b) (c) (d)
July 1 - July 31 18,100 $59.98 18,100 $268,914,312
August 1 - August 31 344,100 $59.35 344,100 $248,493,634
September 1 - September 30 1,406,400 $55.37 1,406,400 $170,622,063
--------- ------ --------- ------------
Total 1,768,600 $56.19 1,768,600 $170,622,063
========= ====== ========= ============
(1) On July 21, 2005, Ashland's Board of Directors authorized a share
repurchase program in an amount up to $270 million.
ITEM 6. SELECTED FINANCIAL DATA
See Five-Year Selected Financial Information on page F-33.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages M-1 through M-13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Quantitative and Qualitative Disclosures about Market Risk on page
M-13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial schedule of
Ashland presented in this annual report on Form 10-K are listed in the
index on page F-1.
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures - As of September 30, 2005,
Ashland, under the supervision and with the participation of Ashland's
management, including Ashland's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of Ashland's disclosure controls and
procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were
effective in timely alerting them to material information relating to
Ashland and its consolidated subsidiaries required to be included in
Ashland's periodic SEC filings on Forms 10-K and 10-Q.
Changes in Internal Control Over Financial Reporting - There has been
no change in Ashland's internal control over financial reporting during the
quarter ended September 30, 2005, that has materially affected, or is
reasonably likely to materially affect, Ashland's internal control over
financial reporting.
Internal Control - See Management's Report on Internal Control Over
Financial Reporting on page F-2.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear
under the captions "Election of Directors" and "Miscellaneous - Section
16(a) Beneficial Ownership Reporting Compliance" in Ashland's definitive
Proxy Statement, which will be filed with the SEC within 120 days after
September 30, 2005. See also the list of Ashland's executive officers and
related information under "Executive Officers of Ashland" in Part I - Item
X in this annual report on Form 10-K.
There is hereby incorporated by reference the information to appear
under the caption "Audit Committee Report" regarding Ashland's audit
committee financial experts, as defined under Item 401 of Regulation S-K of
the Securities Exchange Act of 1934, as amended, in Ashland's Proxy
Statement.
There is hereby incorporated by reference the information to appear
under the caption "Corporate Governance - Shareholder Nominations of
Directors" in Ashland's Proxy Statement.
There is hereby incorporated by reference the information to appear
under the caption "Corporate Governance - Governance Principles" in
Ashland's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear
under the captions "Executive Compensation," "Compensation of Directors"
and "Corporate Governance - Personnel and Compensation Committee Interlocks
and Insider Participation" in Ashland's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
There is hereby incorporated by reference the information to appear
under the captions "Ashland Common Stock Ownership of Directors and Certain
Officers of Ashland" and "Ashland Common Stock Ownership of Certain
Beneficial Owners" in Ashland's Proxy Statement.
16
The following table summarizes the equity compensation plans under
which Ashland Common Stock may be issued as of September 30, 2005. Except
as disclosed in the narrative to the table, all plans were approved by
shareholders of Ashland.
Equity Compensation Plans
Equity Compensation Plan Information
--------------------------------------------------------------------------------
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ------------------------- -------------------- --------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders.............. 3,224,516 $39.88 1,307,327 (2)
Equity compensation plans
not approved by security holders 38,076 (1) $26.99 1,000,000 (3)
----------- ------ ---------
Total................. 3,262,592 $39.72 2,307,327
========= ====== =========
(1) The Ashland Inc. Stock Option Plan for Employees of Joint Ventures was
not approved by Ashland's shareholders. This plan was approved by
Ashland's Board of Directors on September 17, 1998, and was
specifically designed to grant stock options and/or SARs to employees
of joint ventures in which Ashland has an interest. There are
currently no shares reserved for future issuance under this plan. The
Board of Directors authorized the issuance of the shares at the time
the stock options were granted. A recipient of such stock options
and/or SARs has the right to purchase Ashland Common Stock at a price
and on terms specified by the Personnel and Compensation Committee of
Ashland's Board of Directors. The stock options listed in the table
above were granted to certain MAP employees and were registered with
the SEC. All stock options and SARs granted under this plan expired on
November 19, 2005.
(2) Includes 495,679 shares available for issuance under the Amended and
Restated Ashland Inc. Incentive Plan, 434,790 shares available for
issuance under the Deferred Compensation Plan for Employees, and
376,858 shares available for issuance under the Deferred Compensation
Plan for Non-Employee Directors.
(3) Includes 500,000 shares available for issuance under the Deferred
Compensation Plan for Employees (2005) and 500,000 shares available
for issuance under the Deferred Compensation Plan for Non-Employee
Directors (2005). Because these plans are not equity compensation
plans as defined by the rules of the New York Stock Exchange, neither
plan required approval by Ashland's shareholders. The plans were
approved by Ashland's Board of Directors on November 4, 2004, and
became effective January 1, 2005. The plans provide an opportunity to
defer amounts of specified types of compensation as a means of saving
for retirement and other purposes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
There is hereby incorporated by reference the information with respect
to principal accountant fees and services to appear under the captions
"Ratification of Auditors" and "Audit Committee Report" in Ashland's Proxy
Statement.
Ernst & Young LLP ("E&Y"), Ashland's independent registered public
accounting firm, has advised the Audit Committee of Ashland that it has
identified two independence issues in connection with certain prohibited
income tax compliance and other services performed by E&Y affiliates in
Denmark and South Africa. These services involved holding value-added tax
funds of a de minimis amount and making payment of such funds to the
applicable tax authority in Denmark in respect of an Ashland subsidiary in
the Netherlands and serving as the registered office receiving
communications and holding statutory records (e.g., minutes, books,
registers of shareholders, directors and officers) in respect of an Ashland
subsidiary in South Africa. These actions by affiliates of E&Y have been
discontinued. Custody of the assets of an audit client is not permitted
under the AICPA auditor independence rules as well as the SEC auditor
independence rules. The Audit Committee and E&Y have discussed E&Y's
independence with respect to Ashland in light of the foregoing facts. Both
the Ashland Audit Committee and E&Y have considered the impact that the
holding and paying of these funds and the receiving of correspondence and
holding of documents may have had on E&Y's independence with respect to
Ashland and have each independently concluded that there has been no
impairment of E&Y's independence. In making this determination, the Audit
Committee and E&Y considered, among other matters, the de minimis amount of
funds involved, the ministerial nature of the actions, and that the
subsidiaries involved are not material to the consolidated financial
statements of Ashland.
17
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
(3) See Item 15(b) in this annual report on Form 10-K
The consolidated financial statements and financial schedule of
Ashland presented in this annual report on Form 10-K are listed in the
index on page F-1.
(B) DOCUMENTS REQUIRED BY ITEM 601 OF REGULATION S-K
3.1 - Second Restated Articles of Incorporation of
Ashland effective July 21, 2005 (filed as Exhibit
3(i) to Ashland's Form 10-Q for the quarter ended
June 30, 2005, and incorporated herein by reference).
3.2 - By-laws of Ashland, effective as of June 30, 2005
(filed as Exhibit 3(ii) to Ashland's Form 10-Q for
the quarter ended June 30, 2005, and incorporated
herein by reference).
4.1 - Ashland agrees to provide the SEC, upon request,
copies of instruments defining the rights of holders
of long-term debt of Ashland and all of its
subsidiaries for which consolidated or unconsolidated
financial statements are required to be filed with
the SEC.
4.2 - Indenture, dated as of August 15, 1989, as amended
and restated as of August 15, 1990, between Ashland
and Citibank, N.A., as Trustee (filed as Exhibit 4.2
to Ashland's annual report on Form 10-K for the
fiscal year ended September 30, 2001, and
incorporated herein by reference).
4.3 - Rights Agreement, dated as of May 16, 1996, between
Ashland Inc. and the Rights Agent, together with Form
of Right Certificate (filed as Exhibit 4.4 to
Ashland's annual report on Form 10-K for the fiscal
year ended September 30, 2001, and incorporated
herein by reference).
4.4 - Amendment No. 1 dated as of March 18, 2004, to
Rights Agreement dated as of May 16, 1996, between
Ashland Inc. and Rights Agent (filed as Exhibit 4 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
4.5 - Amendment No. 2 dated as of April 27, 2005, to
Rights Agreement dated as of May 16, 1996, between
Ashland Inc. and Rights Agent (filed as Exhibit 4.7
to Ashland's Form S-4/A on May 2, 2005, and
incorporated herein by reference).
The following Exhibits 10.1 through 10.17 are contracts or
compensatory plans or arrangements or management contracts required to be
filed as exhibits pursuant to Items 601(b)(10)(ii)(A) and
601(b)(10)(iii)(A) and (B) of Regulation S-K.
10.1 - Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (filed as Exhibit 10.5 to
Ashland's Form 10-Q for the quarter ended December
31, 2004, and incorporated herein by reference).
10.2 - Ashland Inc. Deferred Compensation Plan (filed as
Exhibit 10.3 to Ashland's Form 10-Q for the quarter
ended December 31, 2004, and incorporated herein by
reference).
10.3 - Ashland Inc. Deferred Compensation Plan for
Employees (2005) (filed as Exhibit 10 to Ashland's
Form 10-Q for the quarter ended March 31, 2005, and
incorporated herein by reference).
10.4 - Amendment No. 1 to Ashland Inc. Deferred
Compensation Plan for Employees (2005) dated October
28, 2005.
10.5 - Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (2005) (filed as Exhibit 10.6
to Ashland's Form 10-Q for the quarter ended December
31, 2004, and incorporated herein by reference).
18
10.6 - Eleventh Amended and Restated Ashland Inc.
Supplemental Early Retirement Plan for Certain
Employees (filed as Exhibit 10.2 to Ashland's Form
10-Q for the quarter ended December 31, 2004, and
incorporated herein by reference).
10.7 - Amendment No. 1 to Eleventh Amended and Restated
Ashland Inc. Supplemental Early Retirement Plan for
Certain Employees dated December 20, 2004.
10.8 - Ashland Inc. Salary Continuation Plan (filed as
Exhibit 10.5 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2002, and
incorporated herein by reference).
10.9 - Form of Ashland Inc. Executive Employment Contract
between Ashland Inc. and certain executives of
Ashland (filed as Exhibit 10.6 to Ashland's annual
report on Form 10-K for the fiscal year ended
September 30, 2002, and incorporated herein by
reference).
10.10 - Form of Indemnification Agreement between Ashland
Inc. and members of its Board of Directors.
10.11 - Ashland Inc. Nonqualified Excess Benefit Pension
Plan - 2003 Restatement (filed as Exhibit 10.1 to
Ashland's Form 10-Q for the quarter ended December
31, 2004, and incorporated herein by reference).
10.12 - Ashland Inc. Directors' Charitable Award Program
(filed as Exhibit 10.11 to Ashland's annual report on
Form 10-K for the fiscal year ended September 30,
2002, and incorporated herein by reference).
10.13 - Ashland Inc. 1993 Stock Incentive Plan (filed as
Exhibit 10.11 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2000, and
incorporated herein by reference).
10.14 - Ashland Inc. 1997 Stock Incentive Plan (filed as
Exhibit 10.14 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2002, and
incorporated herein by reference).
10.15 - Amended and Restated Ashland Inc. Incentive Plan
(filed as Exhibit 10.1 to Ashland's Form 10-Q for the
quarter ended June 30, 2004, and incorporated herein
by reference).
10.16 - Forms of Notice granting Stock Appreciation Rights
Awards.
10.17 - Form of Notice granting Restricted Stock Awards.
10.18 - Form of Notice granting Nonqualified Stock Option
Awards.
10.19 - Five-Year, $350 Million Revolving Credit Agreement
dated as of March 21, 2005 (filed as Exhibit 10.1 to
Ashland's Form 8-K filed on March 24, 2005, and
incorporated herein by reference).
10.20* - Master Agreement dated as of March 18, 2004, and
Amendment No. 1 dated as of April 27, 2005, among
Ashland Inc., ATB Holdings Inc., EXM LLC, New EXM
Inc., Marathon Oil Corporation, Marathon Oil Company,
Marathon Domestic LLC and Marathon Ashland Petroleum
LLC (filed as Exhibit 2.1 to Ashland's Form S-4/A
dated and filed May 19, 2005, and incorporated herein
by reference).
10.21* - Amended and Restated Tax Matters Agreement dated
April 27, 2005, among Ashland Inc., ATB Holdings
Inc., EXM LLC, New EXM Inc., Marathon Oil
Corporation, Marathon Oil Company, Marathon Domestic
LLC and Marathon Ashland Petroleum LLC (filed as
Annex B to Ashland's Form S-4/A dated and filed May
19, 2005, and incorporated herein by reference).
10.22* - Assignment and Assumption Agreement (VIOC Centers)
dated as of March 18, 2004, between Ashland Inc. and
ATB Holdings Inc. (filed as Annex D to Ashland's Form
S-4/A dated and filed May 19, 2005, and incorporated
herein by reference).
10.23* - Assignment and Assumption Agreement (Maleic
Business) dated as of March 18, 2004, between Ashland
Inc. and ATB Holdings Inc. (filed as Annex C to
Ashland's Form S-4/A dated and filed May 19, 2005,
and incorporated herein by reference).
19
10.24* - Amendment No. 2 dated as of March 18, 2004, and
Amendment No. 3 dated as of April 27, 2005, to the
Amended and Restated Limited Liability Company
Agreement dated as of December 31, 1998, of Marathon
Ashland Petroleum LLC, by and between Ashland Inc.
and Marathon Oil Company (filed as Annex E to
Ashland's Form S-4/A dated and filed May 19, 2005,
and incorporated herein by reference).
10.25** - Amendment No. 1 dated as of March 17, 2004, to the
Amended and Restated Limited Liability Company
Agreement dated as of December 31, 1998, of Marathon
Ashland Petroleum LLC (filed as Exhibit 10.2 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
10.26* - Amendment No. 2 dated as of March 17, 2004, to the
Put/Call Registration Rights and Standstill Agreement
dated as of January 1, 1998, among Marathon Oil
Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum LLC (filed as Exhibit 10.1 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
11 - Computation of Earnings Per Share (appearing on
page F-12 of this annual report on Form 10-K).
12 - Computation of Ratio of Earnings to Fixed Charges.
21 - List of Subsidiaries.
23.1 - Consent of Independent Registered Public Accounting
Firm.
23.2 - Consent of Tillinghast-Towers Perrin.
23.3 - Consent of Hamilton, Rabinovitz & Alschuler, Inc.
24 - Power of Attorney, including resolutions of the
Board of Directors.
31.1 - Certification of James J. O'Brien, Chief Executive
Officer of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of J. Marvin Quin, Chief Financial
Officer of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 - Certification 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.
*Ashland agrees to supplement this filing and furnish a copy of any
omitted schedule to the United States Securities and Exchange
Commission upon request.
**Portions of this document have received confidential treatment.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
2O
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By:
/s/ J. Marvin Quin
---------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer
Date: December 9, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant, in the capacities indicated, on December 9, 2005.
SIGNATURES CAPACITY
---------- --------
/S/ JAMES J. O'BRIEN Chairman of the Board, Chief Executive Officer and Director
--------------------------------------------
JAMES J. O'BRIEN
/S/ J. MARVIN QUIN Senior Vice President and Chief Financial Officer
--------------------------------------------
J. MARVIN QUIN
/S/ LAMAR M. CHAMBERS Vice President, Controller and Principal Accounting Officer
--------------------------------------------
LAMAR M. CHAMBERS
* Director
--------------------------------------------
ERNEST H. DREW
* Director
--------------------------------------------
ROGER W. HALE
* Director
--------------------------------------------
BERNADINE P. HEALY
* Director
--------------------------------------------
MANNIE L. JACKSON
* Director
--------------------------------------------
KATHLEEN LIGOCKI
* Director
--------------------------------------------
PATRICK F. NOONAN
* Director
--------------------------------------------
GEORGE A. SCHAEFER, JR.
* Director
--------------------------------------------
THEODORE M. SOLSO
* Director
--------------------------------------------
MICHAEL J. WARD
*By: /s/ David L. Hausrath
David L. Hausrath
Attorney-in-Fact
Date: December 9, 2005
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows revenues, operating income and operating
information by industry segment for each of the last three years ended
September 30.
(In millions) 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
SALES AND OPERATING REVENUES
APAC $ 2,539 $ 2,525 $ 2,400
Ashland Distribution 3,810 3,199 2,811
Ashland Specialty Chemical 1,763 1,386 1,212
Valvoline 1,326 1,297 1,235
Intersegment sales (168) (106) (92)
---------- ---------- ----------
$ 9,270 $ 8,301 $ 7,566
========== ========== ==========
OPERATING INCOME
APAC $ 48 $ 111 $ (42)
Ashland Distribution 123 78 32
Ashland Specialty Chemical 134 87 31
Valvoline 90 105 87
Refining and Marketing (a) 486 383 263
Corporate (135) (102) (105)
---------- ---------- ----------
$ 746 $ 662 $ 266
========== ========== ==========
OPERATING INFORMATION
APAC
Construction backlog at September 30 (millions) (b) $ 2,038 $ 1,746 $ 1,745
Net construction job revenues (millions) (c) $ 1,458 $ 1,433 $ 1,361
Hot-mix asphalt production (million tons) 31.3 33.4 32.5
Aggregate production (million tons) 31.4 29.6 28.7
Ashland Distribution (d)
Sales per shipping day (millions) $ 15.1 $ 12.6 $ 11.2
Gross profit as a percent of sales 9.7% 9.6% 9.9%
Ashland Specialty Chemical (d)
Sales per shipping day (millions) $ 7.0 $ 5.4 $ 4.8
Gross profit as a percent of sales 26.6% 27.9% 29.9%
Valvoline
Lubricant sales (million gallons) 175.4 191.6 193.5
Premium lubricants (percent of U.S. branded volumes) 23.4% 21.5% 18.5%
Refining and Marketing (e)
Refinery runs (thousand barrels per day)
Crude oil refined 970 920 900
Other charge and blend stocks 182 167 133
Refined product sales (thousand barrels per day) (f) 1,421 1,385 1,345
Refining and wholesale marketing margin (per barrel) (g) $ 4.58 $ 3.11 $ 2.59
--------------------------------------------------------------------------------------------------------------------
(a) Includes Ashland's equity income from Marathon Ashland Petroleum LLC
(MAP) through June 30, 2005, amortization related to Ashland's excess
investment in MAP, and other activities associated with refining and
marketing.
(b) Includes APAC's proportionate share of the backlog of unconsolidated
joint ventures.
(c) Total construction job revenues, less subcontract costs.
(d) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
(e) Amounts represent 100% of MAP's operations. Amounts for 2005 are for
the nine months ended June 30, 2005, when Ashland's 38% ownership
ceased.
(f) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(g) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
M-1
RESULTS OF OPERATIONS
Ashland's net income amounted to $2,004 million in 2005, $378 million
in 2004 and $75 million in 2003. Income from continuing operations (which
excludes discontinued operations and the cumulative effect of accounting
changes) amounted to $2,005 million in 2005, $398 million in 2004 and $94
million in 2003. Results for 2005 included a net gain of $1,531 million
from the MAP Transaction and a related loss on the early retirement of
debt, as described in Note D of Notes to Consolidated Financial Statements.
Ashland's results from discontinued operations, consisting of charges
associated with estimated future asbestos liabilities less probable
insurance recoveries, as well as net income from the discontinued
operations of its Electronic Chemicals business, along with the cumulative
effect of accounting changes adopted in 2003, accounted for the difference
in net income and income from continuing operations.
Chemical Sector (consisting of Ashland Distribution, Ashland Specialty
Chemical and Valvoline) operating income totaled $347 million in 2005,
compared to $270 million in 2004 and $150 million in 2003. Ashland
Distribution and Ashland Specialty Chemical both reported record
performances for 2005 on the strength of increased sales and operating
revenues, while Valvoline's results declined from the record 2004
performance, reflecting a decrease in lubricant sales volumes. The
Transportation Construction Sector, commercially known as Ashland Paving
And Construction, Inc. (APAC), recorded operating income of $48 million in
2005, compared to income of $111 million in 2004 and a loss of $42 million
in 2003. APAC's decline in 2005 reflected an active hurricane and tropical
storm season, which caused work disruptions and rapid increases in raw
material and energy costs. Refining and Marketing operating income was $486
million in 2005, compared to $383 million in 2004 and $263 million in 2003.
The 2005 results reflect nine months of equity income from Ashland's 38%
ownership interest in MAP through June 30, 2005, when Ashland transferred
its interest in MAP to Marathon (as described in Note D of Notes to
Consolidated Financial Statements). An analysis of operating income by
industry segment follows.
APAC
Operating income from APAC totaled $48 million in 2005, compared to
$111 million in 2004. Weather delays due to the highly active hurricane and
tropical storm season affected APAC's key summer construction season, and
hot-mix asphalt production, a key source of profits, declined 6% versus the
prior year. Given the fixed nature of many of APAC's costs, volume declines
disproportionately reduce earnings. In addition, rapidly rising raw
material and energy costs throughout the year outpaced price increases and
affected profits on fixed-price contracts. Equity income from an Atlanta
airport runway project declined by $13 million as that job was completed in
2005, while gains on asset sales were $9 million lower in 2005. In 2004,
APAC reversed into income a $5 million reserve for liquidated damages
established in 2003 related to a large highway construction project in
Virginia. In addition, the provision for job loss reserves was $7 million
higher in 2005 versus 2004, partially as a result of higher raw material
and energy costs in fixed price backlog. Partially offsetting these
negative effects was an $8 million increase in gains on hedges of gasoline
and diesel fuel costs. As of September 30, 2005, APAC's construction
backlog, which consists of contracts awarded and funded but not yet
performed, was $2.0 billion, up 17% compared to 2004.
Operating income from APAC totaled $111 million in 2004, compared with
an operating loss of $42 million in 2003. Higher margins on construction
work, driven primarily by reduced operating costs, was the primary
contributor to the earnings improvement. Income also increased from the
sale of hot-mix asphalt and aggregates, reflecting improved pricing and
margins as well as slightly higher sales volumes in both areas. Operating
efficiency increased as a result of broad-based business improvement
programs implemented between 2002 and 2004, and somewhat better weather
conditions for 2004 overall, compared with the record levels of rainfall
experienced in 2003. APAC reversed into income a $5 million reserve for
liquidated damages established in 2003 related to a large highway
construction project in Virginia. Also contributing to 2004 earnings, APAC
sold a significant portion of its ready-mix concrete operations in the June
quarter, realizing proceeds net of selling expenses of $38 million and a
pretax gain of $9 million. Costs related to Project PASS, APAC's process
redesign initiative completed during 2004, amounted to $10 million in 2004,
compared with $20 million in 2003.
ASHLAND DISTRIBUTION
Ashland Distribution reported record operating income of $123 million
in 2005, a 58% improvement compared with $78 million in 2004. During the
September 2005 quarter, Ashland Distribution delivered its seventh
consecutive quarter of record operating income and 16th consecutive record
sales month. Sales and operating revenues increased 19% compared with 2004,
reflecting increased selling prices, as total volumes declined 1% due to
one less shipping day and the disposition of the ingestibles business.
Adjusting for the ingestibles disposition, sales volumes were up 1% on a
per day basis. Gross profit as a percent of sales increased slightly, from
9.6% to
M-2
9.7%, demonstrating the division's success in passing through rising raw
material costs and by aggressively managing expenses. Environmental
remediation expenses increased $5 million compared to 2004.
Ashland Distribution generated operating income of $78 million in
2004, compared with $32 million in 2003. Sales increased 14% compared with
2003, due to a 7% increase in unit volumes and a 7% increase in selling
prices. Gross profit as a percent of sales declined slightly, from 9.9% to
9.6%, attributable primarily to lower margins within the chemicals product
category. Selling, general and administrative expenses declined 10%,
reflecting cost-cutting and efficiency improvements achieved through
Ashland's Top-Quartile Cost Structure (TQCS) program that began in 2003.
Income in 2004 increased from all regions, both domestically and in Europe.
ASHLAND SPECIALTY CHEMICAL
Operating income from Ashland Specialty Chemical increased to a record
$134 million in 2005, a 54% improvement compared to $87 million in 2004.
Sales and operating revenues increased 27%, while gross profit as a percent
of sales declined from 27.9% to 26.6%, as raw material costs escalated at a
faster pace than could be recovered through increased selling prices.
Revenues from the performance materials businesses (Casting Solutions,
Composite Polymers and Specialty Polymers & Adhesives) increased 33%,
reflecting higher selling prices and increased volumes resulting primarily
from the December 2004 acquisition of the DERAKANE(R) resins business.
Revenues from the water technologies businesses (Drew Industrial and Drew
Marine) increased 9%, reflecting increased sales volumes. Results for 2005
included approximately $4 million in net, non-recurring gains principally
related to the termination of a product supply contract and a $7 million
pretax gain on the sale of an idle plant in Plaquemine, Louisiana. Results
for 2004 included a $6 million pretax gain on the sale of a parcel of land
and other fixed assets at the same location. Environmental remediation
expenses were $5 million higher in 2005 compared to 2004.
Operating income from Ashland Specialty Chemical increased to $87
million in 2004, compared to $31 million in 2003. Sales from the
performance materials businesses increased 17%, reflecting an 11% increase
in unit sales volumes and a 6% increase in selling prices. The increase in
sales was partially offset by a decline in gross profit percentage due to
the inability to fully recover persistently rising raw materials costs. The
water technologies businesses achieved higher income as a result of a 7%
increase in revenues. Ashland Specialty Chemical's selling, general and
administrative expenses were reduced in 2004, reflecting cost reductions
achieved through Ashland's TQCS program. Adding to income in 2004, a parcel
of land and fixed assets in Plaquemine, Louisiana were sold for net
proceeds of $9 million, resulting in a pretax gain of $6 million. Results
for 2003 included an impairment charge of $10 million for a maleic
anhydride production facility, as well as a charge of $5 million for staff
reductions under the TQCS program.
VALVOLINE
Valvoline reported operating income of $90 million in 2005, a 14%
decline compared with the record $105 million reported in 2004. The
reduction in earnings resulted from an 8% decrease in lubricant sales
volumes, reflecting deep competitive discounting and a decline in the U.S.
branded lubricant market, and rapidly rising raw material costs. Earnings
from Valvoline Instant Oil Change (VIOC) decreased 16% due to the sale of
60 VIOC centers to Marathon in the MAP Transaction on June 30, 2005, and a
decrease in the number of oil changes. Partially offsetting these decreases
were record results from Valvoline's international operations, which
increased 38% compared to 2004 on the strength of improved results in
Europe and Latin America. At September 30, 2005, VIOC operated 300
company-owned service centers, compared to 360 centers in 2004 and 357
centers in 2003. The VIOC franchising program continues to expand, with 473
centers open at September 30, 2005, compared to 397 centers in 2004 and 372
centers in 2003.
Valvoline generated record operating income of $105 million in 2004,
compared with $87 million in 2003. Lubricant sales volumes decreased 1%
from 2003, but unit sales of higher-margin premium lubricants (MaxLife,
Durablend and SynPower) increased 15%. VIOC reported its third year of
record earnings due in part to a 3% increase in non-oil change revenues and
a 2% increase in premium oil changes, contributing to a 6% increase in the
average sale per customer visit. Valvoline's international operations
posted record operating income in 2004, mostly due to a 6% increase in
lubricant sales volumes and strengthening foreign currencies.
REFINING AND MARKETING
Operating income from Refining and Marketing, which consisted
primarily of equity income from Ashland's 38% ownership interest in MAP
through June 30, 2005, amounted to $486 million in 2005, compared to $383
million in 2004. Equity income from MAP's refining and marketing operations
for the nine months ended
M-3
June 30, 2005 was $114 million higher than for all of 2004, reflecting an
increase of $1.47 per barrel in its refining and wholesale marketing
margin. Equity income from MAP's retail operations (Speedway SuperAmerica
and a 50% interest in the Pilot Travel Centers joint venture) for the nine
months ended June 30, 2005 was $4 million higher than for all of 2004,
reflecting higher merchandise margins. Equity income from MAP's
transportation operations for the nine months ended June 30, 2005 was $8
million lower than for all of 2004, reflecting the three less months of
operations during Ashland's period of ownership. Ashland's environmental
remediation expenses for former refining and marketing sites, including
those conveyed to MAP for which Ashland retained remediation obligations,
amounted to $23 million in 2005, versus income of $6 million in 2004
resulting from reductions in estimated reserves.
Operating income from Refining and Marketing was $383 million in 2004,
compared to $263 million in 2003. Equity income from MAP's refining and
marketing operations increased $127 million, reflecting an increase of 52
cents per barrel in its refining and wholesale marketing margin. MAP's
refineries processed approximately 1.1 million barrels per day of crude oil
and other feedstocks during 2004, an increase of 5% from 2003. Equity
income from MAP's retail operations declined $6 million due to an $8
million gain on the sale of Speedway SuperAmerica's southern stores in
2003.
CORPORATE
Corporate expenses were $135 million in 2005, $102 million in 2004 and
$105 million in 2003. The increase in 2005 reflected $20 million in charges
for estimated future insurance premiums due Oil Insurance Limited (OIL),
the energy-industry mutual insurance consortium in which Ashland
participates. The increase in future premiums was the result of a higher
level of losses than anticipated for the members of OIL, due primarily to
the effects of hurricanes and tropical storms. Ashland has given notice to
OIL that it will terminate its participation effective December 31, 2005,
and the increased premiums will be payable upon withdrawal from OIL. These
estimates may change as additional information becomes available and OIL
calculates the final withdrawal premium. Also contributing to the increase
in corporate expenses for 2005 was a $6 million increase in environmental
remediation expenses primarily related to former businesses other than
chemical and refining and marketing operations. In addition, accruals for
performance-based employee incentive plans and stock incentive plans were
$5 million higher in 2005. The reduction in corporate expenses for 2004
compared to 2003 reflected an increase in 2004 of $16 million related to
performance-based employee incentive plans, which was more than offset by
the inclusion in 2003 of $19 million in severance and other transition
costs related to Ashland's TQCS and other cost reduction programs.
GAIN ON THE MAP TRANSACTION
See Note D of Notes to Consolidated Financial Statements for a
discussion of the MAP Transaction and the resulting pretax gain of $1,284
million recorded in 2005.
LOSS ON EARLY RETIREMENT OF DEBT
See Note D of Notes to Consolidated Financial Statements for a
discussion of the early retirement of debt associated with the MAP
Transaction, which resulted in a pretax loss of $145 million recorded in
2005.
NET INTEREST AND OTHER FINANCIAL COSTS
The following table summarizes the components of net interest and
other financial costs.
(In millions) 2005 2004 2003
-------------------------------------------------------------------------------
Net interest and other financial costs
Interest expense $ 90 $ 114 $ 123
Expenses on sales of accounts receivable 4 3 3
Other financial costs 3 3 3
Interest income (15) (6) (1)
---------- ---------- ---------
$ 82 $ 114 $ 128
========== ========== =========
Ashland's long-term debt declined from $1.8 billion at September 30,
2002 to $94 million at the end of fiscal 2005, accounting for a reduction
in interest expense of $9 million in 2004 and an additional $24 million in
2005. As described in Note D of Notes to Consolidated Financial Statements,
Ashland repaid most of its outstanding debt and certain other financial
obligations with the proceeds of the MAP Transaction. Interest and other
financial costs of
M-4
$86 million in 2005 will not be incurred in future periods because of the
repayments. Interest income increased $5 million in 2004, with most of that
increase due to the recognition of interest income associated with income
tax refunds claimed for prior years. Interest income increased $9 million
in 2005, primarily reflecting the investment of remaining cash proceeds
from the MAP Transaction in the September 2005 quarter.
INCOME TAXES
As described in Note D of Notes to Consolidated Financial Statements,
Ashland's income tax benefit for 2005 included a benefit of $335 million
associated with the MAP Transaction, resulting from the reversal of
deferred tax liabilities. Also as described in Note D, the pretax gain of
$1,284 million was non-taxable to Ashland. Ashland's income tax benefit for
2005 also included $39 million in tax benefits related to prior years.
These benefits resulted primarily from a favorable settlement with the
Internal Revenue Service (IRS) for the 1996-1998 audit period and the
reevaluation of income tax reserves related to other years.
Ashland's income tax expense for 2004 included $48 million in tax
benefits related to prior years. During the year, Ashland reached
resolution with the IRS on several open tax matters from prior years,
resulting in a tax benefit of $33 million as a result of the reduction of
amounts previously provided as contingent tax liabilities. In addition,
Ashland recognized federal income tax benefits associated with a claim for
additional research and development tax credits valued at $15 million.
Excluding these identified items, Ashland's adjusted effective tax
rate was 33.1% in 2005, compared to 36.1% in 2004 and 31.9% in 2003. The
overall effective rate was lower in 2003 than in 2004 and 2005 due to
Ashland's lower level of earnings in 2003 and the resulting larger relative
portion of those earnings derived from income taxed at less than full U.S.
statutory rates.
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGES
Results of Ashland's discontinued operations are summarized below. See
Note P of Notes to Consolidated Financial Statements for an explanation of
these amounts.
(In millions) 2005 2004 2003
--------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations (net of tax)
Asbestos-related litigation reserves and expenses $ (1) $ (18) $ (109)
Electronic Chemicals
Results of operations - - 14
Gain (loss) on sale of operations - (3) 81
Resolution of tax contingency issues - 1 -
---------- ---------- -----------
$ (1) $ (20) $ (14)
========== ========== ===========
As discussed in Note A of Notes to Consolidated Financial Statements,
as of July 1, 2003, Ashland consolidated a lessor entity in its financial
statements under FIN 46, and doing so resulted in an after-tax charge of $5
million to adjust the depreciation included in the cumulative lease
payments to conform to Ashland's depreciation methods.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity,
amounted to $37 million in 2005, $209 million in 2004 and $242 million in
2003. Such amounts include cash distributions from MAP of $272 million in
2005, $146 million in 2004 and $197 million in 2003. During 2005, Ashland
paid income taxes of $299 million, compared with $84 million in 2004 and
$24 million in 2003. Ashland also contributed $121 million to its qualified
pension plans in 2005, compared with $137 million in 2004 and $61 million
in 2003. Reflected in cash flows from operations for 2005 was the
repurchase of $150 million of accounts receivable previously sold under
Ashland's sale of receivables facility. Cash flows from operations during
2005 were supplemented by $3.3 billion in proceeds from the MAP Transaction
and $115 million in proceeds from the issuance of common stock resulting
from stock option exercises. Cash flows from operations during 2004 were
supplemented by $108 million in proceeds from the issuance of common stock
resulting from stock option exercises, as well as $48 million from the sale
of certain APAC operations. After using a portion of the MAP Transaction
proceeds to retire most of its debt and certain other financial
obligations, Ashland had $1.4 billion of cash, cash equivalents and
available-for-sale securities at September 30, 2005.
M-5
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 $102 million of letters of credit outstanding at September 30,
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 $5.5 billion of borrowings at September 30,
2005. Additional permissible borrowings are increased (decreased) by 150%
of any increase (decrease) in stockholders' equity.
At September 30, 2005, working capital (excluding debt due within one
year) amounted to $2,224 million, compared to $926 million at the end of
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 $126 million at September 30, 2005 and $95 million at
September 30, 2004. Liquid assets (cash, cash equivalents,
available-for-sale securities and accounts receivable) amounted to 193% of
current liabilities at September 30, 2005, compared to 84% at the end of
2004. These increases reflect the cash proceeds from the MAP Transaction
net of debt repayments.
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. Through
September 30, 2005, Ashland had repurchased 1.8 million shares at a cost of
$100 million.
Property additions amounted to $702 million during the last three
years and are summarized in the Information by Industry Segment on page
F-31. Property additions included buyouts of operating leases of $101
million in 2005 and $33 million in 2004. For the past three years, APAC
accounted for 46% of Ashland's capital expenditures, while Ashland
Specialty Chemical accounted for 23% and Valvoline accounted for 16%.
Capital used for acquisitions amounted to $166 million during the last
three years, of which $31 million was invested in APAC, $16 million in
Ashland Distribution, $91 million in Ashland Specialty Chemical and $28
million in Valvoline. A summary of the capital employed in Ashland's
operations follows. The decrease in capital employed in Refining and
Marketing in 2005 reflects the MAP Transaction.
(In millions) 2005 2004 2003
-----------------------------------------------------------------------------
Capital employed
APAC $ 1,133 $ 959 $ 1,014
Ashland Distribution 513 449 418
Ashland Specialty Chemical 612 490 438
Valvoline 483 388 399
Refining and Marketing (107) 2,053 1,866
During 2005, Ashland reduced its total debt by $1,454 million to $94
million and stockholders' equity increased by $1,033 million to $3.7
billion, both primarily as a result of the MAP Transaction. Increases
resulting from $2,004 million of net income, $156 million from issuance of
common shares under stock incentive and other plans, and $19 million of
translation gains associated with foreign operations were partially offset
by the distribution of Marathon shares from the MAP Transaction of $936
million, common stock repurchases of $100 million, cash dividends of $79
million, a $30 million increase in the minimum pension liability and $1
million in unrealized losses on cash flow hedges. Debt as a percent of
capital employed was reduced from 36.4% at the end of 2004 to 2.5% at
September 30, 2005.
During 2006, Ashland expects capital expenditures of approximately
$300 million compared with $380 million in 2005. The decline reflects
decreases for APAC and Valvoline, which included most of the $101 million
in lease buyouts in 2005, and increases for Ashland Distribution and
Ashland Specialty Chemical. In 2004, Ashland initiated a multi-year SAP
enterprise resource planning (ERP) project that is expected to be
implemented world-wide across Ashland's Chemical Sector to achieve
increased efficiency and effectiveness in supply chain, financial, and
environmental, health and safety processes. Overall costs for this project
through 2007 are expected to total approximately $90 million, of which
approximately $80 million will be capitalized, including $25 million of
M-6
capitalized costs expected to be spent in 2006. While extensive planning is
underway to support a smooth implementation of the ERP system, such
implementations carry substantial project risk, including the potential for
business interruption and associated adverse impacts on operating results.
The following table aggregates Ashland's commitments to make future
payments under existing contracts at September 30, 2005. Contractual cash
obligations for which the ultimate settlement amounts are not fixed and
determinable have been excluded.
2007- 2009- Later
(In millions) Total 2006 2008 2010 Years
----------------------------------------------------------------------------------------------------------------
Contractual obligations
Obligations to construction subcontractors $ 583 $ 525 $ 58 $ - $ -
Raw material purchase obligations 183 76 82 21 4
Employee benefit obligations (a) 459 177 64 62 156
Operating lease obligations 246 50 77 47 72
Long-term debt (b) 135 19 28 32 56
---------- ----------- ---------- ---------- ----------
Total contractual obligations $ 1,606 $ 847 $ 309 $ 162 $ 288
========== =========== ========== ========== ==========
(a) Includes estimated funding of Ashland's qualified U.S. and non-U.S.
pension plans for 2006, as well as projected benefit payments through
2015 under Ashland's nonqualified pension plans and other
postretirement benefit plans. See Note Q of Notes to Consolidated
Financial Statements for additional information.
(b) Includes principal and interest payments. Capitalized lease
obligations are not significant and are included in long-term debt.
OFF-BALANCE SHEET ARRANGEMENTS
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation and off-road construction equipment, warehouses and
storage facilities, and other equipment, facilities and properties under
leasing agreements that expire at various dates. Capitalized lease
obligations are not significant and are included in long-term debt.
In June 2005, Ashland used $101 million of the proceeds from the MAP
Transaction to purchase assets (primarily APAC construction equipment and
VIOC stores) formerly leased under operating leases. Future minimum rental
payments were not affected by this purchase.
On March 15, 2000, Ashland entered into a five-year agreement to sell,
on an ongoing basis with limited recourse, up to a $200 million undivided
interest in a designated pool of accounts receivable. Under the terms of
the agreement, new receivables were added to the pool and collections
reduced the pool. Ashland retained a credit interest in these receivables
and addressed its risk of loss on this retained interest in its allowance
for doubtful accounts. Receivables sold excluded defaulted accounts or
concentrations over certain limits with any one customer. On March 15,
2005, this agreement was extended for a period of one year and the capacity
was increased to $250 million. The agreement was terminated by Ashland on
July 27, 2005.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of Ashland's 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. Management has reviewed the estimates affecting these items
with the Audit Committee of Ashland's Board of Directors.
LONG-LIVED ASSETS
The cost of plant and equipment is depreciated by the straight-line
method over the estimated useful lives of the assets. Useful lives are
based on historical experience and are adjusted when changes in planned
use, technological advances or other factors show that a different life
would be more appropriate. Such costs are periodically reviewed for
recoverability when impairment indicators are present. Such indicators
include, among other factors, operating
M-7
losses, unused capacity, market value declines and technological
obsolescence. Recorded values of property, plant and equipment that are not
expected to be recovered through undiscounted future net cash flows are
written down to current fair value, which generally is determined from
estimated discounted future net cash flows (assets held for use) or net
realizable value (assets held for sale). During 2003, Ashland recognized an
impairment charge of $10 million for a maleic anhydride production facility
that is shut down and not likely to reopen based on internal analyses.
Although circumstances can change considerably over time, Ashland is not
aware of any impairment indicators that would necessitate periodic reviews
on any significant asset within property, plant and equipment at September
30, 2005.
Intangible assets with indefinite lives are subject to annual
impairment tests. Such tests are completed separately with respect to the
goodwill of each of Ashland's reporting units, which generally are
synonymous with its industry segments. However, the individual operating
divisions of Ashland Specialty Chemical are also considered reporting units
under FAS 142. Since market prices of Ashland's reporting units are not
readily available, management makes various estimates and assumptions in
determining the estimated fair values of those units. Fair values are based
principally on EBITDA (earnings before interest, taxes, depreciation and
amortization) multiples of peer group companies for each of these reporting
units. Ashland recognized impairment charges of $9 million in 2003 and $2
million in 2004 for goodwill associated with non-strategic businesses of
APAC identified for sale. Ashland did not recognize any goodwill impairment
during 2005. The most recent annual impairment tests indicated that the
fair values of each of Ashland's reporting units with significant goodwill
were in excess of their carrying values by at least 17%, and the
consolidated fair values exceeded carrying values by more than 30%. Despite
that excess, however, impairment charges could still be required if a
divestiture decision were made with respect to a particular business
included in one of the reporting units.
EMPLOYEE BENEFIT OBLIGATIONS
Ashland and its subsidiaries sponsor contributory and noncontributory
qualified and non-qualified defined benefit pension plans that cover
substantially all employees in the United States and in a number of other
countries. Benefits under these plans generally are based on employees'
years of service and compensation during the years immediately preceding
their retirement. In addition, the companies also sponsor unfunded
postretirement benefit plans, which provide health care and life insurance
benefits for eligible employees who retire or are disabled. Retiree
contributions to Ashland's health care plans are adjusted periodically, and
the plans contain other cost-sharing features, such as deductibles and
coinsurance. Life insurance plans generally are noncontributory.
As of September 30, 2005, Ashland revised certain of its demographic
assumptions used to determine its pension and other postretirement benefit
costs. The mortality assumption was changed from the 1983 Group Annuity
Mortality Table for Males (set back six years for females) to the RP2000
Table for Healthy Lives in order to reflect longer life expectancies. In
addition, the turnover assumption was changed to rates based on actual plan
experience for the years 1996 through 2000. The previous turnover
assumption was based on actual plan experience through 1990. These changes
are effective as of September 30, 2005 for disclosure purposes and for 2006
expense. Current retirement rates based on actual plan experience were not
revised. The assumption study recently performed indicated that the
assumption was appropriate.
The principal economic assumptions used to determine Ashland's pension
and other postretirement benefit costs are the discount rate, the rate of
compensation increase and the expected long-term rate of return on plan
assets. Because Ashland's retiree health care plans contain various caps
that limit Ashland's contributions and because medical inflation is
expected to continue at a rate in excess of these caps for the immediate
future, the health care cost trend rate has no material impact on Ashland's
postretirement health care benefit costs.
Beginning September 30, 2005, Ashland developed the discount rate used
to determine the present value of its obligations under the U.S. pension
and postretirement health and life plans by matching the stream of benefit
payments from the plans to the Citigroup Pension Discount Curve Spot Rates.
Ashland changed to this approach to better reflect the specific cash flows
of these plans in determining the discount rate. The discount rate
determined as of September 30, 2005 was 5.48% for the U.S. pension plans
and 5.33% for the postretirement health and life plans. Non-U.S. pension
plans followed a similar process based on financial markets in those
countries where Ashland provides a defined benefit pension plan.
Previously, the discount rate for U.S. pension plans was based on the
Moody's Aa Corporate Bond Index, adjusted for longer durations of the
pension plans as compared to the shorter duration of the index, and also
adjusted to convert the semi-annual coupons in the index to an annual
discount rate. This adjusted rate was then rounded to the nearest 25 basis
points, which resulted in a discount rate of 6.0% as of September 30, 2004.
Ashland's expense under these plans is determined using the discount rate
as of the beginning of the fiscal year, which amounted to 6.0% for 2005 for
the pension plans, 6.0% for the first seven months of the fiscal year for
the postretirement health plans and 5.5% for the final five months of the
fiscal year as a result of the
M-8
May 1, 2005 remeasurement reflecting the amendment to the prescription drug
benefit of the health care plans for retirees age 65 or older.
Historically, the discount rates used for expense were 6.25% for 2004 and
6.75% for 2003. The 2006 expense for the pension plans will be based on a
discount rate of 5.48%, while 5.33% will be used for the postretirement
health and life plans.
The rate of compensation increase assumptions were 4.5% for 2005, 4.5%
for 2004 and 5.0% for 2003. The long-term expected rate of return on assets
was assumed to be 8.5% in 2005, 8.5% in 2004 and 9.0% in 2003. The return
on plan assets is subject to wide year-to-year variances. For 2005, the
pension plan assets generated an actual return of 14.0%, compared to 11.8%
in 2004 and 19.1% in 2003. However, the expected return on plan assets is
designed to be a long-term assumption, and actual returns will be subject
to considerable year-to-year variances. Ashland has generated compounded
annual investment returns of 5.3% and 8.2% on its pension plan assets over
the last five-year and ten-year periods. Shown below are the estimated
increases in pension and postretirement expense that would have resulted
from a 1% change in each of the assumptions for each of the last three
years.
(In millions) 2005 2004 2003
----------------------------------------------------------------------------------------------
Increase in pensions costs from
Decrease in the discount rate $ 22 $ 21 $ 20
Increase in the salary adjustment rate 9 9 9
Decrease in the expected return on plan assets 9 7 6
Increase in other postretirement costs from
Decrease in the discount rate 2 2 2
INCOME TAXES
Ashland is subject to income taxes in the United States and numerous
foreign jurisdictions. Significant judgment is required in determining
Ashland's provision for income taxes and the related assets and
liabilities. In the ordinary course of Ashland's business, there are many
transactions and calculations where the ultimate tax determination is
uncertain. Ashland is regularly under audit by tax authorities. Accruals
for tax contingencies are provided for in accordance with the requirements
of FASB Statement No. 5, "Accounting for Contingencies."
Although Ashland believes it has appropriate support for the positions
taken on tax returns, a liability has been recorded that represents
Ashland's best estimate of the probable loss on certain of these positions.
Ashland believes that the recorded accruals for all known tax liabilities
are adequate for all open years, based on the assessment of many factors
including past experience and interpretations of tax law applied to the
facts of each matter. Although Ashland believes the recorded assets and
liabilities are reasonable, tax regulations are subject to interpretation
and tax litigation is inherently uncertain. Therefore, Ashland's
assessments can involve both a series of complex judgments about future
events and rely heavily on estimates and assumptions. Although Ashland
believes that the estimates and assumptions supporting its assessments are
reasonable, the final determination of tax audits and any related
litigation could be materially different than that which is reflected in
historical income tax provisions and recorded assets and liabilities. Based
on the results of an audit or litigation, a material effect on Ashland's
income tax provision, net income, or cash flows could result in the period
such a determination is made. Due to the complexity involved, Ashland is
not able to estimate the range of reasonably possible losses in excess of
amounts recorded.
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.
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
M-9
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 Ashland's estimate of future payments. Ashland's reserve for
asbestos claims on an undiscounted basis amounted to $571 million at
September 30, 2005, compared to $618 million at September 30, 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 retained the services of Tillinghast-Towers Perrin to assist
management in estimating 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.
At September 30, 2005, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers amounted to
$400 million, of which $64 million relates to costs previously paid.
Receivables from insurance companies amounted to $435 million at September
30, 2004. Approximately 40% of the estimated receivables from insurance
companies at September 30, 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
M-10
September 30, 2005, such locations included 102 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, 94 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
$178 million at September 30, 2005 and $152 million at September 30, 2004,
of which $145 million at September 30, 2005 and $119 million at September
30, 2004 were classified in noncurrent liabilities on the 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 $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.
CONSTRUCTION CONTRACTS
Income related to construction contracts generally is recognized by
the units-of-production method, which is a variation of the
percentage-of-completion method. Construction jobs by their very nature are
subject to numerous risks that could create variances from expectations.
Such risks include changes in raw material and other costs, adverse weather
conditions and the performance of subcontractors and other entities. Income
is only certain after a job is completed, and the extent of completion can
be difficult to assess in certain circumstances.
The extent of completion for each production phase is determined by
reference to material quantities, labor hours, subcontract costs or other
factors that are believed to be most indicative of the progress made under
each phase of a project. Revenues earned are computed by reference to the
contract or detailed analyses of revenues and expenses by production phase
that supported the related construction contract or bid proposal. These
detailed analyses also serve as early indicators as to whether a
construction contract may ultimately be completed at a loss. Any
anticipated losses on such contracts are charged against operations as soon
as such losses are determined to be probable and estimable. In 2003,
reserves of $14 million were established for job losses related to a large
highway construction project in Virginia, reflecting weather-related cost
increases and construction delays resulting from record levels of rainfall.
In 2004, $5 million of that reserve, which was the amount that had been
provided for potential liquidated damages, was reversed into income when it
was determined that those damages would not apply.
Assumptions concerning the extent of completion can have a significant
effect on the income recognized on an individual construction project in
any period. However, the effects of individual assumptions on APAC's
reported results are mitigated to some extent by the significant number of
jobs in various stages of completion at any point in time.
OUTLOOK
Ashland has four primary goals in fiscal 2006: to integrate the
Chemical Sector, to improve the performance of the Transportation
Construction Sector, to employ the proceeds from the MAP Transaction in a
value-creating manner and to generate cash flow.
To achieve sustained profitable growth, Ashland must leverage
efficiencies throughout its chemical businesses and across its range of
customers and suppliers. Therefore, Ashland's supply chain must be global,
highly adaptive and technology-enabled. In October 2005, Ashland
successfully launched the first phase of its enterprise resource planning
system, GlobalOne, in Canada. GlobalOne is intended to provide the Chemical
Sector with uniformity,
M-11
transparency and leverage across the supply chain, thereby reducing
administrative and transit costs and working capital. Most important, this
common system should enable seamless, efficient and effective processing of
customer orders for any Chemical Sector product. The objective of
GlobalOne's implementation is to provide superior customer service while
increasing efficiencies in purchasing, manufacturing and delivery
processes.
To be successful, APAC must achieve operational excellence in both the
construction services and construction materials components of its
business. The ability to schedule properly, manage project costs from
initiation to completion and optimize the use of material, equipment and
personnel will drive construction services profits. In addition, APAC must
manage its asphalt and aggregate plants more efficiently and achieve higher
production levels. Finally, APAC is carefully analyzing the profitability
of each of its markets and assessing their future potential. The primary
objective is to grow APAC's bottom line, even if this results in a smaller
construction business.
At September 30, 2005, APAC's backlog of work awarded and funded, but
not yet performed, totaled $2.0 billion, 17% ahead of 2004. The Major
Projects Group won three significant projects in 2005, representing
approximately 9% of the total backlog. A hedging program was initiated in
March 2005, partially protecting APAC's backlog against escalating gasoline
and diesel fuel costs on a go-forward basis. Steps have been taken to
establish consistent, effective processes that should make APAC more
efficient.
Key improvement areas have been identified for APAC. Focus is
increasing on selling aggregates and hot-mix asphalt to third parties.
Also, when these construction materials are used in APAC's construction
jobs, the focus is on capturing their market value in the construction
bids. Finally, APAC is reflecting rising energy and raw material costs in
its pricing models. Ultimately, in a business driven by being the low
bidder, APAC must be operationally excellent to keep projects on track and
finish on time - safely, under budget and with high quality for its
customers.
The MAP Transaction put Ashland in a solid financial position. With
the proceeds, most of Ashland's debt was retired creating a strong balance
sheet. Ashland is now carefully considering opportunities to deploy the
proceeds in value-creating ways. As acquisitions are considered, teams are
identifying different markets, channels and customers - all with the goal
of strengthening Ashland's core businesses, leveraging its capabilities and
achieving its financial objectives. Ashland is looking beyond U.S. borders
to emerging growth markets.
An important determinant of the value of a business is its ability to
generate cash flow over time. Ashland's goal is to drive sustainable cash
flow from its portfolio across an economic cycle. The goal will be pursued
by driving profit growth from Ashland's businesses and improving efficiency
from its capital assets.
Ashland's sales and operating revenues are normally subject to
seasonal variations. Although APAC normally enjoys a relatively long
construction season, most of its operating income is generated during the
construction period of May through October. The following table compares
operating income by quarter for the three years ended September 30, 2005,
excluding Refining and Marketing operations, to illustrate the historical
seasonality of Ashland's remaining four wholly-owned businesses. Amounts
for each quarter do not necessarily total to results for the year due to
rounding.
(In millions) 2005 2004 2003
----------------------------------------------------------------------------
Quarterly operating income (loss)
December 31 $ 44 $ 66 $ 8
March 31 25 8 (45)
June 30 120 87 38
September 30 70 117 1
EFFECTS OF INFLATION AND CHANGING PRICES
Ashland's financial statements are prepared on the historical cost
method of accounting and, as a result, do not reflect changes in the
purchasing power of the U.S. dollar. Although annual inflation rates have
been low in recent years, Ashland's results are still affected by the
cumulative inflationary trend from prior years.
Certain of the industries in which Ashland operates are
capital-intensive, and replacement costs for its plant and equipment
generally would exceed their historical costs. Accordingly, depreciation,
depletion and amortization expense would be greater if it were based on
current replacement costs. However, since replacement facilities would
reflect technological improvements and changes in business strategies, such
facilities would be expected to be more productive than existing
facilities, mitigating part of the increased expense.
M-12
Ashland uses the LIFO method to value a substantial portion of its
inventories to provide a better matching of revenues with current costs.
However, LIFO values such inventories below their replacement costs.
Monetary assets (such as cash, cash equivalents and accounts
receivable) lose purchasing power as a result of inflation, while monetary
liabilities (such as accounts payable and indebtedness) result in a gain,
because they can be settled with dollars of diminished purchasing power.
Ashland's monetary assets now exceed its monetary liabilities, leaving it
more exposed to the effects of future inflation than in the past, when that
relationship was reversed.
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, with respect to
Ashland's operating performance. 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 Risks and Uncertainties in Note A of
Notes to Consolidated Financial Statements and in Item 1A of this annual
report on Form 10-K. Ashland undertakes no obligation to subsequently
update or revise these forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland regularly uses commodity-based and foreign currency
derivative instruments to manage its exposure to price fluctuations
associated with the purchase of diesel fuel and gasoline, as well as
certain transactions denominated in foreign currencies. All derivative
instruments are recognized as either assets or liabilities on the balance
sheet and are measured at fair value. Changes in the fair value of all
derivatives are recognized immediately in income unless the derivative
qualifies as a hedge of future cash flows. Gains and losses related to a
hedge are either recognized in income immediately to offset the gain or
loss on the hedged item, or deferred and recorded in the stockholders'
equity section of the Consolidated Balance Sheet as a component of total
comprehensive income and subsequently recognized in net income when the
hedged item affects net income. The ineffective portion of the change in
fair value of a hedge is recognized in income immediately. Ashland has
designated a limited portion of its foreign currency derivatives as
qualifying for hedge accounting treatment, but their impact on the
consolidated financial statements is not significant. Credit risks arise
from the possible inability of counterparties to meet the terms of their
contracts, but exposure is limited to the replacement value of the
contracts. Ashland further minimizes this credit risk through internal
monitoring procedures and as of September 30, 2005 does not have
significant credit risk on open derivative contracts. The potential loss
from a hypothetical 10% adverse change in commodity prices or foreign
currency rates on Ashland's open commodity-based and foreign currency
derivative instruments at September 30, 2005 would not significantly affect
Ashland's consolidated financial position, results of operations, cash
flows or liquidity.
M-13
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE
PAGE
----------
Management's report on internal control over financial reporting ......... F-2
Reports of independent registered public accounting firm ................. F-3, F-4
Consolidated financial statements:
Statements of consolidated income ................................... F-5
Consolidated balance sheets ......................................... F-6
Statements of consolidated stockholders' equity ..................... F-7
Statements of consolidated cash flows ............................... F-8
Notes to consolidated financial statements .......................... F-9
Information by industry segment .......................................... F-30
Quarterly financial information .......................................... F-32
Consolidated financial schedule:
Schedule II - Valuation and qualifying accounts ..................... F-32
Five-year selected financial information ................................. F-33
Schedules other than that listed above have been omitted because of
the absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements or
the notes thereto. Separate financial statements for MAP required by Rule
3-09 of Regulation S-X will be filed as an amendment to this annual report
on Form 10-K within 90 days after the end of MAP's fiscal year ending
December 31, 2005. Separate financial statements of other unconsolidated
affiliates are omitted because each company does not constitute a
significant subsidiary using the 20% tests when considered individually.
Summarized financial information for such affiliates is disclosed in Note E
of Notes to Consolidated Financial Statements.
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for the preparation and integrity of the
consolidated financial statements and other financial information included
in this annual report on Form 10-K. Such financial statements are prepared
in accordance with U.S. generally accepted accounting principles.
Accounting principles are selected and information is reported which, using
management's best judgment and estimates, present fairly Ashland's
consolidated financial position, results of operations and cash flows. The
other financial information in this annual report on Form 10-K is
consistent with the consolidated financial statements.
Ashland's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). Ashland's internal control
over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
Ashland's consolidated financial statements. Ashland's internal control
over financial reporting is supported by a code of business conduct
entitled "Business Responsibilities of an Ashland Employee" which
summarizes our guiding values such as obeying the law, adhering to high
ethical standards and acting as responsible members of the communities
where we operate. Compliance with that Code forms the foundation of our
internal control systems, which are designed to provide reasonable
assurance that Ashland's assets are safeguarded and its records reflect, in
all material respects, transactions in accordance with management's
authorization. The concept of reasonable assurance is based on the
recognition that the cost of a system of internal control should not exceed
the related benefits. Management believes that adequate internal controls
are maintained by the selection and training of qualified personnel, by an
appropriate division of responsibility in all organizational arrangements,
by the establishment and communication of accounting and business policies,
and by internal audits.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and even when determined
to be effective, can only provide reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Board, subject to stockholder ratification, selects and engages
the independent auditors based on the recommendation of the Audit
Committee. The Audit Committee, composed of directors who are not members
of management, reviews the adequacy of Ashland's policies, procedures and
controls, the scope of auditing and other services performed by the
independent auditors, and the scope of the internal audit function. The
Committee holds meetings with Ashland's internal auditor and independent
auditors, with and without management present, to discuss the findings of
their audits, the overall quality of Ashland's financial reporting and
their evaluation of Ashland's internal controls. The report of Ashland's
Audit Committee can be found in the Company's 2005 Proxy Statement.
Management assessed the effectiveness of Ashland's internal control
over financial reporting as of September 30, 2005. Management conducted its
assessment utilizing the framework described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this assessment, management
believes that Ashland maintained effective internal control over financial
reporting as of September 30, 2005.
Ernst & Young LLP, an independent registered public accounting firm,
has audited and reported on the consolidated financial statements of
Ashland Inc. and consolidated subsidiaries, management's assessment of the
effectiveness of Ashland's internal control over financial reporting and
the effectiveness of Ashland's internal control over financial reporting.
The reports of the independent auditors are contained in this Annual
Report.
/s/ James J. O'Brien /s/ J. Marvin Quin
James J. O'Brien J. Marvin Quin
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
November 30, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Ashland Inc. and consolidated subsidiaries
We have audited the accompanying consolidated balance sheets of
Ashland Inc. and consolidated subsidiaries as of September 30, 2005 and
2004, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 2005. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of Ashland Inc.'s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above (appearing
on pages F-5 to F-31 of this annual report on Form 10-K) present fairly, in
all material respects, the consolidated financial position of Ashland Inc.
and consolidated subsidiaries at September 30, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2005, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the financial statements, in 2003 Ashland
Inc. changed its method of accounting for employee stock based compensation
and variable interest entities.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Ashland Inc.'s internal control over financial reporting as of September
30, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated November 30, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 30, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Ashland Inc. and consolidated subsidiaries
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Ashland Inc. and consolidated subsidiaries maintained effective internal
control over financial reporting as of September 30, 2005, based on
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Ashland Inc.'s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Ashland Inc. and
consolidated subsidiaries maintained effective internal control over
financial reporting as of September 30, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion,
Ashland Inc. and consolidated subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of
September 30, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Ashland Inc. and consolidated subsidiaries as of
September 30, 2005 and 2004, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 2005 and our report dated November 30, 2005
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 30, 2005
F-4
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended September 30
(In millions except per share data) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ 9,270 $ 8,301 $ 7,566
Equity income - Note E 531 432 301
Other income 59 48 45
----------- ----------- -----------
9,860 8,781 7,912
Costs and expenses
Cost of sales and operating expenses 7,823 6,948 6,390
Selling, general and administrative expenses 1,291 1,171 1,256
----------- ----------- -----------
9,114 8,119 7,646
----------- ----------- -----------
Operating income 746 662 266
Gain on the MAP Transaction - Note D (a) 1,284 - -
Loss on early retirement of debt - Note D (145) - -
Net interest and other financial costs - Note G (82) (114) (128)
----------- ----------- -----------
Income from continuing operations before income taxes 1,803 548 138
Income taxes - Note L 202 (150) (44)
----------- ----------- -----------
Income from continuing operations 2,005 398 94
Results from discontinued operations (net of income taxes) - Note P (1) (20) (14)
----------- ----------- -----------
Income before cumulative effect of accounting changes 2,004 378 80
Cumulative effect of accounting changes (net of income taxes) - Note A - - (5)
----------- ----------- -----------
Net income $ 2,004 $ 378 $ 75
=========== =========== ===========
Earnings per share - Note A
Basic
Income from continuing operations $ 27.50 $ 5.69 $ 1.37
Results from discontinued operations (.01) (.28) (.19)
Cumulative effect of accounting changes - - (.08)
----------- ----------- -----------
Net income $ 27.49 $ 5.41 $ 1.10
=========== =========== ===========
Diluted
Income from continuing operations $ 26.86 $ 5.59 $ 1.37
Results from discontinued operations (.01) (.28) (.19)
Cumulative effect of accounting changes - - (.08)
----------- ----------- -----------
Net income $ 26.85 $ 5.31 $ 1.10
=========== =========== ===========
(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 Note D for
further information.
See Notes to Consolidated Financial Statements.
F-5
Ashland Inc. and Consolidated Subsidiaries
Consolidated Balance Sheets
September 30
(In millions) 2005 2004
-----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 985 $ 243
Available-for-sale securities - Note J 403 -
Accounts receivable (less allowances for doubtful accounts of
$43 million in 2005 and $41 million in 2004) 1,599 1,290
Inventories - Note A 527 458
Deferred income taxes - Note L 122 103
Other current assets 121 208
----------- ----------
3,757 2,302
Investments and other assets
Investment in Marathon Ashland Petroleum LLC (MAP) - Notes D and E - 2,713
Goodwill and other intangibles - Note F 650 529
Asbestos insurance receivable (noncurrent portion) - Note O 370 399
Deferred income taxes - Note L 175 -
Other noncurrent assets 441 303
----------- ----------
1,636 3,944
Property, plant and equipment
Cost
Land 122 123
Mineral rights and land improvements 77 47
Buildings 545 534
Machinery and equipment 2,402 2,332
Construction in progress 128 68
----------- ----------
3,274 3,104
Accumulated depreciation, depletion and amortization (1,852) (1,848)
----------- ----------
1,422 1,256
----------- ----------
$ 6,815 $ 7,502
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year
Revolving credit facility $ - $ 40
Current portion of long-term debt 12 399
Trade and other payables 1,520 1,362
Income taxes 13 14
----------- ----------
1,545 1,815
Noncurrent liabilities
Long-term debt (less current portion) - Note G 82 1,109
Employee benefit obligations - Note Q 358 428
Deferred income taxes - Note L - 367
Reserves of captive insurance companies 182 179
Asbestos litigation reserve (noncurrent portion) - Note O 521 568
Other long-term liabilities and deferred credits 388 330
----------- ----------
1,531 2,981
Stockholders' equity - Notes M and N
Preferred stock, no par value, 30 million shares authorized - -
Common stock, par value $.01 per share in 2005 and $1.00 per share in 2004
200 million shares authorized in 2005 and 300 million shares authorized in 2004
Issued - 73 million shares in 2005 and 72 million shares in 2004 1 72
Paid-in capital 605 478
Retained earnings 3,251 2,262
Accumulated other comprehensive loss (118) (106)
----------- ----------
3,739 2,706
----------- ----------
$ 6,815 $ 7,502
=========== ==========
See Notes to Consolidated Financial Statements.
F-6
Ashland Inc. and Consolidated Subsidiaries
Statements of Consolidated Stockholders' Equity
Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
-------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 68 $ 338 $ 1,961 $ (194) $ 2,173
Total comprehensive income (a) 75 68 143
Cash dividends, $1.10 per common share (75) (75)
Issued 81,698 common shares under
stock incentive and other plans (b) 12 12
---------- ---------- ---------- ----------- -----------
Balance at September 30, 2003 68 350 1,961 (126) 2,253
Total comprehensive income (a) 378 20 398
Cash dividends, $1.10 per common share (77) (77)
Issued 3,310,204 common shares under
stock incentive and other plans (b) 4 128 132
---------- ---------- ---------- ----------- -----------
Balance at September 30, 2004 72 478 2,262 (106) 2,706
Total comprehensive income (a) 2,004 (12) 1,992
Cash dividends, $1.10 per common share (79) (79)
Distribution of Marathon shares from the
MAP Transaction - Note D (936) (936)
Change in par value of common stock - Note M (74) 74 -
Issued 3,055,082 common shares under
stock incentive and other plans (b) 3 153 156
Repurchase of 1,768,600 common shares (100) (100)
---------- ---------- ---------- ----------- -----------
Balance at September 30, 2005 (c) $ 1 $ 605 $ 3,251 $ (118) $ 3,739
========== ========== ========== =========== ===========
(a) Reconciliations of net income to total comprehensive income follow.
(In millions) 2005 2004 2003
------------------------------------------------------------------------------------
Net income $ 2,004 $ 378 $ 75
Minimum pension liability adjustment (49) (21) 24
Related tax benefit (expense) 19 8 (9)
Unrealized translation gains 19 32 53
Related tax benefit - 1 -
Unrealized losses on cash flow hedges (1) - -
---------- ---------- ----------
Total comprehensive income $ 1,992 $ 398 $ 143
========== ========== ==========
(b) Includes income tax benefits resulting from the exercise of stock
options of $34 million in 2005 and $16 million in 2004. The amount in
2003 was not significant.
(c) At September 30, 2005, the accumulated other comprehensive loss of
$118 million (after tax) was comprised of a minimum pension liability
of $160 million, net unrealized translation gains of $43 million, and
net unrealized losses on cash flow hedges of $1 million.
See Notes to Consolidated Financial Statements.
F-7
Ashland Inc. and Consolidated Subsidiaries
Statements of Consolidated Cash Flows
Years Ended September 30
(In millions) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------
Cash flows from operations
Income from continuing operations $ 2,005 $ 398 $ 94
Adjustments to reconcile to cash flows from operations
Depreciation, depletion and amortization 193 193 204
Deferred income taxes (532) 125 49
Equity income from affiliates (531) (432) (301)
Distributions from equity affiliates 281 169 203
Gain on the MAP Transaction - Note D (1,284) - -
Loss on early retirement of debt - Note D 145 - -
Change in operating assets and liabilities (a) (235) (246) (8)
Other items (5) 2 1
----------- ----------- -----------
37 209 242
Cash flows from financing
Proceeds from issuance of common stock 115 108 2
Repayment of long-term debt (1,552) (100) (216)
Repurchase of common stock (100) - -
Increase (decrease) in short-term debt (40) 40 (10)
Cash dividends paid (79) (77) (75)
----------- ----------- -----------
(1,656) (29) (299)
Cash flows from investment
Additions to property, plant and equipment (380) (210) (112)
Purchase of operations - net of cash acquired (156) (5) (5)
Proceeds from sale of operations 3,306 48 7
Purchases of available-for-sale securities (402) - -
Proceeds from sales and maturities of available-for-sale securities 1 - -
Other - net 19 26 13
----------- ----------- -----------
2,388 (141) (97)
----------- ----------- -----------
Cash provided (used) by continuing operations 769 39 (154)
Cash provided (used) by discontinued operations (27) (19) 287
----------- ----------- -----------
Increase in cash and cash equivalents 742 20 133
Cash and cash equivalents - beginning of year 243 223 90
----------- ----------- -----------
Cash and cash equivalents - end of year $ 985 $ 243 $ 223
=========== =========== ===========
Decrease (increase) in operating assets (a)
Accounts receivable $ (312) $ (157) $ (79)
Inventories (82) (14) 15
Deferred income taxes (3) 2 22
Other current assets 94 (64) (5)
Investments and other assets (245) (15) 7
Increase (decrease) in operating liabilities (a)
Trade and other payables 150 (15) 115
Income taxes (3) (19) (50)
Noncurrent liabilities 166 36 (33)
----------- ----------- -----------
Change in operating assets and liabilities $ (235) $ (246) $ (8)
=========== =========== ===========
(a) Excludes changes resulting from operations acquired or sold.
Supplemental disclosures
Cash payments for
Interest $ 119 $ 116 $ 125
Income taxes 299 84 24
Non-cash distribution of Marathon stock 936 - -
See Notes to Consolidated Financial Statements.
F-8
Ashland Inc. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Ashland
and its majority owned subsidiaries. Investments in joint ventures and 20%
to 50% owned affiliates are accounted for by the equity method. In January
2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." Beginning July 1, 2003, the lessor entity in one of Ashland's
lease programs was consolidated in Ashland's financial statements under FIN
46, resulting in a pretax charge of $8 million ($5 million net of income
taxes) for the cumulative effect of this accounting change. Property, plant
and equipment increased by $27 million and long-term debt increased by $35
million as a result of the consolidation of the lessor entity. Ashland
canceled the lease and purchased the assets from the lessor in October
2003. All material intercompany transactions and balances have been
eliminated. Certain prior period data has been reclassified in the
consolidated financial statements and accompanying footnotes to conform to
current period presentation.
USE OF ESTIMATES, RISKS AND UNCERTAINTIES
The preparation of Ashland's 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.
Ashland's results are affected by domestic and international economic,
political, legislative, regulatory and legal actions, as well as weather
conditions. Economic conditions, such as recessionary trends, inflation,
interest and monetary exchange rates, and changes in the prices of
hydrocarbon-based products, can have a significant effect on operations.
Political actions may include changes in the policies of the Organization
of Petroleum Exporting Countries or other developments involving or
affecting oil-producing countries, including military conflict, embargoes,
internal instability or actions or reactions of the U.S. government in
anticipation of, or in response to, such actions. While Ashland maintains
reserves for anticipated liabilities and carries various levels of
insurance, Ashland could be affected by civil, criminal, regulatory or
administrative actions, claims or proceedings relating to asbestos,
environmental remediation or other matters. In addition, climate and
weather can significantly affect Ashland's results from certain of its
operations, including APAC's construction activities.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments maturing within
three months after purchase.
AVAILABLE-FOR-SALE SECURITIES
Securities are classified as held-to-maturity or available-for-sale on
the date of purchase. Available-for-sale securities are reported at fair
value with unrealized gains and losses, net of related deferred income
taxes, included in accumulated other comprehensive income, a component of
stockholders' equity. The fair value of a security is determined based on
quoted market prices. Interest and dividends along with realized gains or
losses are reported within the net interest and other financial costs line
in the Statements of Consolidated Income. The cost of securities sold is
based on the specific identification method. All securities are reviewed
quarterly for possible other-than-temporary impairment. The review includes
an analysis of the facts and circumstances of each individual investment
such as the severity of loss, the length of time the fair value has been
below cost, the expectation for that security's performance, the
creditworthiness of the issuer and Ashland's intent and ability to hold the
security. A decline in value that is considered to be other-than-temporary
is recorded as a loss within the net interest and other financial costs
line in the Statements of Consolidated Income.
F-9
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Ashland records an allowance for doubtful accounts as a best estimate
of the amount of probable credit losses for accounts receivable. Each month
Ashland reviews this allowance and considers factors such as customer
credit, past transaction history with the customer and changes in customer
payment terms when determining whether the collection of a receivable is
reasonably assured. Past due balances over 90 days and over a specified
amount are reviewed individually for collectibility. Receivables are
charged off against the allowance for doubtful accounts when it is probable
a receivable will not be recovered.
INVENTORIES
(In millions) 2005 2004
-------------------------------------------------------------------------------
Chemicals and plastics $ 429 $ 370
Construction materials 80 71
Lubricants 68 61
Other products 67 45
Supplies 9 6
Excess of replacement costs over LIFO carrying values (126) (95)
---------- ----------
$ 527 $ 458
========== ==========
Inventories are carried at the lower of cost or market. Chemicals,
plastics and lubricants with a replacement cost of $337 million at
September 30, 2005, and $286 million at September 30, 2004, 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).
In November 2004, the FASB issued Statement No. 151 (FAS 151),
"Inventory Costs." FAS 151 amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). FAS 151 will be effective for Ashland in fiscal
2006 and is expected to have an immaterial effect on Ashland's financial
position, results of operations and cash flows.
PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment is depreciated by the
straight-line method over the estimated useful lives of the assets. The
cost of mineral rights is depleted principally over 5 to 50 years,
buildings are depreciated over 25 to 35 years and machinery and equipment
principally over 4 to 15 years. Such costs are periodically reviewed for
recoverability when impairment indicators are present. Such indicators
include, among other factors, operating losses, unused capacity, market
value declines and technological obsolescence. Recorded values of property,
plant and equipment that are not expected to be recovered through
undiscounted future net cash flows are written down to current fair value,
which generally is determined from estimated discounted future net cash
flows (assets held for use) or net realizable value (assets held for sale).
During 2003, Ashland recognized an impairment charge of $10 million for a
maleic anhydride production facility that is shutdown and not likely to
reopen based on internal analyses. Impairment charges recognized during
2005 and 2004 were not significant.
DERIVATIVE INSTRUMENTS
Ashland regularly uses commodity-based and foreign currency
derivative instruments to manage its exposure to price fluctuations
associated with the purchase of diesel fuel and gasoline, as well as
certain transactions denominated in foreign currencies. All derivative
instruments are recognized as either assets or liabilities on the balance
sheet and are measured at fair value. Changes in the fair value of all
derivatives are recognized immediately in income unless the derivative
qualifies as a hedge of future cash flows. Gains and losses related to a
hedge are either recognized in income immediately to offset the gain or
loss on the hedged item, or deferred and recorded in the stockholders'
equity section of the Consolidated Balance Sheet as a component of total
comprehensive income and subsequently recognized in net income when the
hedged item affects net income. The ineffective portion of the change in
fair value of a hedge is recognized in income immediately. Ashland has
designated a limited portion of its
F-10
foreign currency derivatives as qualifying for hedge accounting treatment,
but their impact on the consolidated financial statements is not
significant. Credit risks arise from the possible inability of
counterparties to meet the terms of their contracts, but exposure is
limited to the replacement value of the contracts. Ashland further
minimizes this credit risk through internal monitoring procedures and as of
September 30, 2005 does not have significant credit risk on open derivative
contracts.
REVENUE RECOGNITION
Income related to construction contracts generally is recognized by
the units-of-production method, which is a variation of the
percentage-of-completion method. Any anticipated losses on such contracts
are charged against operations as soon as such losses are determined to be
probable and estimable. Other revenues generally are recognized when
products are shipped or services are provided to customers, the sales price
is fixed or determinable and collectibility is reasonably assured. Costs
associated with revenues, including shipping and handling costs, are
recorded in cost of sales and operating expenses.
EXPENSE RECOGNITION
Because Ashland's products generally are sold without any extended
warranties, liabilities for product warranties are insignificant. Costs of
product warranties generally are expensed as incurred. Advertising costs
($69 million in 2005, $78 million in 2004 and $77 million in 2003) and
research and development costs ($45 million in 2005, $43 million in 2004
and $36 million in 2003) are expensed as incurred.
INCOME TAXES
Ashland is subject to income taxes in the United States and numerous
foreign jurisdictions. Significant judgment is required in determining
Ashland's provision for income taxes and the related assets and
liabilities. In the ordinary course of Ashland's business, there are many
transactions and calculations where the ultimate tax determination is
uncertain. Ashland is regularly under audit by tax authorities. Accruals
for tax contingencies are provided for in accordance with the requirements
of FASB Statement No. 5, "Accounting for Contingencies."
Although Ashland believes it has appropriate support for the positions
taken on tax returns, a liability has been recorded that represents
Ashland's best estimate of the probable loss on certain of these positions.
Ashland believes that the recorded accruals for all known tax liabilities
are adequate for all open years, based on the assessment of many factors
including past experience and interpretations of tax law applied to the
facts of each matter. Although Ashland believes the recorded assets and
liabilities are reasonable, tax regulations are subject to interpretation
and tax litigation is inherently uncertain. Therefore, Ashland's
assessments can involve both a series of complex judgments about future
events and rely heavily on estimates and assumptions. Although Ashland
believes that the estimates and assumptions supporting its assessments are
reasonable, the final determination of tax audits and any related
litigation could be materially different than that which is reflected in
historical income tax provisions and recorded assets and liabilities. Based
on the results of an audit or litigation, a material effect on Ashland's
income tax provision, net income, or cash flows could result in the period
such a determination is made. Due to the complexity involved, Ashland is
not able to estimate the range of reasonably possible losses in excess of
amounts recorded.
ENVIRONMENTAL COSTS
Accruals for environmental costs are recognized when it is probable a
liability has been incurred and the amount of that liability can be
reasonably estimated. Such costs are charged to expense if they relate to
the remediation of conditions caused by past operations or are not expected
to mitigate or prevent contamination from future operations. Liabilities
are recorded at undiscounted amounts based on experience, assessments and
current technology, without regard to any third-party recoveries and are
regularly adjusted as environmental assessments and remediation efforts
continue.
FOREIGN CURRENCY TRANSLATION
Operations outside the United States are measured using the local
currency as the functional currency. Upon consolidation, the results of
operations of the subsidiaries and affiliates whose functional currency is
other than the U.S. dollar are translated into U.S. dollars at the average
exchange rates for the year and assets and liabilities are translated at
year end exchange rates. Adjustments to translate assets and liabilities
into U.S. dollars are recorded in
F-11
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the stockholders' equity section of the Consolidated Balance Sheet as a
component of total comprehensive income and are included in net earnings
only upon sale or liquidation of the underlying foreign subsidiary or
affiliated company.
STOCK INCENTIVE PLANS
As of October 1, 2002, Ashland began expensing employee stock options
in accordance with FASB Statement No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," 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. Prior to October 1, 2002, Ashland accounted for stock options
under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," and related Interpretations, and no expense was
recorded. In 2004, Ashland began granting stock-settled stock appreciation
rights (SARs), which are expensed like stock options in accordance with FAS
123. In addition to stock options and SARs, Ashland grants nonvested stock
awards to key employees and directors, which are expensed over their
vesting period under either APB 25 or FAS 123.
EARNINGS PER SHARE
Following is the computation of basic and diluted earnings per share
(EPS) from continuing operations.
(In millions except per share data) 2005 2004 2003
--------------------------------------------------------------------------------------------------
Numerator
Numerator for basic and diluted EPS -
Income from continuing operations $ 2,005 $ 398 $ 94
========== ========== ===========
Denominator
Denominator for basic EPS - Weighted average
common shares outstanding 73 70 68
Common shares issuable upon exercise of stock options
and stock appreciation rights 2 1 1
---------- ---------- -----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 75 71 69
========== ========== ===========
EPS from continuing operations
Basic $ 27.50 $ 5.69 $ 1.37
Diluted 26.86 5.59 1.37
NOTE B - INFORMATION BY INDUSTRY SEGMENT
Ashland's businesses are managed along four industry segments: APAC,
Ashland Distribution, Ashland Specialty Chemical and Valvoline. Ashland
also held a 38% interest in Marathon Ashland Petroleum LLC (MAP), which was
the primary component of its Refining and Marketing segment, through June
30, 2005. Information by industry segment is shown on pages F-30 and F-31.
The APAC group of companies performs contract construction work, such
as paving, repairing and resurfacing highways, streets, airports,
residential and commercial developments, sidewalks and driveways; grading
and base work. In addition, it performs a number of services such as
excavation and site work for the construction of bridges, other structures,
drainage facilities and underground utilities for public and private
projects. APAC conducts its business through 25 market-focused business
units and a Major Projects Group operating in 14 southern and mid-continent
states. These business units provide construction services and materials
throughout the regions in which they operate.
Ashland Distribution distributes chemicals, plastics, and composites
in North America and plastics in Europe, and provides environmental
services throughout North America. Ashland Distribution specializes in
providing mixed truckloads and less-than-truckload quantities to customers
in a wide range of industries. Deliveries are facilitated through a network
of owned or leased facilities including 126 locations in North America.
Distribution of
F-12
thermoplastic resins in Europe is conducted in 13 countries primarily
through 17 third-party warehouses and one owned warehouse.
Ashland Specialty Chemical is focused on two primary businesses:
performance materials and water technologies. It is a worldwide supplier of
specialty chemicals and customized services for industries including
building and construction; metal casting; packaging and converting;
chemical processing; power generation; automotive, commercial and
institutional facility management; food processing; mining; pulp and paper;
paint and coatings; merchant marine; recreational marine and
transportation. Ashland Specialty Chemical owns and operates 38
manufacturing facilities and participates in 12 manufacturing joint
ventures in 19 countries.
Valvoline is a marketer of premium-branded automotive and commercial
oils, automotive chemicals, automotive appearance products and automotive
services, with sales in more than 100 countries. Valvoline is engaged in
the "fast oil change" business through owned and franchised service centers
operating under the Valvoline Instant Oil Change (VIOC) name.
Ashland's Refining and Marketing operations consisted primarily of
equity income from Ashland's 38% interest in MAP, a former joint venture
with Marathon Oil Corporation (Marathon), which operates seven refineries
with a total crude oil refining capacity of 948,000 barrels per day. On
June 30, 2005, Ashland completed the transfer of its 38% interest in MAP
and two other businesses to Marathon in a transaction valued at
approximately $3.7 billion. For further information on this transaction see
Note D.
Information about Ashland's domestic and international operations
follows. Ashland has no material operations in any individual international
country and no single customer represents more than 10% of sales and
operating revenues in 2005, 2004 or 2003.
Revenues from Property, plant
external customers Net assets and equipment
------------------------------------- ----------------------- ----------------------
(In millions) 2005 2004 2003 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------------
United States $ 8,080 $ 7,406 $ 6,787 $ 3,162 $ 2,244 $ 1,260 $ 1,105
International 1,780 1,375 1,125 577 462 162 151
----------- ----------- ----------- ---------- ---------- ---------- ----------
$ 9,860 $ 8,781 $ 7,912 $ 3,739 $ 2,706 $ 1,422 $ 1,256
=========== =========== =========== ========== ========== ========== ==========
NOTE C - RELATED PARTY TRANSACTIONS
Ashland sells chemicals and lubricants to MAP and purchases petroleum
products from MAP. Such transactions are in the ordinary course of business
at negotiated prices comparable to those of transactions with other
customers and suppliers. In addition, Ashland and MAP provide certain
administrative services to each other, the net amounts of which are not
significant and are included in the sales amounts below. As further
described in Note D, Ashland transferred its remaining interest in MAP to
Marathon on June 30, 2005. The following table indicates the amounts of
these transactions for the nine months ended June 30, 2005 and the fiscal
years ended September 30, 2004 and 2003. Ashland's transactions with other
affiliates and related parties were not significant.
(In millions) 2005 2004 2003
-------------------------------------------------------------------------------
Ashland's sales to MAP $ 19 $ 22 $ 25
Ashland's purchases from MAP 192 274 247
NOTE D - MAP TRANSACTION
On June 30, 2005, Ashland completed its previously announced agreement
with Marathon to transfer Ashland's 38% interest in MAP and two other
businesses to Marathon in a transaction valued at approximately $3.7
billion (the "MAP Transaction"). The two other businesses were Ashland's
maleic anhydride business and 60 Valvoline Instant Oil Change centers in
Michigan and northwest Ohio.
As a result of the transaction, Old Ashland shareholders of record as
of the close of business on June 30, 2005 received .2364 Marathon shares
and one Ashland share per Old Ashland share. In total, Ashland's
shareholders received 17,538,815 shares of Marathon common stock with an
aggregate value of $936 million based upon the June 30 closing price of
Marathon stock. Additionally, the transaction resulted in Ashland's receipt
of $2.4 billion in
F-13
NOTE D - MAP TRANSACTION (CONTINUED)
cash and MAP accounts receivable of $913 million, which totaled $3.3
billion. This amount was comprised of $2.8 billion of cash and accounts
receivable, which amount was included in the $3.7 billion transaction
value, and $518 million of additional cash and accounts receivable
representing 38% of MAP's distributable cash and other adjustments as of
June 30, 2005. As of September 30, 2005, substantially all of the
receivables had been collected.
Proceeds net of expenses of $28 million exceeded the book investment
and resulted in a pretax gain of $1,284 million. Even though the Marathon
common stock distribution went directly to Ashland shareholders, for
financial reporting purposes the Marathon stock is reflected as non-cash
proceeds from the transaction, included in the gain computation, and then
shown as a distribution to shareholders out of retained earnings in
Ashland's stockholders' equity progression. The pretax gain is shown on a
separate line caption on the Statements of Consolidated Income below
operating income and labeled "Gain on the MAP Transaction." Because none of
the businesses qualify as discontinued operations under FASB Statement No.
144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," the gain is reported in income from continuing operations, with no
restatement of prior results.
The MAP Transaction was structured to be generally tax-free to Ashland
shareholders and tax-efficient to Ashland. Ashland and Marathon entered
into a closing agreement with the Internal Revenue Service (IRS) with
respect to various tax consequences of the transaction. Pursuant to a Tax
Matters Agreement (TMA) with Marathon, any tax payable under Section 355(e)
of the Internal Revenue Code on the transaction up to $200 million will be
borne by Marathon, with the next $175 million being borne by Ashland, and
any tax over $375 million being split equally between the two companies. An
estimate of the 355(e) tax due of $9 million was filed with the IRS and
paid in the September 2005 quarter, the cost of which was borne by
Marathon.
Due to the structure of the transaction, Marathon is entitled to the
tax deductions for Ashland's future payments of certain contingent
liabilities related to previously owned businesses of Ashland. However,
pursuant to the terms of the TMA, Marathon has agreed to compensate Ashland
for these tax deductions. Ashland recorded a discounted receivable of $62
million for the estimated present value of probable recoveries from
Marathon for the portion of these future tax deductions which is not
dependent upon Marathon's ability to utilize these deductions. This
receivable is included in the $1,284 million pretax gain on the transaction
and is included in other noncurrent assets on Ashland's balance sheet at
September 30, 2005. Deferred tax assets previously recorded on these
contingent liabilities were reversed through the income tax provision for
the transaction. Going forward, adjustments to the receivable resulting
from changes in the liability estimates will go through the Gain on the MAP
Transaction line caption on the income statement, while the accretion of
the discount will be reflected in interest income.
Net deferred tax liabilities totaling $335 million were reversed
through the income tax provision for the transaction. The reversal of
deferred taxes, including those deferred tax assets related to the
contingent liabilities discussed above, reflects the fact that Marathon
assumes Ashland's tax basis in these net assets as a result of the MAP
Transaction.
Ashland used a substantial portion of the proceeds of the MAP
Transaction to retire most of its debt and certain other financial
obligations. In addition to the payoff of $250 million of receivables
financing and the purchase of $101 million of assets that were formerly
leased under operating leases, Ashland retired approximately $1.6 billion
of balance sheet debt as of September 30, 2005 and incurred a loss on the
early retirement of debt of $145 million. The loss consisted of debt
repayment premiums of $139 million, a tender fee of $3 million and the
write-off of deferred debt issuance costs of $3 million. A tax benefit of
$57 million was recorded for the loss on early retirement of debt. Ashland
expects to retire additional debt and other financial obligations in
subsequent quarters.
The gain on the MAP Transaction and the loss on early retirement of
debt, net of their respective tax effects, increased net income by $1,531
million, or $20.51 per share, for the year ended September 30, 2005. Due to
the continuing nature of certain tax issues, the gain may continue to be
adjusted in future periods and is expected to be primarily in the tax area
due to the unique and complicated tax aspects of the transaction.
Adjustments to the gain will be reflected in the quarter they are
determined.
NOTE E - UNCONSOLIDATED AFFILIATES
Summarized financial information reported by MAP and other companies
accounted for on the equity method is presented in the following table,
along with a summary of the amounts recorded in Ashland's consolidated
financial statements. As further discussed in Note D, Ashland transferred
its remaining interest in MAP to Marathon on June 30, 2005. MAP's
summarized financial information as presented below is for the nine months
ended June 30,
F-14
2005. The summarized financial information for all other companies
accounted for on the equity method by Ashland is as of and for the year
ended September 30, 2005. Since MAP was organized as a limited liability
company that elected to be taxed as a partnership, the parents were
responsible for income taxes applicable to their share of MAP's taxable
income. The net income of MAP reflected in the following table does not
include any provision for income taxes incurred by its parents. At
September 30, 2005, Ashland's retained earnings included $30 million of
undistributed earnings from unconsolidated affiliates accounted for on the
equity method.
Other
(In millions) MAP affiliates Total
----------------------------------------------------------------------------------------
September 30, 2005
Financial position
Current assets $ 162
Current liabilities (89)
----------
Working capital 73
Noncurrent assets 62
Noncurrent liabilities (12)
----------
Stockholders' equity $ 123
==========
Results of operations
Sales and operating revenues $ 38,195 (a) $ 402
Income from operations 1,408 (a) 33
Net income 1,396 (a) 23
Amounts recorded by Ashland
Investments and advances $ - $ 61 $ 61
Equity income 517 14 531
Distributions received 272 9 281
September 30, 2004
Financial position
Current assets $ 5,265 $ 160
Current liabilities (3,436) (87)
----------- ----------
Working capital 1,829 73
Noncurrent assets 5,219 78
Noncurrent liabilities (724) (14)
----------- ----------
Stockholders' equity $ 6,324 $ 137
=========== ==========
Results of operations
Sales and operating revenues $ 40,672 $ 409
Income from operations 1,129 51
Net income 1,118 44
Amounts recorded by Ashland
Investments and advances 2,713 54 $ 2,767
Equity income 405 27 432
Distributions received 146 23 169
September 30, 2003
Results of operations
Sales and operating revenues $ 32,034 $ 336
Income from operations 810 41
Net income 795 34
Amounts recorded by Ashland
Equity income 285 16 $ 301
Distributions received 197 6 203
(a) Amounts are for the nine months ended June 30, 2005. See Note D for
further information.
F-15
NOTE F - GOODWILL AND OTHER INTANGIBLES
In accordance with FASB Statement No. 142 (FAS 142), "Goodwill and
Other Intangible Assets," Ashland has discontinued the practice of
amortizing goodwill and indefinite lived intangible assets and initiated an
annual review for impairment. Impairment is to be examined more frequently
if certain indicators are encountered. Ashland has completed its most
recent annual goodwill impairment test required by FAS 142 as of July 1,
2005 and has determined that no impairment exists.
The following is a progression of goodwill by segment for the years
ended September 30, 2005 and 2004.
Ashland
Ashland Specialty
(In millions) APAC Distribution Chemical Valvoline Total
--------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 426 $ - $ 91 $ 6 $ 523
Goodwill assigned to sold businesses (13) - - - (13)
Impairment losses (2) - - - (2)
Currency translation adjustments - - 5 - 5
----------- ----------- ---------- ---------- ----------
Balance at September 30, 2004 411 - 96 6 513
Goodwill assigned to sold businesses (1) - - - (1)
Acquisitions 3 1 43 18 65
----------- ----------- ---------- ---------- ----------
Balance at September 30, 2005 $ 413 $ 1 $ 139 $ 24 $ 577
=========== =========== ========== ========== ==========
Intangible assets consist of trademarks, 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 is amortized principally
over 10 to 25 years and patents and other intangibles over 3 to 17 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 September 30,
2005 and 2004.
2005 2004
----------------------------------------- -----------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(In millions) amount amortization amount amount amortization amount
-------------------------------------------------------------------------- -----------------------------------------
Trademarks $ 56 $ (18) $ 38 $ 23 $ (16) $ 7
Patents and other intangibles 49 (14) 35 24 (15) 9
----------- -------------- ------------ ----------- -------------- ------------
Total intangible assets $ 105 $ (32) $ 73 $ 47 $ (31) $ 16
=========== ============== ============ =========== ============== ============
Amortization expense recognized on intangible assets was $4 million
for 2005, $3 million for 2004 and $3 million for 2003. As of September 30,
2005, all of Ashland's intangible assets that had a carrying value were
being amortized. Estimated amortization expense for future periods is $5
million in 2006, $4 million in 2007, $4 million in 2008, $3 million in 2009
and $3 million in 2010.
F-16
NOTE G - DEBT
(In millions) 2005 2004
-------------------------------------------------------------------------------------------------------
Medium-term notes, due 2005-2019, interest at a weighted
average rate of 7.9% at September 30, 2005 (7.1% to 9.4%) $ 42 $ 524
8.80% debentures, due 2012 20 250
7.83% medium-term notes, Series J, due 2005 - 229
Pollution control and industrial revenue bonds, due
2005-2022, interest at a weighted average rate of 5.7%
at September 30, 2004 (1.7% to 7.1%) - 168
6.86% medium-term notes, Series H, due 2009 17 150
6.625% senior notes, due 2008 3 150
Other 12 37
----------- -----------
Total long-term debt 94 1,508
Current portion of long-term debt (12) (399)
----------- -----------
Long-term debt (less current portion) $ 82 $ 1,109
=========== ===========
Aggregate maturities of long-term debt are $12 million in 2006, $12
million in 2007, $5 million in 2008, $20 million in 2009 and $3 million in
2010. The weighted average interest rate on short-term borrowings
outstanding was 2.7% at September 30, 2004. No short-term borrowings were
outstanding at September 30, 2005.
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 $102 million of letters of
credit outstanding at September 30, 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 $5.5
billion of borrowings at September 30, 2005. Additional permissible
borrowings are increased (decreased) by 150% of any increase (decrease) in
stockholders' equity.
NET INTEREST AND OTHER FINANCIAL COSTS
(In millions) 2005 2004 2003
--------------------------------------------------------------------------------------------------
Interest expense $ 90 $ 114 $ 123
Expenses on sales of accounts receivable (see Note I) 4 3 3
Other financial costs 3 3 3
Interest income (15) (6) (1)
---------- ---------- -----------
$ 82 $ 114 $ 128
========== ========== ===========
NOTE H - LEASES
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation and off-road construction equipment, warehouses and
storage facilities, and other equipment, facilities and properties under
leasing agreements that expire at various dates. Capitalized lease
obligations are not significant and are included in long-term debt.
In June 2005, Ashland used $101 million of the proceeds from the MAP
Transaction to purchase assets (primarily APAC construction equipment and
VIOC stores) formerly leased under operating leases. Future minimum rental
payments were not affected by this purchase. Future minimum rental payments
at September 30, 2005 and rental expense under operating leases follow.
F-17
NOTE H - LEASES (CONTINUED)
(In millions)
Future minimum rental payments Rental expense 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
2006 $ 50 Minimum rentals
2007 42 (including rentals under
2008 35 short-term leases) $ 112 $ 104 $ 98
2009 27 Contingent rentals 3 3 3
2010 20 Sublease rental income (2) (2) (2)
----------- ----------- -----------
Later years 72 $ 113 $ 105 $ 99
---------- =========== =========== ===========
$ 246
==========
NOTE I - SALE OF ACCOUNTS RECEIVABLE
On March 15, 2000, Ashland entered into a five-year agreement to sell,
on an ongoing basis with limited recourse, up to a $200 million undivided
interest in a designated pool of accounts receivable. Under the terms of
the agreement, new receivables were added to the pool and collections
reduced the pool. Ashland retained a credit interest in these receivables
and addressed its risk of loss on this retained interest in its allowance
for doubtful accounts. Receivables sold excluded defaulted accounts or
concentrations over certain limits with any one customer. On March 15,
2005, this agreement was extended for a period of one year and the capacity
was increased to $250 million. The agreement was terminated by Ashland on
July 27, 2005.
NOTE J - SECURITIES AND FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
Ashland uses commodity-based and foreign currency derivative
instruments as described in Note A. Open contracts were not significant at
September 30, 2005 and 2004.
FAIR VALUES
The carrying amounts and fair values of Ashland's significant
financial instruments at September 30, 2005 and 2004 are shown below. The
fair values of cash and cash equivalents, available-for-sale securities,
investments of captive insurance companies and the revolving credit
facility approximate their carrying amounts. The fair values of long-term
debt are based on quoted market prices or, if market prices are not
available, the present values of the underlying cash flows discounted at
Ashland's incremental borrowing rates.
2005 2004
----------------------- ------------------------
Carrying Fair Carrying Fair
(In millions) amount value amount value
---------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 985 $ 985 $ 243 $ 243
Available-for-sale securities 403 403 - -
Investments of captive insurance companies (a) 14 14 13 13
Liabilities
Revolving credit facility - - 40 40
Long-term debt (including current portion) 94 106 1,508 1,675
(a) Included in other noncurrent assets in the Consolidated Balance Sheets.
F-18
AVAILABLE-FOR-SALE SECURITIES
The following table provides a summary of the available-for-sale
securities portfolio as of September 30, 2005. Ashland held no
available-for-sale securities in 2004.
Amortized Unrealized Unrealized Fair
(In millions) cost gain loss value
--------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 122 $ - $ - $ 122
Corporate debt securities 281 - - 281
---------- ---------- ---------- -----------
Total $ 403 $ - $ - $ 403
========== ========== ========== ===========
The net unrealized loss on available-for-sale securities included in
other comprehensive income as of September 30, 2005 was not significant. No
available-for-sale securities were sold during fiscal year 2005 and all
available-for-sale security holdings had a maturity of 12 months or less as
of September 30, 2005. Actual maturities may differ from contractual
maturities when there exists a right to call or prepay obligations with or
without call or prepayment penalties.
NOTE K - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
In November 2004, Ashland Composite Polymers, a business unit of
Ashland Specialty Chemical, acquired Dow Chemical's DERAKANE(R) epoxy vinyl
ester resins business for approximately $90 million. DERAKANE(R) technology
is used in fiber reinforced plastic applications requiring outstanding
corrosion resistance and structural strength, which complements Ashland's
existing product portfolio of thermoset resins. The purchase included all
technology and intellectual property assets associated with the DERAKANE(R)
resins business. No physical assets were transferred to Ashland.
In June 2005, Valvoline acquired Car Brite, a leading marketer of
products for the U.S. professional automotive reconditioning industry whose
products include a broad array of interior and exterior cleaners, paint
restorers and protectants and final detail dressings, paints and dyes.
Several other acquisitions were completed by APAC, Ashland Distribution,
Ashland Specialty Chemical and Valvoline during the three years ended
September 30, 2005. These acquisitions, individually and in the aggregate,
did not have a significant effect on Ashland's consolidated financial
statements.
All acquisitions are accounted for under the purchase method of
accounting. Ashland is currently in the process of finalizing its valuation
of the assets acquired and liabilities assumed for several acquisitions to
assist it in allocating the purchase price to the individual assets
acquired and liabilities assumed. The preliminary allocation of purchase
price included in the current period balance sheet is based on Ashland's
current best estimate and is subject to revision based on final
determination of fair value. Ashland anticipates that the valuations will
be completed prior to the first anniversary of the acquisitions.
DIVESTITURES
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 Oil
Corporation in a transaction valued at approximately $3.7 billion. See Note
D for further information on this transaction. Also during 2005, Ashland
Distribution sold its ingestibles business and APAC made one small
divestiture, neither of which had a significant effect on Ashland's
consolidated financial statements.
During 2004, APAC sold much of its remaining ready-mix operations and
certain other operations. During 2003, APAC sold the assets of its
Nashville division and certain ready-mix operations in Missouri. None of
these divestitures had a significant effect on Ashland's consolidated
financial statements.
On August 29, 2003, Ashland Specialty Chemical sold the net assets of
its Electronic Chemicals business and certain related subsidiaries in a
transaction valued at approximately $300 million before tax. See Note P for
information on this transaction.
F-19
NOTE L - INCOME TAXES
A summary of the provision for income taxes related to continuing
operations follows.
(In millions) 2005 2004 2003
-----------------------------------------------------------------
Current
Federal $ 267 $ (6) $ (17)
State 35 6 (3)
Foreign 28 25 15
----------- ----------- -----------
330 25 (5)
Deferred (532) 125 49
----------- ----------- -----------
$ (202) $ 150 $ 44
=========== =========== ===========
Deferred income taxes are provided for income and expense items
recognized in different years for tax and financial reporting purposes.
Ashland has not recorded deferred income taxes on the undistributed
earnings of certain foreign subsidiaries and foreign corporate joint
ventures. Management intends to indefinitely reinvest such earnings, which
amounted to $188 million at September 30, 2005. Because of significant
foreign tax credits, it is estimated that U.S. federal income taxes of
approximately $16 million would be incurred if those earnings were
distributed. Foreign net operating loss carryforwards primarily relate to
certain European operations and generally may be carried forward
indefinitely. Temporary differences that give rise to significant deferred
tax assets and liabilities follow.
(In millions) 2005 2004
-----------------------------------------------------------------------------------------------------------
Employee benefit obligations $ 192 $ 201
Environmental, self-insurance and litigation reserves (net of receivables) 112 183
Compensation accruals 86 74
Uncollectible accounts receivable 15 15
Foreign net operating loss carryforwards 18 12
Other items 42 37
Valuation allowances (18) (12)
----------- -----------
Total deferred tax assets 447 510
----------- -----------
Property, plant and equipment 147 182
Investment in unconsolidated affiliates 3 592
----------- -----------
Total deferred tax liabilities 150 774
----------- -----------
Net deferred tax (asset) liability $ (297) $ 264
=========== ===========
As described in Note D, Ashland's income tax benefit for 2005 included
a benefit of $335 million associated with the MAP Transaction, resulting
from the reversal of deferred tax liabilities. Ashland's income tax benefit
for 2005 also included $39 million in tax benefits related to prior years.
These benefits resulted primarily from a favorable settlement with the
Internal Revenue Service for the 1996 - 1998 audit period and the
reevaluation of income tax reserves related to other years.
Ashland's income tax expense for 2004 included $48 million in tax
benefits related to prior years. During the year, Ashland reached
resolution with the Internal Revenue Service on several open tax matters
from prior years, resulting in a tax benefit of $33 million as a result of
the reduction of amounts previously provided as contingent tax liabilities.
In addition, Ashland recognized federal income tax benefits associated with
a claim for additional research and development tax credits valued at $15
million.
The U.S. and foreign components of income from continuing operations
before income taxes and a reconciliation of the statutory federal income
tax with the provision for income taxes follow.
F-20
(In millions) 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
United States $ 1,659 $ 441 $ 60
Foreign 144 107 78
----------- ----------- -----------
$ 1,803 $ 548 $ 138
=========== =========== ===========
Income taxes computed at U.S. statutory rate (35%) $ 631 $ 192 $ 48
Increase (decrease) in amount computed resulting from
Tax free gain on MAP Transaction (450) - -
Reversal of deferred tax liabilities due to the MAP Transaction (335) - -
Resolution and reevaluation of prior-year contingency issues (39) (33) -
Claim for prior-year research and development credits (1) (15) -
State income taxes 9 18 3
Net impact of foreign results 2 - (2)
Business meals and entertainment 2 2 3
Deductible dividends under employee stock ownership plan (2) (2) (2)
Life insurance income (3) (2) (2)
Other items (16) (10) (4)
----------- ----------- -----------
Income taxes $ (202) $ 150 $ 44
=========== =========== ===========
NOTE M - CAPITAL STOCK
On July 21, 2005, Ashland's Board of Directors authorized the purchase
of $270 million of Ashland common stock in the open market. Through
September 30, 2005, Ashland had repurchased 1.8 million shares at a cost of
$100 million.
In addition to other consideration received in connection with the MAP
Transaction, Ashland shareholders received one share of Ashland common
stock, par value $0.01 per share, in exchange for each share of Old Ashland
common stock, par value $1.00 per share.
Under Ashland's Shareholder Rights Plan, each common share is
accompanied by one right to purchase one-thousandth share of preferred
stock for $140. Each one-thousandth share of preferred stock will be
entitled to dividends and to vote on an equivalent basis with one common
share. The rights are neither exercisable nor separately transferable from
the common shares unless a party acquires or tenders for more than 15% of
Ashland's common stock. If any party acquires more than 15% of Ashland's
common stock or acquires Ashland in a business combination, each right
(other than those held by the acquiring party) will entitle the holder to
purchase preferred stock of Ashland or the acquiring company at a
substantial discount. The rights expire on May 16, 2006 and Ashland's Board
of Directors can amend certain provisions of the Plan or redeem the rights
at any time prior to their becoming exercisable. At September 30, 2005,
500,000 shares of cumulative preferred stock are reserved for potential
issuance under the Shareholder Rights Plan and 5.6 million common shares
are reserved for issuance under stock incentive and deferred compensation
plans.
F-21
NOTE N - STOCK INCENTIVE PLANS
Ashland has stock incentive plans under which key employees or
directors are granted stock options, stock-settled stock appreciation
rights (SARs) or nonvested stock awards. Stock options and SARs are granted
to employees at a price equal to the fair market value of the stock on the
date of grant and become exercisable over periods of one to three years.
Unexercised options and SARs lapse 10 years after the date of grant.
Nonvested stock awards entitle employees or directors to vote the shares
and to receive any dividends thereon. However, such shares are subject to
forfeiture upon termination of service before the vesting period ends.
During 2005, Ashland granted 22,500 nonvested stock awards with a weighted
average fair value of $60.30 per share. During 2004, Ashland granted
216,900 nonvested stock awards with a weighted average fair value of $40.87
per share. Nonvested stock awards in 2003 were not significant.
As discussed in Note A, Ashland began expensing employee stock options
and SARs in accordance with FAS 123 during fiscal year 2003. The following
table illustrates the fair value per share of options or SARs granted using
the Black-Scholes option pricing model with the indicated assumptions.
(In millions except per share data) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Weighted average fair value per share of options or SARs granted $ 14.37 $ 12.65 $ 6.71
Assumptions (weighted average)
Risk-free interest rate 4.0% 3.4% 3.1%
Expected dividend yield 1.9% 2.0% 3.3%
Expected volatility 25.9% 25.9% 27.3%
Expected life (in years) 5.0 5.0 5.0
A progression of activity and various other information relative to
stock options and SARs is presented in the following table.
2005 2004 2003
--------------------------- ---------------------------- ---------------------------
Number Weighted Weighted Weighted
of average average average
(In thousands except common exercise price Common exercise price Common exercise price
per share data) shares per share shares per share shares per share
------------------------------------------------------------------------------------------------------------------------------
Outstanding-beginning of year (a) 5,165 $ 40.37 7,807 $ 37.17 7,482 $ 37.28
Granted 688 58.73 603 54.65 537 33.42
Exercised (3,048) 37.93 (3,100) 35.29 (103) 27.96
Canceled (83) 38.63 (145) 36.04 (109) 35.27
MAP Transaction adjustment (b) 552 - - - - -
---------- ---------- -----------
Outstanding-end of year (a) 3,274 39.74 (b) 5,165 40.37 7,807 37.17
========== ========== ===========
Exercisable-end of year 2,170 34.30 4,067 39.37 6,491 38.25
(a) Shares of common stock available for future grants of options or
awards amounted to 496,000 at September 30, 2005 and 1,098,000 at
September 30, 2004. Exercise prices per share for options and SARs
outstanding at September 30, 2005 ranged from $22.45 to $28.04 for
805,000 shares, from $30.00 to $39.58 for 859,000 shares, from $43.50
to $45.19 for 917,000 shares, and from $50.02 to $58.50 for 693,000
shares. The weighted average remaining contractual life of the options
and SARs was 6.9 years.
(b) As described in Note D, Ashland shareholders received $936 million of
Marathon shares as a result of the MAP Transaction. Adjustments were
made to outstanding grants of stock options and SARs to maintain their
intrinsic values. The number of shares was increased by a factor of
1.2129 and the exercise prices were decreased by the same factor.
These adjustments did not result in an increase in the fair value of
outstanding grants or any adjustment to expense recognition.
F-22
NOTE O - 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.
(In thousands) 2005 2004 2003
------------------------------------------------------------------------------
Open claims - beginning of year 196 198 160
New claims filed 12 29 66
Claims settled (6) (7) (7)
Claims dismissed (18) (24) (21)
---------- ---------- ----------
Open claims - end of year 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 $1,985 per claim resolved in 2005, compared to $1,655
in 2004 and $1,610 in 2003. A progression of activity in the asbestos
reserve is presented in the following table.
(In millions) 2005 2004 2003
-------------------------------------------------------------------------------
Asbestos reserve - beginning of period $ 618 $ 610 $ 202
Expense incurred - 59 453
Amounts paid (47) (51) (45)
---------- ---------- ----------
Asbestos reserve - end of period $ 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 Ashland's estimate of future payments. Ashland's reserve for
asbestos claims on an undiscounted basis amounted to $571 million at
September 30, 2005, compared to $618 million at September 30, 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
F-23
NOTE O - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
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 retained the services of Tillinghast-Towers Perrin to assist
management in estimating 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.
At September 30, 2005, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers amounted to
$400 million, of which $64 million relates to costs previously paid.
Receivables from insurance companies amounted to $435 million at September
30, 2004. Approximately 40% of the estimated receivables from insurance
companies at September 30, 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
September 30, 2005, such locations included 102 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, 94 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
$178 million at September 30, 2005 and $152 million at September 30, 2004,
of which $145 million at September 30, 2005 and $119 million at September
30, 2004 were classified in noncurrent liabilities on the 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
F-24
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 $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 or cost is not predictable.
NOTE P - DISCONTINUED OPERATIONS
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, a former subsidiary. During the quarter ended
December 31, 2002, Ashland increased its reserve for asbestos claims by
$390 million to cover litigation defense and claim settlement costs
expected to be paid through December 2012. Because insurance provides
reimbursements for most of these costs and coverage-in-place agreements
exist with the insurance companies that provide substantially all of the
coverage being accessed, the increase in the asbestos reserve was offset in
part by probable insurance recoveries valued at $235 million. The resulting
$155 million pretax charge to income, net of deferred income tax benefits
of $60 million, was reflected as an after-tax loss from discontinued
operations of $95 million in the Statement of Consolidated Income for the
three months ended December 31, 2002. Additional reserves were recorded in
2003 and 2004 to reflect updates to these estimates. No increase to the
asbestos reserve or insurance receivable was recorded during 2005, though
minor unreserved expenses were incurred associated with asbestos
liabilities. See Note O for further discussion of Ashland's
asbestos-related litigation.
On August 29, 2003, Ashland sold the net assets of its Electronic
Chemicals business and certain related subsidiaries in a transaction valued
at approximately $300 million before tax. Electronic Chemicals was a part
of Ashland Specialty Chemical, providing ultra pure chemicals and other
products and services to the worldwide semiconductor industry, with
revenues of $215 million in 2003. The sale reflects Ashland's strategy to
optimize its business mix and focus greater attention on the remaining
chemical and transportation construction operations where it can achieve
strategic advantage. Ashland's after-tax proceeds were used primarily to
reduce debt. During 2004, Ashland recorded certain minor adjustments to the
gain reported in 2003.
During 2004, Ashland reached resolution with the Internal Revenue
Service on several open tax matters from prior years. In addition to
amounts reported in income from continuing operations, favorable resolution
was also reached on matters associated with previously discontinued
businesses, resulting in a $1 million tax benefit from the associated
reduction in contingent tax liabilities previously recorded.
Components of amounts reflected in the income statements related to
discontinued operations are presented in the following table.
F-25
NOTE P - DISCONTINUED OPERATIONS (CONTINUED)
(In millions) 2005 2004 2003
----------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations
Asbestos-related litigation reserves and expenses $ (1) $ (29) $ (178)
Electronic Chemicals - - 17
Gain (loss) on disposal of discontinued operations
Electronic Chemicals - (2) 101
---------- ---------- ----------
Loss before income taxes (1) (31) (60)
Income tax benefit (expense)
Income (loss) from discontinued operations
Asbestos-related litigation reserves and expenses - 11 69
Electronic Chemicals - - (3)
Gain (loss) on disposal of discontinued operations - (1) (20)
Resolution of tax contingency issues - 1 -
---------- ---------- ----------
Results from discontinued operations $ (1) $ (20) $ (14)
========== ========== ==========
NOTE Q - EMPLOYEE BENEFIT PLANS
PENSION PLANS
Ashland and its subsidiaries sponsor contributory and noncontributory
qualified and non-qualified defined benefit pension plans that cover
substantially all employees in the United States and in a number of other
countries. Included in the following pension plan disclosures for the first
time in 2004 are amounts related to employees in the United Kingdom, the
Netherlands and Canada. Amounts for prior years have not been restated, as
the impact on Ashland's financial position and results of operations would
not be material.
Ashland's funding policy is to fully fund the accumulated benefit
obligations of its qualified U.S. plans with the level of contributions
being determined annually to achieve that objective over time. In addition,
Ashland has non-qualified unfunded pension plans which provide supplemental
defined benefits to those employees whose benefits under the qualified
pension plans are limited by the Employee Retirement Income Security Act of
1974 and the Internal Revenue Code. Ashland funds the costs of the
non-qualified plans as the benefits are paid. Pension obligations for
employees of non-U.S. consolidated subsidiaries are provided for by
depositing funds with trustees or by book reserves in accordance with local
practices and regulations of the respective countries.
Prior to July 1, 2003, benefits under Ashland's U.S. pension plans
generally were based on employees' years of service and compensation during
the years immediately preceding their retirement. Although certain changes
were implemented on that date, the pension benefits of employees with at
least ten years of service were not affected. As of July 1, 2003, the
pension benefits of affected employees were converted to cash balance
accounts. Such employees received an initial account balance equal to the
present value of their accrued benefits under the previous plan on that
date. Pension benefits for these employees are based on the balances in
their accounts upon retirement.
OTHER POSTRETIREMENT BENEFIT PLANS
Ashland and its subsidiaries sponsor healthcare and life insurance
plans for eligible employees who retire or are disabled. Ashland's retiree
life insurance plans are noncontributory, while Ashland shares the costs of
providing healthcare coverage with its retired employees through premiums,
deductibles and coinsurance provisions. Ashland funds its share of the
costs of the postretirement benefit plans as the benefits are paid.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. Among other
things, the Act will expand Medicare to include an outpatient prescription
drug benefit beginning in 2006, as well as provide a subsidy for sponsors
of retiree health care plans that provide a benefit that is at least
actuarially equivalent to the Medicare Act benefits. In May 2004, the FASB
issued Staff Position (FSP) No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." The FSP provides accounting guidance for the
effects of the Act to a sponsor of a postretirement health care plan.
Regulations implementing major provisions of the Act, including the
determination of actuarial equivalency, were issued in January 2005.
Effective May 1, 2005, Ashland amended its health care plan for retirees
age 65 or older so that the company will always qualify for the subsidy and
remeasured
F-26
its postretirement benefit obligation as of that date. The remeasurement
reduced the postretirement benefit obligation by $58 million and reduced
postretirement benefit costs by $3 million over the last five months of
fiscal year 2005.
On July 1, 2003, Ashland implemented changes in the way it shares the
cost of healthcare coverage with future retirees. These changes did not
affect the previous cost-sharing program for retirees or for employees
meeting certain qualifications at that date. However, Ashland did amend
that program to limit its annual per capita costs to an amount equivalent
to base year per capita costs, plus annual increases of up to 1.5% per year
for costs incurred after January 1, 2004. Under a previous amendment, base
year costs were limited to the amounts incurred in 1992, plus annual
increases of up to 4.5% per year thereafter. As a result, health care cost
trend rates have no significant effect on the amounts reported for the
health care plans. Premiums for retiree healthcare coverage are equivalent
to the excess of the estimated per capita costs over the amounts borne by
Ashland.
Employees who were employed on June 30, 2003 who did not meet the
required qualifications were allocated notional accounts that can only be
used to pay all or part of the premiums for retiree healthcare coverage.
Such premiums represent the full costs of providing that coverage, without
any subsidy from Ashland. Employees must meet certain requirements upon
separation in order to have access to their notional accounts. Retirees
will continue to have access to Ashland coverage after their notional
accounts are exhausted, but they will be responsible for paying the full
premiums. New hires after June 30, 2003 will have access to any retiree
health coverage that may be provided, but will have no company funds
available to help pay for such coverage.
COMPONENTS OF NET PERIODIC BENEFIT COSTS
The plan amendments in 2003 and 1992 previously discussed under other
postretirement benefit plans reduced Ashland's accrued obligations under
those plans, and the reductions are being amortized to income over future
periods. Such amortization reduced Ashland's net periodic benefit costs for
other postretirement benefits by $9 million in 2005, $15 million in 2004
and $10 million in 2003. At September 30, 2005, the remaining unrecognized
prior service credit resulting from the changes amounted to $76 million,
and will reduce future costs by $8 million in 2006 and approximately $8
million annually thereafter through 2014.
The following table summarizes the components of pension and other
postretirement benefit costs, and the assumptions used to determine net
periodic benefit costs for U.S. plans. Non-U.S. pension plans use
assumptions generally consistent with those of U.S. plans.
Pension benefits Other postretirement benefits
------------------------------------ -----------------------------------
(In millions) 2005 2004 2003 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
Net periodic benefit costs
Service cost $ 53 $ 51 $ 43 $ 9 $ 9 $ 11
Interest cost 78 73 65 16 17 22
Expected return on plan assets (78) (66) (51) - - -
Amortization of prior service credit - - - (9) (15) (10)
Amortization of net actuarial loss 33 29 30 3 5 3
----------- ---------- ----------- ---------- ----------- ----------
$ 86 $ 87 $ 87 $ 19 $ 16 $ 26
=========== ========== =========== ========== =========== ==========
U.S. plan assumptions
Discount rate 6.00% 6.25% 6.75% 6.00% 6.25% 6.75%
Rate of compensation increase 4.50% 4.50% 5.00% - - -
Expected long-term rate of
return on plan assets 8.50% 8.50% 9.00% - - -
OBLIGATIONS AND FUNDED STATUS
Ashland uses a measurement date of September 30 for all of its pension
and postretirement benefit plans. Actuarial valuations are performed for
the pension, postemployment and postretirement plans to determine Ashland's
obligation for each plan. Summaries of the change in benefit obligations,
plan assets, funded status of the plans, amounts recognized in the balance
sheet, and assumptions used to determine the U.S. plan benefit obligations
for 2005 and 2004 follow. Non-U.S. pension plans use assumptions generally
consistent with those of U.S. plans.
F-27
NOTE Q - EMPLOYEE BENEFIT PLANS (CONTINUED)
Other postretirement
Pension plans benefit plans
----------------------- ------------------------
(In millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at October 1 $ 1,330 $ 1,192 (a) $ 298 $ 296
Service cost 53 51 9 9
Interest cost 78 73 16 17
Participant contributions 1 1 9 11
Benefits paid (56) (48) (31) (31)
Medicare Part D Act - - (58) -
Changes in assumptions 160 44 4 7
Foreign currency exchange rate changes 2 8 - -
Other-net (10) 9 (1) (11)
---------- ---------- ----------- ----------
Benefit obligations at September 30 $ 1,558 $ 1,330 $ 246 $ 298
========== ========== =========== ==========
Change in plan assets
Value of plan assets at October 1 $ 932 $ 740 (a) $ - $ -
Actual return on plan assets 131 86 - -
Employer contributions 121 137 22 20
Participant contributions 1 1 9 11
Benefits paid (50) (43) (31) (31)
Foreign currency exchange rate changes 1 5 - -
Other 7 6 - -
---------- ---------- ----------- ----------
Value of plan assets at September 30 $ 1,143 $ 932 $ - $ -
========== ========== =========== ==========
Funded status of the plans
Unfunded benefit obligation $ (415) $ (398) $ (246) $ (298)
Unrecognized net actuarial loss 480 422 (a) 19 77
Unrecognized prior service credit - (2) (76) (85)
---------- ---------- ----------- ----------
Net amount recognized $ 65 $ 22 $ (303) $ (306)
========== ========== =========== ==========
Amounts recognized in the balance sheet
Accrued benefit liabilities $ (199) $ (191) $ (303) $ (306)
Intangible assets 2 1 - -
Accumulated other comprehensive loss 262 212 - -
---------- ---------- ----------- ----------
Net amount recognized $ 65 $ 22 $ (303) $ (306)
========== ========== =========== ==========
U.S. plan assumptions
Discount rate 5.48% 6.00% 5.33% 6.00%
Rate of compensation increase 4.50% 4.50% - -
(a) Beginning balances have been adjusted to include $91 million of
benefit obligations, $60 million of plan assets, and $31 million of
unrecognized net actuarial loss for certain non-U.S. pension plans.
The accumulated benefit obligation for all pension plans was $1,345
million at September 30, 2005 and $1,118 million at September 30, 2004.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows.
2005 2004
---------------------------------- -----------------------------------
Non- Non-
Qualified qualified Qualified qualified
(In millions) plans (b) plans Total plans (b) plans Total
---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 1,355 $ 118 $ 1,473 $ 1,195 $ 110 $ 1,305
Accumulated benefit obligation 1,171 106 1,277 1,000 98 1,098
Fair value of plan assets 1,069 - 1,069 908 - 908
(b) Includes qualified U.S. and non-U.S. pension plans.
F-28
PLAN ASSETS
The expected long-term rate of return on U.S. pension plan assets for
2005 of 8.5% was based on an assumed real rate of return of 5.5% and a
projected long-term inflation rate of 3%. The basis for determining the
expected long-term rate of return is a combination of future return
assumptions for various asset classes in Ashland's investment portfolio,
historical analysis of previous returns, market indices and a projection of
inflation.
Ashland's U.S. pension plan assets are managed by outside investment
managers, which are monitored monthly against investment return benchmarks
and Ashland's established investment strategy. Ashland's investment
strategy is designed to promote diversification to moderate volatility and
to balance the expected long-term rate of return with an acceptable risk
level. Investment managers are selected based on an analysis of, among
other things, their investment process, historical investment results,
frequency of management turnover, cost structure and assets under
management. Assets are periodically reallocated between investment managers
to maintain an appropriate asset mix, diversification of investments and to
maximize returns.
Ashland's investment strategy and management practices relative to
plan assets of non-U.S. plans generally are consistent with those for U.S.
plans, except in those countries where investment of plan assets is
dictated by applicable regulations.
The target allocation for 2005 by asset category and actual
allocations at September 30, 2005 and 2004 follow.
Target Actual at September 30
-------- ------------------------
(In millions) 2005 2005 2004
---------------------------------------------------------------------
Plan assets allocation
Equity securities 70% 71% 68%
Debt securities 30% 27% 30%
Other - 2% 2%
-------- -------- --------
100% 100% 100%
======== ======== ========
CASH FLOWS
In fiscal 2006, Ashland expects to contribute $135 million to its U.S.
pension plans and $6 million to its non-U.S. pension plans. The following
benefit payments, which reflect future service, are expected to be paid in
each of the next five years and in aggregate for five years thereafter.
Other postretirement benefits
--------------------------------------------
Pension With Medicare Without Medicare
(In millions) benefits Part D subsidy Part D subsidy
--------------------------------------------------------------------------------------
2006 $ 66 $ 20 $ 23
2007 63 20 23
2008 73 20 24
2009 72 20 24
2010 83 20 25
2011-2015 490 110 138
OTHER PLANS
Certain union employees are covered under multiemployer pension plans
administered by unions. Amounts contributed annually to the plans by
Ashland and charged to expense amounted to $6 million in 2005 and $5
million in 2004 and 2003.
Ashland sponsors qualified savings plans to assist eligible employees
in providing for retirement or other future needs. Under such plans,
company contributions amounted to $24 million in 2005, $23 million in 2004
and $19 million in 2003.
F-29
Ashland Inc. and Consolidated Subsidiaries
Information by Industry Segment
Years Ended September 30
(In millions) 2005 2004 2003
-----------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues
APAC $ 2,539 $ 2,525 $ 2,400
Ashland Distribution 3,810 3,199 2,811
Ashland Specialty Chemical 1,763 1,386 1,212
Valvoline 1,326 1,297 1,235
Intersegment sales (a)
Ashland Distribution (22) (19) (21)
Ashland Specialty Chemical (144) (86) (69)
Valvoline (2) (1) (2)
---------- ---------- ----------
9,270 8,301 7,566
Equity income
APAC 6 19 9
Ashland Specialty Chemical 8 8 7
Refining and Marketing 517 405 285
---------- ---------- ----------
531 432 301
Other income
APAC 20 22 -
Ashland Distribution 7 9 18
Ashland Specialty Chemical 21 16 10
Valvoline 6 4 5
Refining and Marketing 3 (6) 2
Corporate 2 3 10
---------- ---------- ----------
59 48 45
---------- ---------- ----------
$ 9,860 $ 8,781 $ 7,912
========== ========== ==========
Operating income
APAC $ 48 $ 111 $ (42)
Ashland Distribution 123 78 32
Ashland Specialty Chemical 134 87 31
Valvoline 90 105 87
Refining and Marketing (b) 486 383 263
Corporate (135) (102) (105)
---------- ---------- ----------
$ 746 $ 662 $ 266
========== ========== ==========
Assets
APAC $ 1,569 $ 1,428 $ 1,481
Ashland Distribution 1,057 922 856
Ashland Specialty Chemical 997 842 749
Valvoline 723 658 667
Refining and Marketing 85 2,742 2,484
Corporate (c) 2,384 910 769
---------- ---------- ----------
$ 6,815 $ 7,502 $ 7,006
========== ========== ==========
F-30
(In millions) 2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Investment in equity affiliates
APAC $ 10 $ 6 $ 4
Ashland Specialty Chemical 42 40 35
Valvoline 7 7 8
Refining and Marketing - 2,713 2,448
Corporate 2 1 -
----------- ---------- ----------
$ 61 $ 2,767 $ 2,495
=========== ========== ==========
Expense (income) not affecting cash
Depreciation, depletion and amortization
APAC $ 93 $ 95 $ 108
Ashland Distribution 18 18 19
Ashland Specialty Chemical 44 41 40
Valvoline 27 27 26
Corporate 11 12 11
----------- ---------- ----------
193 193 204
Other noncash items (d)
APAC (36) 20 (25)
Ashland Distribution (6) 3 3
Ashland Specialty Chemical (48)(e) 8 (2)
Valvoline (31)(e) 2 4
Refining and Marketing (2,005)(e) (181) 2
Corporate 200 (e) 12 (30)
----------- ---------- ----------
(1,926) (136) (48)
----------- ---------- ----------
$ (1,733) $ 57 $ 156
=========== ========== ==========
Property, plant and equipment - net
APAC $ 592 $ 478 $ 525
Ashland Distribution 176 166 174
Ashland Specialty Chemical 318 309 282
Valvoline 236 215 221
Corporate 100 88 70
----------- ---------- ----------
$ 1,422 $ 1,256 $ 1,272
=========== ========== ==========
Additions to property, plant and equipment
APAC $ 200 $ 73 $ 47
Ashland Distribution 26 10 5
Ashland Specialty Chemical 64 62 34
Valvoline 66 26 18
Corporate 24 39 8
----------- ---------- ----------
$ 380 $ 210 $ 112
=========== ========== ==========
(a) Intersegment sales are accounted for at prices that approximate market
value.
(b) Includes Ashland's equity income from MAP through June 30, 2005,
amortization related to Ashland's excess investment in MAP, and other
activities associated with refining and marketing.
(c) Includes cash, cash equivalents, available-for-sale securities and
other unallocated assets.
(d) Includes deferred income taxes, equity income from affiliates net of
distributions and other items not affecting cash.
(e) Includes a $1,531 million reduction to income from continuing
operations to arrive at cash flows from operations for the gain on the
MAP Transaction and the loss on early retirement of debt, net of their
respective tax effects. This amount was recorded by segment as
follows: $(43) million for Ashland Specialty Chemical, $(24) million
for Valvoline, $(1,625) million for Refining and Marketing, and $161
million for Corporate.
F-31
QUARTERLY FINANCIAL INFORMATION
The following table presents quarterly financial information and per
share data relative to Ashland's common stock.
Quarters ended December 31 March 31 June 30 September 30
------------------ ------------------- ------------------- ------------------
(In millions except per share data) 2004 2003 2005 2004 2005(a) 2004 2005(b) 2004
--------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 2,177 $ 1,936 $ 2,062 $ 1,825 $ 2,492 $ 2,206 $ 2,538 $ 2,334
Operating income 180 92 86 10 410 292 70 268
Income (loss) from
continuing operations 94 39 33 (11) 1,767 167 112 203
Net income (loss) 94 34 33 (16) 1,767 161 111 200
Basic earnings (loss) per share
Continuing operations $ 1.30 $ .56 $ .45 $ (.16) $ 24.13 $ 2.38 $ 1.51 $ 2.86
Net income (loss) 1.30 .49 .45 (.23) 24.13 2.29 1.50 2.81
Diluted earnings (loss) per share
Continuing operations $ 1.28 $ .56 $ .44 $ (.16) $ 23.65 $ 2.35 $ 1.49 $ 2.81
Net income (loss) 1.28 .49 .44 (.23) 23.65 2.26 1.48 2.76
Common cash dividends per share $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275
Market price per common share
High $ 60.17 $ 44.55 $ 68.85 $ 52.20 $ 72.20 $ 53.35 $ 65.25 $ 56.71
Low 53.80 33.19 54.72 43.73 61.45 44.25 50.45 48.40
(a) 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. Ashland
recorded a gain of $1,295 million during the quarter as a result of
this transaction. See Note D for further information.
(b) During the quarter, Ashland recorded $39 million in tax benefits
related to prior years. These benefits resulted primarily from a
favorable settlement with the Internal Revenue Service for the 1996 -
1998 audit period and the reevaluation of income tax reserves related
to other years.
Ashland Inc. and Consolidated Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Balance at Provisions Balance
beginning charged to Reserves Other at end
(In millions) of year earnings utilized changes of year
---------------------------------------------------------------------------------------------------------------------
Year ended September 30, 2005
Reserves deducted from asset accounts
Accounts receivable $ 41 $ 15 $ (13) $ - $ 43
Inventories 10 3 (2) - 11
---------------------------------------------------------------------------------------------------------------------
Year ended September 30, 2004
Reserves deducted from asset accounts
Accounts receivable $ 35 $ 20 $ (16) $ 2 $ 41
Inventories 9 2 (1) - 10
---------------------------------------------------------------------------------------------------------------------
Year ended September 30, 2003
Reserves deducted from asset accounts
Accounts receivable $ 34 $ 18 $ (18) $ 1 $ 35
Inventories 12 2 (5) - 9
---------------------------------------------------------------------------------------------------------------------
F-32
Ashland Inc. and Consolidated Subsidiaries
FIVE-YEAR SELECTED FINANCIAL INFORMATION
Years Ended September 30
(In millions except per share data) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Revenues
Sales and operating revenues $ 9,270 $ 8,301 $ 7,566 $ 7,390 $ 7,544
Equity income 531 432 301 181 755
Other income 59 48 45 46 53
Costs and expenses
Cost of sales and operating expenses (7,823) (6,948) (6,390) (6,115) (6,358)
Selling, general and administrative expenses (1,291) (1,171) (1,256) (1,181) (1,163)
---------- ---------- ----------- ----------- -----------
Operating income 746 662 266 321 831
Gain on the MAP Transaction 1,284 - - - -
Loss on early retirement of debt (145) - - - -
Net interest and other financial costs (82) (114) (128) (138) (175)
---------- ---------- ----------- ----------- -----------
Income from continuing operations
before income taxes 1,803 548 138 183 656
Income taxes 202 (150) (44) (68) (266)
---------- ---------- ----------- ----------- -----------
Income from continuing operations 2,005 398 94 115 390
Results from discontinued operations (1) (20) (14) 13 32
---------- ---------- ----------- ----------- -----------
Income before cumulative effect
of accounting changes 2,004 378 80 128 422
Cumulative effect of accounting changes - - (5) (11) (5)
---------- ---------- ----------- ----------- -----------
Net income $ 2,004 $ 378 $ 75 $ 117 $ 417
========== ========== =========== =========== ===========
BALANCE SHEET INFORMATION
Current assets $ 3,757 $ 2,302 $ 2,085 $ 2,071 $ 2,233
Current liabilities 1,545 1,815 1,484 1,520 1,530
---------- ---------- ----------- ----------- -----------
Working capital $ 2,212 $ 487 $ 601 $ 551 $ 703
========== ========== =========== =========== ===========
Total assets $ 6,815 $ 7,502 $ 7,006 $ 6,722 $ 7,128
Short-term debt $ - $ 40 $ - $ 10 $ -
Long-term debt (including current portion) 94 1,508 1,614 1,797 1,871
Stockholders' equity 3,739 2,706 2,253 2,173 2,226
---------- ---------- ----------- ----------- -----------
Capital employed $ 3,833 $ 4,254 $ 3,867 $ 3,980 $ 4,097
========== ========== =========== =========== ===========
CASH FLOW INFORMATION
Cash flows from operations $ 37 $ 209 $ 242 $ 168 $ 814
Additions to property, plant and equipment 380 210 112 178 214
Cash dividends 79 77 75 76 76
COMMON STOCK INFORMATION
Diluted earnings per share
Income from continuing operations $ 26.86 $ 5.59 $ 1.37 $ 1.64 $ 5.54
Net income 26.85 5.31 1.10 1.67 5.93
Cash dividends per share 1.10 1.10 1.10 1.10 1.10
F-33
EXHIBIT INDEX
Exhibit
No. Description
------- -------------------------------------------------------
10.4 - Amendment No. 1 to Ashland Inc. Deferred
Compensation Plan for Employees (2005) dated October
28, 2005.
10.7 - Amendment No. 1 to Eleventh Amended and Restated
Ashland Inc. Supplemental Early Retirement Plan for
Certain Employees dated December 20, 2004.
10.10 - Form of Indemnification Agreement between Ashland
Inc. and members of its Board of Directors.
10.16 - Forms of Notice granting Stock Appreciation Rights
Awards.
10.17 - Form of Notice granting Restricted Stock Awards.
10.18 - Form of Notice granting Nonqualified Stock Option
Awards.
12 - Computation of Ratio of Earnings to Fixed Charges.
21 - List of Subsidiaries.
23.1 - Consent of Independent Registered Public Accounting
Firm.
23.2 - Consent of Tillinghast-Towers Perrin.
23.3 - Consent of Hamilton, Rabinovitz & Alschuler, Inc.
24 - Power of Attorney, including resolutions of the
Board of Directors.
31.1 - Certification of James J. O'Brien, Chief Executive
Officer of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of J. Marvin Quin, Chief Financial
Officer of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 - Certification 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.