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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, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 1-32532
ASHLAND INC.
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
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. |X|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer |X| Accelerated Filer |_| Non-Accelerated Filer |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
At March 31, 2006, the aggregate market value of voting stock held by
non-affiliates of the Registrant was approximately $5,033,392,163. 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 October 31, 2006, there were 64,238,433 shares of Registrant's common
stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive Proxy Statement (the "Proxy
Statement") for its January 25, 2007 Annual Meeting of Shareholders are
incorporated by reference into Part III of this annual report on Form 10-K
to the extent described herein.
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................... 1
General...................................................... 1
Corporate Developments....................................... 1
Ashland Performance Materials................................ 2
Ashland Distribution......................................... 2
Valvoline.................................................... 3
Ashland Water Technologies................................... 4
APAC......................................................... 4
Miscellaneous................................................ 4
Item 1A. Risk Factors................................................... 6
Item 1B. Unresolved Staff Comments...................................... 8
Item 2. Properties..................................................... 8
Item 3. Legal Proceedings.............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............ 9
Item X. Executive Officers of Ashland ................................. 10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 11
Item 6. Selected Financial Data........................................ 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 11
Item 8. Financial Statements and Supplementary Data.................... 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 12
Item 9A. Controls and Procedures........................................ 12
Item 9B. Other Information.............................................. 12
PART III
Item 10. Directors and Executive Officers of the Registrant............. 12
Item 11. Executive Compensation......................................... 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............. 13
Item 13. Certain Relationships and Related Transactions................. 13
Item 14. Principal Accountant Fees and Services......................... 13
PART IV
Item 15. Exhibits and Financial Statement Schedules..................... 14
PART I
ITEM 1. BUSINESS
GENERAL
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). Ashland was organized in
2004 as the successor to a Kentucky corporation of the same name organized
on October 22, 1936. 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 consist of four wholly owned segments: Ashland
Performance Materials, Ashland Distribution, Valvoline and Ashland Water
Technologies. Financial information about these segments for the three
fiscal years ended September 30, 2006, is set forth on pages F-31 and F-32
of this annual report on Form 10-K.
Ashland Performance Materials is a worldwide manufacturer and supplier
of specialty chemicals and customized services to the building and
construction, packaging and converting, transportation, marine and metal
casting industries. It is a technology leader in metal casting consumables
and design services; unsaturated polyester and vinyl ester resins and
gelcoats; and high-performance adhesives and specialty resins.
Ashland Distribution distributes chemicals, plastics and resins in
North America and plastics in Europe. Ashland Distribution also provides
environmental services. 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.
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 Water Technologies is a supplier of chemical and non-chemical
water treatment solutions for industrial, municipal and commercial
facilities. It provides industrial, commercial and institutional water
treatments, wastewater treatment, pathogen control, paint and coating
additives, pulp and paper processing and mining chemistries. In addition,
it also provides boiler and cooling water treatments.
At September 30, 2006, Ashland and its consolidated subsidiaries had
approximately 11,700 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
Ashland's transportation and construction operations consisted of its
wholly owned subsidiary Ashland Paving And Construction, Inc. (together
with its subsidiaries, "APAC"). APAC performed asphalt and concrete
contract construction work, including highway paving and repair, excavation
and grading and bridge construction, and produced asphaltic and ready-mix
concrete, crushed stone and other aggregate in the southern and
mid-continent United States. On August 28, 2006, Ashland completed the sale
of APAC to Oldcastle Materials, Inc. ("Oldcastle") (the "APAC
Transaction"). The purchase price for APAC as of the date of the
transaction was $1.30 billion in cash, which is subject to adjustment upon
the final determination of certain closing balance sheet amounts. Expected
net proceeds after taxes and fees is $1.23 billion, also subject to change
based on the determination of the final adjusted purchase price and income
tax effects. For additional information about the APAC Transaction, see
Note D of "Notes to Consolidated Financial Statements" in this annual
report on Form 10-K.
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On June 30, 2005, Ashland completed the transfer of its 38% interest
in Marathon Ashland Petroleum LLC ("MAP"), a former joint venture with
Marathon Oil Corporation ("Marathon"), and two other Ashland businesses to
Marathon (the "MAP Transaction"). For additional information about the MAP
Transaction, see Note E of "Notes to Consolidated Financial Statements" in
this annual report on Form 10-K.
ASHLAND PERFORMANCE MATERIALS
Ashland Performance Materials is a worldwide manufacturer and supplier
of specialty chemicals and customized services to the building and
construction, packaging and converting, transportation, marine and metal
casting industries. It is a technology leader in metal casting consumables
and design services; unsaturated polyester and vinyl ester resins and
gelcoats; and high-performance adhesives and specialty resins. Ashland
Performance Materials owns and operates 29 manufacturing facilities and
participates in 10 manufacturing joint ventures in 15 countries. Ashland
Performance Materials' 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 Performance Materials' businesses hold proprietary
technology, and Ashland believes it has a leading or strong market position
in many of its specialty chemical products.
Composite Polymers - This business group manufactures and sells a
broad range of corrosion-resistant, fire-retardant, general-purpose and
high-performance 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, and Mississauga,
Ontario, 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 an Ashland
facility located in Changzhou, China.
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 eight 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 seven joint venture manufacturing facilities
located in Vienna, Austria; 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 packaging and converting, building and
construction, and transportation markets. Key technologies and markets
include: acrylic polymers for pressure-sensitive adhesives; urethane
adhesives for flexible packaging applications; hot melt adhesives for
various packaging applications; 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. The group has manufacturing plants in
Calumet City, Illinois; Totowa, New Jersey; Ashland and Columbus, Ohio;
White City, Oregon; and Kidderminster, England.
ASHLAND DISTRIBUTION
Ashland Distribution distributes chemicals, plastics and composite raw
materials in North America and plastics in Europe. Deliveries are
facilitated at locations in North America through a network of 68 owned or
leased facilities, 59 third-party warehouses, rail terminals and tank
terminals and 13 locations that perform contract packaging activities for
Ashland Distribution. Distribution of thermoplastic resins in Europe is
conducted in 13 countries primarily through 17 third-party warehouses and
one owned warehouse. 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 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.
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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, including major
automobile manufacturers, 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").
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 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 globally with 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.
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.
In North America, Valvoline is comprised of the following 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 group consists of two units,
Distribution Sales and Valvoline Instant Oil Change(R) ("VIOC"). The
Distribution Sales business unit sells branded products and services to
installers (such as car dealers, general repair shops 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 401 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. The VIOC
chain 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, 2006, 287 company-owned and 482 independently owned and
operated franchise centers were operating in 39 states. 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
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with Cummins in India and 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.
ASHLAND WATER TECHNOLOGIES
Ashland Water Technologies is a supplier of chemical and non-chemical
water treatment solutions for industrial, municipal and commercial
facilities. It provides industrial, commercial and institutional water
treatments, wastewater treatment, pathogen control, paint and coating
additives, pulp and paper processing and mining chemistries. In addition,
it also provides boiler and cooling water treatments; fuel treatments;
welding, refrigerant and sealing products; and fire-fighting, safety and
rescue products and services for the merchant marine industry. Ashland
Water Technologies owns and operates 13 manufacturing facilities in 12
countries and participates in four joint ventures. Ashland Water
Technologies' diverse spectrum of products competes globally in niche
markets. The number of competitors varies from product to product and
markets served.
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; Chester Hill, Australia;
Ajax, Ontario, Canada; Nanjing, China; Somercotes, England; Viiala,
Finland; 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.
Environmental and Process Solutions - This business group was formed
in May 2006 when Ashland acquired the water treatment business of Degussa
A.G. The group offers specialty chemicals that provide environmentally
friendly, high-performance dispersion and flocculation for applications in
many industries, including municipal or industrial waste water treatment;
chemical; and paper, mining and petroleum industries. The business group
markets under the following brands: PRAESTOL(R) flocculants, POLYSTABIL(R)
and TALLOFIN(R) dispersants and antiscalants, ANTISPUMIN(R) defoamers and
PRAESTARET(R) retention systems. This business group has manufacturing
facilities in Greensboro, North Carolina; Americana, Brazil; Beijing,
China; Krefeld, Germany; and Perm, Russia.
APAC
Ashland's transportation and construction operations ceased as of
August 28, 2006, upon the sale of APAC to Oldcastle. For additional
information about the APAC Transaction, including its accounting treatment
as a discontinued operation, see Note D to "Notes to Consolidated Financial
Statements" in this annual report on Form 10-K.
Under Ashland's ownership, the APAC group of companies was one of the
nation's largest transportation construction contractors and a major
supplier of construction materials. APAC performed 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 performed 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 conducted its business through 25 market-focused
business units and a Major Projects Group operating in 14 southern and
mid-continent states. These business units provided construction services
and materials throughout the regions in which they operated.
Prior to the APAC Transaction, approximately 76% of APAC's sales and
operating revenues were construction revenues, with the remaining 24%
coming from sales of construction materials. Approximately 83% of APAC's
construction revenues were derived directly from highway and other public
sector sources, with the remaining 17% coming from industrial and
commercial customers and private developers.
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
4
implementation of EH&S management systems; internal auditing by an
independent auditing group; 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 these new rules cannot be estimated until the
manner in which they will be implemented has been more precisely defined.
At September 30, 2006, Ashland's reserves for environmental
remediation amounted to $199 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. Although it is not possible to predict with certainty the ultimate
costs of environmental remediation, Ashland currently estimates that the
upper end of the reasonably possible range of future costs for identified
sites could be as high as approximately $310 million. Ashland does not
believe that any current individual remediation location is material to
Ashland, as its largest reserve for any site is less than 10% of Ashland's
total remediation reserve. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation expense
amounted to $57 million in 2006, compared to $52 million in 2005 and $7
million in 2004.
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.
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.
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.
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 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.
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.
5
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.
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. Research and development costs are expensed as
they are incurred and totaled $48 million in 2006 ($45 million in 2005 and
$43 million in 2004).
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 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
The following discussion of "risk factors" identifies the most
significant factors that may adversely affect our business, operations,
financial position or future financial performance. This information should
be read in conjunction with Management's Discussion and Analysis (MD&A) and
the consolidated financial statements and related notes incorporated by
reference into this report. The following discussion of risks is not
all-inclusive, but is designed to highlight what we believe are important
factors to consider when evaluating our expectations. These factors could
cause our future results to differ from those in forward-looking statements
and from historical trends.
SEVERAL OF ASHLAND'S BUSINESSES ARE CYCLICAL IN NATURE, AND ECONOMIC
DOWNTURNS OR DECLINES IN DEMAND, PARTICULARLY FOR CERTAIN DURABLE GOODS,
MAY NEGATIVELY IMPACT ITS REVENUES AND PROFITABILITY.
The profitability of Ashland is susceptible to downturns in the
economy, particularly in those segments related to durable goods, including
the housing, construction, automotive and marine industries. Both overall
demand for Ashland's products and services and its profitability will
likely change as a direct result of an economic recession, inflation,
changes in hydrocarbon (and its derivatives) and other raw materials
prices, or changes in governmental monetary or fiscal policies.
ASHLAND MAY NOT BE ABLE TO SUCCESSFULLY REDEPLOY THE PROCEEDS OF THE MAP
TRANSACTION IN A VALUE-CREATING MANNER.
Ashland may not be able to successfully redeploy the MAP Transaction
proceeds in a manner that will generate value for its shareholders. To the
extent that the proceeds of the MAP Transaction are used for business
acquisitions, there is a risk that the acquisition will fail to provide
expected returns to Ashland's shareholders. In addition, 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.
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 domestically and in most international locations 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 system in Canada. In
October 2006, this ERP system was successfully implemented for Valvoline's
U.S. operations and certain corporate functions. While extensive planning
is underway to support a smooth implementation of the ERP system, such
implementations carry substantial risk, including the potential for
business interruption and associated adverse impacts on operating results.
6
FAILURE OF ASHLAND TO SUCCESSFULLY COMPLETE IMPLEMENTATION OF ITS SUPPLY
CHAIN OPTIMIZATION PROJECT COULD ADVERSELY IMPACT ASHLAND'S RESULTS OF
OPERATIONS AND CASH FLOWS.
Ashland has been undergoing a major process initiative designed to
optimize its supply chain function. By integrating the supply chain
function 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. The
Supply Chain Optimization Project is, in part, dependent upon the
successful execution of the ERP project discussed in the preceding risk
factor. The implementation of the Supply Chain Optimization Project also
carries substantial risk, including the potential for business interruption
and associated adverse impacts on operating results.
ASHLAND MAY NOT BE ABLE TO PASS THROUGH INCREASES IN RAW MATERIAL COSTS,
WHICH MAY IMPAIR ITS COMPETITIVE POSITION AND REDUCE ITS PROFITABILITY.
Rising and volatile raw material prices, especially those of
hydrocarbon derivatives, may negatively impact Ashland's costs. Ashland is
not always able to raise prices in response to such increased costs, and
its ability to pass on the costs of such price increases is dependent upon
market conditions. Therefore, such increases in costs could impair
Ashland's competitive position in certain markets and reduce its
profitability.
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 matters 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 MAY INCUR SUBSTANTIAL OPERATING COSTS AND CAPITAL
EXPENDITURES AS A RESULT OF ENVIRONMENTAL AND HEALTH AND SAFETY LIABILITIES
AND REQUIREMENTS, WHICH COULD REDUCE ASHLAND'S 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. Ashland has investigated and remediated a
number of its current and former properties. Engineering studies,
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.
PROVISIONS OF ASHLAND'S ARTICLES OF INCORPORATION AND BY-LAWS 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 could
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;
7
- 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.
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 Dublin, Ohio (Ashland Distribution and Ashland Performance
Materials); Boonton, New Jersey (Ashland Water Technologies); 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 I of "Notes to Consolidated Financial
Statements" in this annual report on Form 10-K.
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
49,800 active lawsuits pending as of September 30, 2006. In these active
lawsuits, approximately 0.4% of the active lawsuits involve claims between
$0 and $100,000; approximately 1.6% of the active lawsuits involve claims
between $100,000 and $1 million; less than 1% of the active lawsuits
involve claims between $1 million and $5 million; less than 0.2% of the
active lawsuits involve claims between $5 million and $10 million; less
than 2% of the active lawsuits involve claims between $10 million and $15
million; and less than .02% of the active lawsuits involve claims between
$15 million and $100 million. The variability of requested damages, coupled
with the actual experience of resolving claims over an extended period,
demonstrates that damages requested in any particular lawsuit or complaint
bear little or no relevance to the merits or disposition value of a
particular case. Rather, the amount potentially recoverable by a specific
plaintiff or group of plaintiffs is determined by other factors such as
product identification or lack thereof, the type and severity of the
disease alleged, the number and culpability of other defendants, the impact
of bankruptcies of other
8
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 P of "Notes to Consolidated Financial Statements" in this annual
report on Form 10-K.
Foundry Class Action - In response to an investigation by the United
States Department of Justice that was closed in 2006 without criminal or
civil allegations being made by the government, several foundry owners have
filed lawsuits seeking class action status for classes of customers of
foundry resins manufacturers such as Ashland. These cases have been
consolidated for pretrial purposes in the United States District Court,
Southern District of Ohio. Ashland will vigorously defend these civil
actions.
Environmental Proceedings - Under the federal Comprehensive
Environmental Response Compensation and Liability Act (as amended) and
similar state laws, Ashland may be subject to joint and several liability
for clean-up costs in connection with alleged releases of hazardous
substances at sites where it has been identified as a "potentially
responsible party" ("PRP"). As of September 30, 2006, Ashland had been
named a PRP at 72 waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the United States Environmental Protection Agency ("USEPA") or
a state agency, in which Ashland is typically participating as a member of
a PRP group. Generally, the type of relief sought includes remediation of
contaminated soil and/or groundwater, reimbursement for past costs of site
clean-up and administrative oversight and/or long-term monitoring of
environmental conditions at the sites. The ultimate costs are not
predictable with assurance.
For additional information regarding environmental matters and
reserves, see "Management's Discussion and Analysis - Application of
Critical Accounting Policies - Environmental remediation" and Note P of
"Notes to Consolidated Financial Statements" in this annual report on Form
10-K.
Securities and Exchange Commission ("Commission") Settlement - On
October 10, 2006, Ashland entered into a settlement of an administrative
proceeding with the Commission, concluding an investigation into
adjustments that reduced Ashland's environmental remediation reserves for
certain sites for the fiscal years 1999 and 2000. These adjustments to
environmental reserves totaled $12.2 million in 1999 and $12.6 million in
2000. Pursuant to the settlement, Ashland agreed as part of a cease and
desist order, without admitting or denying any liability, not to violate
certain provisions of the federal securities laws and to establish or
continue various policies and procedures in connection with the
determination of its environmental reserves. The settlement is subject to
approval by the Commission.
MTBE Litigation - Ashland is a defendant along with many other
companies in approximately 30 cases alleging methyl tertiary-butyl ether
("MTBE") contamination in groundwater. All of these cases have been
consolidated in a multi-district litigation in the Southern District of New
York for preliminary proceedings. The plaintiffs generally are water
providers or governmental authorities and they allege that refiners,
manufacturers and sellers of gasoline containing MTBE are liable for
manufacturing a defective product and that owners and operators of retail
gasoline sites have allowed MTBE to be discharged into the groundwater.
Ashland's potential liability relates to gasoline containing MTBE allegedly
produced and sold by Ashland, or one or more of its subsidiaries, in the
period prior to the formation of the Marathon Ashland Petroleum LLC
("MAP"). Ashland only distributed MTBE or gasoline containing MTBE in a
limited number of states and has been dismissed in a number of cases in
which it was established that Ashland did not market MTBE or gasoline
containing MTBE in the state or region at issue. Many MTBE cases allege
class action status and seek punitive damages or treble damages under a
variety of statutes and theories. The potential impact of these cases and
any future similar cases is uncertain. Ashland will vigorously defend these
actions.
Other Legal Proceedings - In addition to the matters described above,
there are various claims, lawsuits and administrative proceedings pending
or threatened against Ashland and its current and former subsidiaries. Such
actions are with respect to commercial matters, product liability, toxic
tort liability and other environmental matters, which seek remedies or
damages, some of which are for substantial amounts. While these actions are
being contested, their outcome is not predictable.
ITEM 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, 2006.
9
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 52) 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.
DAVID L. HAUSRATH (age 54) is Senior Vice President and General
Counsel and has served in such capacities since 2004 and 1999,
respectively. During the past five years, he has also served as Secretary
and Vice President of Ashland.
J. MARVIN QUIN (age 59) is Senior Vice President and Chief Financial
Officer of Ashland and has served in such capacities since 1992.
GARY A CAPPELINE* (age 57) was Senior Vice President of Ashland and
served in such capacity from February 2004 until October 2006. During the
past five years, he has also served as President and Chief Operating
Officer, Chemical Sector, Group Operating Officer and Vice President of
Ashland; President of Ashland Specialty Chemical Company; and as a chemical
industry partner at Bear Stearns Merchant Bank. Mr. Cappeline ceased to be
an executive officer of Ashland effective October 9, 2006.
LAMAR M. CHAMBERS (age 51) 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
APAC.
SUSAN B. ESLER (age 45) is Vice President - Human Resources and
Communications of Ashland and has served in such capacity since October
2006. During the past five years, she has also served as Vice President -
Human Resources, and Director of Corporate Human Resources of Ashland.
THEODORE L. HARRIS (age 41) is Vice President of Ashland and President
of Ashland Distribution and has served in such capacities since October
2006. During the past five years, he has also served as Vice President and
General Manager of the Composite Polymers Division, and as a general
manager, food ingredients division for FMC Corporation.
SAMUEL J. MITCHELL, JR. (age 45) is Vice President of Ashland and
President of Ashland Consumer Markets and has served in such capacities
since 2002. During the past five years, he has also served as President of
Valvoline and Vice President and General Manager of Valvoline Retail
Business.
R. KIRK RANDOLPH* (age 43) was Vice President of Ashland and President
of APAC, and served in such capacities from September 2005 until August
2006. During the past five years, he has also served as Vice President -
Design/Build, Vice President of Operations Support, and Regional Vice
President of APAC. Mr. Randolph resigned from Ashland effective August 28,
2006, as a result of the APAC Transaction.
PETER H. RIJNEVELDSHOEK (age 54) is Vice President of Ashland and
President of Ashland Europe and has served in such capacities since October
2006. During the past five years, he has also served as Senior Vice
President, Performance Materials (formerly Thermoset Resins), Vice
President Europe, Asia and Africa, Drew Industrial Division, and Director
European Shared Business Services.
MICHAEL J. SHANNON (age 46) is Vice President of Ashland and President
of Ashland Global Supply Chain and has served in such capacities since
January and October 2006, respectively. During the past five years, he has
also served as Executive Vice President, Global Supply Chain, Senior Vice
President, Performance Materials (formerly Thermoset Resins) and Vice
President and General Manager of the Petrochemical Division and the
Engineering Department.
WALTER H. SOLOMON (age 46) is Vice President and Chief Growth Officer
of Ashland and has served in such capacities since 2005. During the past
five years, he has also served as Senior Vice President and General
Manager, Retail Business of Valvoline, and as President and Chief Executive
Officer of Connectmail, Ltd.
FRANK L. WATERS (age 45) is Vice President of Ashland and President of
Ashland Water Technologies and Ashland Performance Materials and has served
in such capacities since 2002 and October 2006, respectively. During the
past five years, he has also served as President of Ashland Distribution
and Vice President and General Manager of Ashland Plastics - Europe.
*Messrs. Cappeline and Randolph were executive officers of Ashland
during the fiscal year ended September 30, 2006; however, they are no
longer serving as executive officers of Ashland.
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
10
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.
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-33 for information
relating to market price and dividends of Ashland's Common Stock.
At November 20, 2006, there were approximately 14,400 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 2006.
Issuer Purchases of Equity Securities (1)
Maximum number
Total number of (or approximate
Total Average price shares purchased dollar value) of shares
number of paid per share, as part of publicly that may yet be
shares including announced plans purchased under the
Period purchased commission or programs plans or programs
-------------------------- ----------- -------------- ------------------- -----------------------
(a) (b) (c) (d)
July 1 - July 31 0 0 0 $209,068,589
August 1 - August 31 1,190,200 $63.18 1,190,200 $133,866,021
September 1 - September 30 3,078,700 $62.52 3,078,700 6,069,800 shares
--------- ------ --------- ----------------
Total 4,268,900 $62.70 4,268,900 6,069,800 shares
========= ====== ========= ================
(1) During the quarter ended September 30, 2006, Ashland repurchased shares
of Ashland Common Stock (the "Shares") pursuant to publicly announced
programs. Prior to September 14, 2006, Shares were repurchased pursuant
to a stock repurchase program originally announced on July 21, 2005, in
an amount of $270 million. After repurchasing $196 million in Shares
under the original authorization, Ashland announced on January 25,
2006, that the authorization had been increased by an additional $176
million, to a total of $250 million at that time. As of September 14,
2006, Ashland had completed all repurchases to be made under that
program.
On September 14, 2006, Ashland announced a new program under which it
is authorized to repurchase a total of 7 million Shares. Shares
repurchased by Ashland between September 15 and September 30, 2006,
were made pursuant to this new program.
ITEM 6. SELECTED FINANCIAL DATA
See Five-Year Selected Financial Information on page F-34.
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-11.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Quantitative and Qualitative Disclosures about Market Risk on page
M-12.
11
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.
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, 2006,
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 as of September 30, 2006.
Internal Control - See Management's Report on Internal Control Over
Financial Reporting on page F-2 and Report of Independent Registered Public
Accounting Firm on page F-3.
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, 2006, that has materially affected, or is
reasonably likely to materially affect, Ashland's internal control over
financial reporting.
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, 2006. 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.
12
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.
The following table summarizes the equity compensation plans under
which Ashland Common Stock may be issued as of September 30, 2006. 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...................... 2,600,732 $41.56 4,761,679 (2)
Equity compensation plans
not approved by security holders...... 909 (1) $39.58 1,000,000 (3)
--------- ------ ---------
Total......................... 2,601,641 $41.56 5,761,679
========= ====== =========
(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. The stock options listed in the table above were
granted to certain MAP employees. All stock options and SARs granted
under this plan expired on November 19, 2005, except for grants made to
employees who have been reemployed by Ashland.
(2) Includes 3,992,500 shares available for issuance under the 2006 Ashland
Inc. Incentive Plan, 403,229 shares available for issuance under the
Deferred Compensation Plan for Employees, and 365,950 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
There is hereby incorporated by reference the information to appear
under the caption "Corporate Governance - Certain Relationships and
Transactions" in Ashland's Proxy Statement.
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.
13
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 - Third Restated Articles of Incorporation of Ashland
effective May 17, 2006 (filed as Exhibit 3(i) to
Ashland's Form 10-Q for the quarter ended June 30, 2006,
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).
The following Exhibits 10.1 through 10.20 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) (filed as Exhibit 10.4 to
Ashland's annual report on Form 10-K for fiscal year
ended September 30, 2005, and incorporated herein by
reference).
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).
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 (filed as Exhibit 10.7 to Ashland's annual
report on Form 10-K for fiscal year ended September 30,
2005, and incorporated herein by reference).
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 10.1 to Ashland's Form 8-K filed on
September 25, 2006, and incorporated herein by
reference).
10.10 - Form of Indemnification Agreement between Ashland Inc.
and members of its Board of Directors (filed as Exhibit
10.10 to Ashland's annual report on Form 10-K for fiscal
year ended September 30, 2005, and incorporated herein by
reference).
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).
14
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 - 2006 Ashland Inc. Incentive Plan (filed as Exhibit 10 to
Ashland's Form 10-Q for the quarter ended December 31,
2005, and incorporated herein by reference).
10.17 - Forms of Notice granting Stock Appreciation Rights
Awards.
10.18 - Form of Notice granting Restricted Stock Awards.
10.19 - Form of Notice granting Nonqualified Stock Option Awards.
10.20 - Letter Agreement between Ashland Inc. and Gary A.
Cappeline regarding severance.
10.21 - 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).
10.22* - 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).
10.23* - 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).
10.24* - 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 - Stock Purchase Agreement between Ashland Inc. and
Oldcastle Materials, Inc., dated August 19, 2006 (filed
as Exhibit 10.1 to Ashland's Form 8-K filed on August 28,
2006, and incorporated herein by reference).
10.26 - Amended and Restated Stock Trading Plan between Ashland
Inc. and Credit Suisse Securities (USA) LLC, dated
September 20, 2006.
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 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.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
15
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: November 28, 2006
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 November 28, 2006.
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 and Controller
-----------------------
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: November 28, 2006
16
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) 2006 2005 2004
-----------------------------------------------------------------------------------------------
SALES AND OPERATING REVENUES
Performance Materials (a) $ 1,425 $ 1,369 $ 1,026
Distribution 4,070 3,810 3,199
Valvoline 1,409 1,326 1,297
Water Technologies (a) 502 394 360
Intersegment sales (173) (168) (106)
---------- ---------- ----------
$ 7,233 $ 6,731 $ 5,776
========== ========== ==========
OPERATING INCOME
Performance Materials (a) $ 112 $ 88 $ 42
Distribution 120 99 56
Valvoline (21) 59 77
Water Technologies (a) 14 11 14
Refining and Marketing (b) - 486 383
Unallocated and other (c) (55) (72) (47)
---------- ---------- ----------
$ 170 $ 671 $ 525
========== ========== ==========
OPERATING INFORMATION
Performance Materials (d)
Sales per shipping day $ 5.7 $ 5.4 $ 4.0
Pounds sold per shipping day 4.9 5.4 5.1
Gross profit as a percent of sales 22.5% 20.4% 20.4%
Distribution (d)
Sales per shipping day $ 16.2 $ 15.1 $ 12.6
Pounds sold per shipping day 18.9 19.2 19.4
Gross profit as a percent of sales 9.5% 9.7% 9.6%
Valvoline (d)
Lubricant sales gallons 168.7 175.4 191.6
Premium lubricants (percent of U.S. branded volumes) 23.1% 23.4% 21.5%
Gross profit as a percent of sales 19.9% 26.6% 28.2%
Water Technologies (d)
Sales per shipping day $ 2.0 $ 1.6 $ 1.4
Gross profit as a percent of sales 43.7% 47.8% 49.3%
-----------------------------------------------------------------------------------------------
(a) In the June 2006 quarter, Ashland redefined its reporting segments as
it continues to evolve into a diversified chemical company. Performance
Materials and Water Technologies were formerly combined under Ashland
Specialty Chemical. Prior periods have been conformed to the current
period presentation.
(b) 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.
(c) Includes corporate costs previously allocated to APAC of $41 million in
2006, $45 million in 2005 and $42 million in 2004.
(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.
M-1
RESULTS OF OPERATIONS
Ashland's net income amounted to $407 million in 2006, $2,004 million
in 2005 and $378 million in 2004. Income from continuing operations
amounted to $183 million in 2006, $1,958 million in 2005 and $311 million
in 2004. 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 E of Notes to Consolidated Financial Statements.
Ashland's results from discontinued operations included an after-tax gain
on the sale of APAC of $110 million in 2006, net income from APAC of $115
million in 2006, $47 million in 2005 and $87 million in 2004, and after-tax
charges associated with estimated future asbestos liabilities less probable
insurance recoveries of $1 million in 2006, $1 million in 2005 and $18
million in 2004.
Ashland's operating income amounted to $170 million in 2006, $671
million in 2005 and $525 million in 2004. Included in these amounts is
Refining and Marketing operating income of $486 million in 2005 and $383
million in 2004. 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 E of
Notes to Consolidated Financial Statements), while 2004 includes a full
year of equity income from MAP. An analysis of operating income by industry
segment follows.
During 2006, Ashland redefined its reporting segments as it continues
to evolve into a diversified, global chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland Specialty
Chemical, have now been separately disclosed since these businesses serve
different markets and recent acquisitions have made Water Technologies a
much larger and more distinct part of Ashland.
Segment operating results reflect new methodology adopted in October
2005 for allocating substantially all corporate expenses to Ashland's
operating businesses, with the exception of certain legacy costs or items
clearly not associated with the operating divisions. Additional corporate
expenses allocated to Ashland's four remaining operating divisions under
this new methodology amounted to $70 million in 2006, $89 million in 2005
and $81 million in 2004. However, the sale of APAC in August 2006 and the
reclassification of APAC's results as discontinued operations impacted this
methodology change. Under generally accepted accounting principles,
allocations of general corporate overhead may not be allocated to
discontinued operations for financial statement presentation. As a result,
the "Unallocated and other" component of operating income primarily
represents corporate overhead previously allocated to APAC. Results for
prior periods have been reclassified to conform to the new allocation
methodology.
PERFORMANCE MATERIALS
Performance Materials reported record operating income of $112 million
for 2006, a 27% increase compared to $88 million for 2005. Sales and
operating revenues increased 4%, from $1,369 million for 2005 to $1,425
million for 2006, reflecting increased prices. The gross profit margin
increased to 22.5% from 20.4% in 2005, resulting in a $56 million increase
in operating income. Pounds per shipping day decreased 9% from 5.4 million
pounds for 2005 to 4.9 million pounds for 2006, resulting in an $18 million
decline in operating income. When these volumes are adjusted for the maleic
anhydride business transferred to Marathon as part of the MAP Transaction
in 2005 the volumes decreased 2%. Selling, general and administrative
(SG&A) expenses increased $4 million in the 2006 period, reflecting a $3
million increase in environmental remediation expenses, while the 2005
period included $11 million in gains from the sale of an idle plant and the
termination of a product supply contract.
Performance Materials reported operating income of $88 million for
2005, a 110% improvement compared to $42 million for 2004. Sales and
operating revenues increased 33%, from $1,026 million for 2004 to $1,369
million for 2005, reflecting increased prices and increased volumes from
the December 2004 acquisition of the DERAKANE(R) resins business. The gross
profit margin was unchanged at 20.4%, resulting in a $48 million increase
in operating income on the increased sales. Pounds per shipping day
increased 6% from 5.1 million pounds for 2004 to 5.4 million pounds for
2005, resulting in a $16 million increase in operating income. SG&A
expenses increased $27 million in the 2005 period, reflecting the
DERAKANE(R) acquisition and a $3 million increase in environmental
remediation expenses. In addition, the 2005 period included $11 million in
gains from the sale of an idle plant and the termination of a product
supply contract, while the 2004 period included a $6 million gain on the
sale of some idle land.
DISTRIBUTION
Distribution reported record operating income of $120 million for
2006, a 21% increase compared to $99 million for 2005. Sales and operating
revenues were a record $4,070 million for 2006, a 7% increase compared to
$3,810 million for 2005. Gross profit as a percent of sales decreased from
9.7% for 2005 to 9.5% for 2006, but increased on a cents per pound basis,
resulting in a $24 million increase in operating income. Pounds per
shipping day declined 2% from 19.2 million pounds in 2006 to 18.9 million
pounds in 2005, reducing operating income by $7 million. A disciplined cost
structure resulted in a decline in SG&A expenses of $7 million, despite a
$4 million increase in environmental remediation expenses.
M-2
Distribution reported operating income of $99 million for 2005, a 77%
improvement compared to $56 million for 2004. Sales and operating revenues
increased 19% from $3,199 million in 2004 to $3,810 million in 2005,
reflecting increased selling prices, as pounds per shipping day declined 1%
due to the disposition of the ingestibles business. Adjusting for the
ingestibles disposition, pounds per shipping day increased 1%. Gross profit
as a percent of sales increased slightly, from 9.6% to 9.7%, demonstrating
the division's success in passing through rising raw material costs and
aggressively managing expenses. The slight margin increase on higher sales
dollars resulted in a $64 million increase in gross profit, partially
offset by a $4 million decline due to lower volumes. SG&A expenses
increased $15 million, including a $5 million increase in environmental
remediation expenses.
VALVOLINE
Valvoline reported an operating loss of $21 million for 2006, compared
to operating income of $59 million for 2005. The decline primarily
reflected rapidly rising raw material costs which eroded the gross profit
margin as it decreased from 26.6% in 2005 to 19.9% in 2006, resulting in a
$57 million decline in operating income. The lower margin reflected
increases in material costs, which were not fully offset by price increases
in the marketplace. Lubricant sales volumes declined 4%, from 175.4 million
gallons in 2005 to 168.7 million gallons in 2006, reflecting a weak
consumer market. The net impact of volume fluctuations in all product lines
resulted in an $11 million decrease in operating income. Also included in
2006 results was an impairment charge of $4 million related to certain
Valvoline Instant Oil Change (VIOC) locations. International operating
income declined 40% primarily due to higher raw material costs. SG&A
expenses increased $10 million compared to the prior year, reflecting
higher costs related to GlobalOne, litigation issues and severance.
Valvoline reported operating income of $59 million for 2005, compared
to $77 million for 2004. The decline primarily reflected an 8% decrease in
lubricant sales volumes from 191.6 million gallons in 2004 to 175.4 million
gallons in 2005, resulting in a $14 million decrease in gross profit. SG&A
expenses, including GlobalOne and allocated corporate expenses, increased
$7 million compared to the prior year. Earnings from 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.
WATER TECHNOLOGIES
Water Technologies reported operating income of $14 million for 2006
compared to $11 million for 2005. Results for 2006 included an $8 million
foreign currency hedge gain on the May 2006 acquisition of the water
treatment business of Degussa AG and a $1 million gain on insurance
settlements, partially offset by a $6 million charge for severance costs
due to restructuring the business. The operations acquired in the Degussa
acquisition, now operating as the Environmental and Process Solutions
(E&PS) group within Water Technologies, added $5 million to operating
income. Excluding the impact of these items, operating income declined $5
million. Sales and operating revenues increased 27% to $502 million in
2006, compared to $394 million in 2005. The E&PS business accounted for $82
million, or 21%, of the increase. The gross profit margin decreased from
47.8% in 2005 to 43.7% in 2006, as price increases could not keep pace with
rising raw material costs. This decrease also reflects the acquired E&PS
business, which has a lower gross profit percentage than Ashland's other
water businesses.
Water Technologies reported operating income of $11 million for 2005
compared to $14 million for 2004. Sales and operating revenues increased 9%
to $394 million for 2005 compared to $360 million for 2004. The gross
profit margin decreased from 49.3% in 2004 to 47.8% in 2005, as rising raw
material costs could not be fully recovered through price increases.
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 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 up
to a maximum of $50 million for costs incurred on or after January 1, 2004,
amounted to $23 million in 2005, versus income of $6 million in 2004
resulting from reductions in estimated reserves.
M-3
UNALLOCATED AND OTHER
Unallocated and other costs, consisting of certain legacy costs or
items clearly not associated with the operating divisions, were $55 million
in 2006, $72 million in 2005 and $47 million in 2004. As described on page
M-2, these amounts included costs previously allocated to APAC of $41
million in 2006, $45 million in 2005 and $42 million in 2004. In addition
to the ongoing costs that typically occur each year related to formerly
owned businesses, 2006 included $17 million in environmental remediation
expenses, income of $11 million from an insurance claim recovery and income
of $5 million from the favorable adjustment to the previously estimated
withdrawal premium due Oil Insurance Limited (OIL), the energy-industry
mutual insurance consortium in which Ashland terminated its participation
effective December 31, 2005. Included in 2005 were $20 million in charges
for estimated future premiums due OIL, resulting from a higher level of
losses than anticipated for the members of OIL, due primarily to the
effects of a highly active hurricane season during 2005.
(LOSS) GAIN ON THE MAP TRANSACTION
See Note E 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. Ashland recorded a loss on the MAP Transaction of
$5 million in 2006, as a result of a decrease in the discounted receivable
from Marathon for the estimated present value of future tax deductions. The
loss resulted primarily from a $4 million reclassification of certain tax
benefits related to previously owned businesses of Ashland. The offsetting
benefit was recorded in income taxes as deferred tax benefits.
LOSS ON EARLY RETIREMENT OF DEBT
See Note E 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 INTERERST AND OTHER FINANCING INCOME (COSTS)
The following table summarizes the components of net interest and
other financing income (costs).
(In millions) 2006 2005 2004
-------------------------------------------------------------------------------------
NET INTEREST AND OTHER FINANCING INCOME (COSTS)
Interest income $ 59 $ 15 $ 6
Interest expense (8) (90) (114)
Expenses on sales of accounts receivable - (4) (3)
Other financing costs (4) (3) (3)
---------- ---------- -----------
$ 47 $ (82) $ (114)
========== ========== ===========
The decrease in interest expense and increase in interest income for
2006 and 2005 reflect the retirement of most of Ashland's debt from the
proceeds of the MAP Transaction in June 2005 as described in Note E of
Notes to Consolidated Financial Statements, and the temporary investment of
the remaining proceeds in cash equivalents and short-term,
available-for-sale securities.
INCOME TAX (EXPENSE) BENEFIT
Ashland's income tax expense for 2006 included $32 million in tax
benefits unrelated to pretax earnings for 2006. During 2006, Ashland
recognized $16 million in tax benefits resulting from the resolution of
domestic and foreign tax matters and the reevaluation of income tax
reserves related to prior years. Also during 2006, $16 million in tax
benefits were recorded to adjust the 2005 income tax provision to the 2005
tax returns as ultimately filed.
As described in Note E 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 E, 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.
M-4
Excluding these identified items, Ashland's adjusted effective tax
rate was 28.8% in 2006, compared to 32.4% in 2005 and 36.0% in 2004. The
overall effective rate was lower in 2006 than in 2005 and 2004 due to
Ashland's lower level of pretax income from continuing operations in 2006
and the resulting larger relative portion of those earnings derived from
income taxed at less than full U.S. statutory rates. See Note M of Notes to
Consolidated Financial Statements for the reconciliation of Ashland's tax
provision for the last three years to the 35% U.S. statutory rate.
INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES)
Results of Ashland's discontinued operations are summarized below. See
Note D of Notes to Consolidated Financial Statements for an explanation of
these amounts.
(In millions) 2006 2005 2004
-----------------------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES)
APAC
Results of operations $ 115 $ 47 $ 87
Gain on sale of operations 110 - -
Asbestos-related litigation reserves and expenses (1) (1) (18)
Electronic Chemicals - loss on sale of operations - - (2)
---------- ---------- ----------
$ 224 $ 46 $ 67
========== ========== ==========
Ashland recorded an after-tax gain on the sale of APAC of $110 million
in 2006. Net income from the results of operations of APAC amounted to $115
million in 2006, $47 million in 2005 and $87 million in 2004. The increase
from 2005 to 2006 reflected improved margins on construction jobs and
material sales and favorable weather. The decline from 2004 to 2005
reflected weather delays due to the highly active hurricane and tropical
storm season in 2005 and rapidly rising raw material and energy costs.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operating activities from continuing operations, a
major source of Ashland's liquidity, amounted to a cash inflow of $148
million in 2006, a cash outflow of $64 million in 2005 and a cash inflow of
$43 million in 2004. Such amounts included cash distributions from MAP of
$272 million in 2005 and $146 million in 2004. During 2006, Ashland paid
income taxes of $140 million, compared with $299 million in 2005 and $84
million in 2004. Ashland contributed $105 million to its qualified pension
plans in 2006, compared with $121 million in 2005 and $137 million in 2004.
Cash payments for interest expense amounted to $9 million in 2006, $119
million in 2005 and $116 million in 2004. Cash flows from operating
activities of discontinued operations, consisting primarily of the
operating cash flows from APAC, amounted to cash inflows of $197 million in
2006, $53 million in 2005 and $143 million in 2004.
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 August 2006, Standard & Poor's
lowered Ashland's senior debt rating from BBB- to BB+, their highest
non-investment grade rating, and lowered Ashland's commercial paper rating
from A-3 to B, citing Ashland's intention to distribute the APAC proceeds
to shareholders instead of using the proceeds for business investment.
Ashland has a revolving credit agreement that expires on March 21, 2010,
which provides for up to $350 million in borrowings. The borrowing capacity
under this facility was reduced by $108 million of letters of credit
outstanding at September 30, 2006. The revolving credit agreement contains
a covenant limiting the total debt Ashland may incur from all sources as a
function of Ashland's stockholders' equity. The covenant's terms would have
permitted Ashland to borrow $4.6 billion at September 30, 2006, in addition
to the actual total debt incurred at that time. Permissible total Ashland
debt under the covenant's terms increases (or decreases) by 150% of any
increase (or decrease) in stockholders' equity.
At September 30, 2006, working capital (excluding debt due within one
year) amounted to $2,221 million, compared to $2,224 million at the end of
2005. 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 $147 million at September 30, 2006 and $127 million at
September 30, 2005. Liquid assets (cash, cash equivalents,
available-for-sale securities and accounts receivable) amounted to 175% of
current liabilities at September 30, 2006, compared to 170% at September
30, 2005.
CAPITAL RESOURCES
On September 14, 2006 Ashland's Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of APAC
to the Ashland Common Stock shareholders as a one-time special dividend.
Each shareholder of record
M-5
as of October 10, 2006, received $10.20 per share, for a total of $674
million. This amount is accrued as dividends payable in the Consolidated
Balance Sheet at September 30, 2006. Substantially all of the remaining
proceeds were directed to be used to repurchase Ashland Common Stock in
accordance with the terms authorized by Ashland's Board of Directors. See
Note N of Notes to Consolidated Financial Statements for a description of
Ashland's share repurchase programs.
Ashland repurchased 6.7 million shares for $405 million during fiscal
year 2006. Since the inception of the first described share repurchase
program on July 21, 2005 through September 30, 2006, Ashland had
repurchased a total of 8.4 million shares at a cost of $505 million.
Following the completion of the current share repurchase program Ashland
estimates it will have purchased approximately 18% of the shares
outstanding on June 30, 2005. The stock repurchase actions are consistent
with certain representations of intent made to the Internal Revenue Service
with respect to the transfer of MAP.
Property additions (excluding the property additions of the
discontinued operations of APAC) amounted to $492 million during the last
three years and are summarized in the Information by Industry Segment on
page F-32. For the past three years, Performance Materials accounted for
30% of Ashland's capital expenditures, while Distribution accounted for
15%, Valvoline accounted for 26% and Water Technologies accounted for 12%.
Capital used for acquisitions amounted to $323 million during the last
three years, of which $103 million was invested in Performance Materials,
$16 million in Distribution, $36 million in Valvoline and $168 million in
Water Technologies. A summary of the capital employed in Ashland's current
operations as of the end of the last three years follows.
(In millions) 2006 2005 2004
-------------------------------------------------------------------
CAPITAL EMPLOYED
Performance Materials $ 505 $ 466 $ 373
Distribution 564 513 449
Valvoline 489 483 388
Water Technologies 322 146 116
During 2006, Ashland reduced its total debt by $12 million to $82
million and stockholders' equity decreased by $643 million to $3.1 billion.
Increases in stockholders' equity resulting from $407 million of net
income, $33 million from issuance of common shares under stock incentive
and other plans, a $47 million decrease in the minimum pension liability
and $28 million of translation gains associated with foreign operations
were more than offset by decreases resulting from common stock repurchases
of $405 million, the special cash dividend of $674 million related to the
APAC divestiture, regular cash dividends of $78 million, and $1 million in
unrealized losses on cash flow hedges. Debt as a percent of capital
employed was 2.6% at September 30, 2006 compared to 2.5% at September 30,
2005.
During 2007, Ashland expects capital expenditures of approximately
$193 million compared with $175 million in 2006. The budgeted expenditures
for 2007 include $20 million for compliance matters, $54 million for
maintenance of capabilities, $62 million for productivity enhancements and
cost reductions, and $57 million for growth projects. In 2004, Ashland
initiated a multi-year SAP enterprise resource planning (ERP) project that
is expected to increase efficiency and effectiveness in supply chain,
financial, and environmental, health and safety processes. The
implementation of the ERP system in the U.S. began in October 2006, and
while early indications are that the initial implementation was successful,
such implementations carry substantial risk, including the potential for
business interruption and associated adverse impacts on operating results.
The scope of the project was expanded in 2006 to include new, additional
functionality and the overall costs for this project through 2008 are now
expected to total approximately $140 million, of which approximately $110
million will be capitalized. Costs for 2007 are expected to total
approximately $30 million, of which approximately $25 million will be
capitalized.
The following table aggregates Ashland's commitments to make future
payments under existing contracts at September 30, 2006. Contractual cash
obligations for which the ultimate settlement amounts are not fixed and
determinable have been excluded.
2008- 2010- Later
(In millions) Total 2007 2009 2011 Years
---------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
Raw material purchase obligations $ 108 $ 62 $ 42 $ 4 $ -
Employee benefit obligations (a) 372 88 58 64 162
Operating lease obligations 197 40 64 34 59
Long-term debt (b) 116 18 36 10 52
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 793 $ 208 $ 200 $ 112 $ 273
========== ========== ========== ========== ==========
(a) Includes estimated funding of Ashland's qualified U.S. and non-U.S.
pension plans for 2007, as well as projected benefit payments through
2016 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.
M-6
OFF-BALANCE SHEET ARRANGEMENTS
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation 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 and environmental remediation. Although
management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances,
actual results could differ significantly from the estimates under
different assumptions or conditions. 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 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).
Asset impairment charges were $6 million in 2006 and were not significant
in 2005 and 2004. 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, 2006.
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 Performance Materials and Water Technologies 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 did not recognize any
goodwill impairment during 2006 and 2005, and the amount recognized in 2004
was not significant. 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 21% (except
for the E&PS business of Water Technologies acquired in May 2006), and the
consolidated fair values exceeded carrying values by approximately 40%.
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
M-7
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, 2006, Ashland revised certain demographic
assumptions used to determine its pension and other postretirement benefit
costs. The mortality assumption was changed from the RP2000 Table for
Healthy Lives to the RP2000 Combined Mortality Table for Males and Females
- Healthy Lives projected to 2006 using Scale AA. In addition, the rates of
turnover were revised for current active members based on actual experience
of plan participants for the period 2003 through 2005. The previous rates
of turnover assumption were based on actual plan experience for the years
1996 through 2000. Current retirement rates are based upon actual
experience. These changes were effective as of September 30, 2006 for
disclosure purposes and for 2007 expense.
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, 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, 2006 was 5.77% for the U.S. pension plans
and 5.64% 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. The
weighted-average discount rate for Ashland's U.S. and non-U.S. pension
plans combined was 5.66% as of September 30, 2006. 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. Ashland's
expense under both U.S. and non-U.S. pension plans is determined using the
discount rate as of the beginning of the fiscal year, which amounted to a
weighted-average rate of 5.42% for 2006, 5.98% for 2005 and 6.20% for 2004.
The rates used for the postretirement health and life plans were 5.33% for
2006, 6.00% for 2005 and 6.25% for 2004. The 2007 expense for the pension
plans will be based on a weighted-average discount rate of 5.66%, while
5.64% will be used for the postretirement health and life plans.
The weighted-average rate of compensation increase assumptions were
4.46% for 2006, 4.43% for 2005 and 4.43% for 2004, reflecting a 4.5% rate
for the U.S. plans for all three years. The weighted-average long-term
expected rate of return on assets was assumed to be 8.26% in 2006, 8.35% in
2005 and 8.35% in 2004, reflecting an 8.5% rate for the U.S. plans for all
three years. The return on plan assets is subject to wide year-to-year
variances. For 2006, the U.S. pension plan assets generated an actual
return of 8.8%, compared to 14.0% in 2005 and 11.8% in 2004. 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 8.8% and 8.0%
on its U.S. pension plan assets over the last five-year and ten-year
periods. The rate of compensation increase assumption for the U.S. plans
will be reduced to 3.75% and the expected return on U.S. plan assets will
be reduced to 7.75% in determining Ashland's pension costs for 2007. 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) 2006 2005 2004
---------------------------------------------------------------------------------------
INCREASE IN PENSION COSTS FROM
Decrease in the discount rate $ 25 $ 22 $ 21
Increase in the salary adjustment rate 11 9 9
Decrease in the expected return on plan assets 11 9 7
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. Income taxes are accounted for under FASB Statement No. 109
(FAS 109), "Accounting for Income Taxes." The provision for income taxes
includes income taxes paid, currently payable or receivable, and those
deferred. Under FAS 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets
and liabilities, and are measured using enacted tax rates and laws that are
expected to be in effect when the differences reverse. Deferred tax assets
are also recognized for the estimated future effects of tax loss
carryforwards. The effect on deferred taxes of changes in tax
M-8
rates is recognized in the period in which the enactment date changes.
Valuation allowances are established when necessary on a jurisdictional
basis to reduce deferred tax assets to the amounts expected to be realized.
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.
Ashland retained Hamilton, Rabinovitz & Alschuler, Inc. (HR&A) to
assist in developing and periodically updating independent and accurate
reserve estimates for future asbestos claims and related costs given
various assumptions. The methodology used by HR&A to project future
asbestos costs is based largely on Ashland's recent experience, including
claim-filing and settlement rates, disease mix, enacted legislation, open
claims, and litigation defense and claim settlement costs. Ashland's claim
experience is compared to the results of previously conducted
epidemiological studies estimating the number of people likely to develop
asbestos-related diseases. Those studies were undertaken in connection with
national analyses of the population expected to have been exposed to
asbestos. Using that information, HR&A estimates a range of the number of
future claims that may be filed, as well as the related costs that may be
incurred in resolving those claims.
From the range of estimates, Ashland records the amount it believes to
be the best estimate of future payments for litigation defense and claim
settlement costs. During the most recent update of this estimate completed
during 2006, it was determined that the reserves for asbestos claims should
be increased by $104 million. This increase in the reserves was based on
the results of a non-inflated, non-discounted 51-year model developed with
the assistance of HR&A. This increase resulted in total reserves for
asbestos claims of $635 million at September 30, 2006, compared to $571
million at September 30, 2005.
Projecting future asbestos costs is subject to numerous variables that
are extremely difficult to predict. In addition to the significant
uncertainties surrounding the number of claims that might be received,
other variables include the type and severity of the disease alleged by
each claimant, the long latency period associated with asbestos exposure,
dismissal rates, costs of medical treatment, the impact of bankruptcies of
other companies that are co-defendants in claims, uncertainties surrounding
the litigation process from jurisdiction to jurisdiction and from case to
case, and the impact of potential changes in legislative or judicial
standards. Furthermore, any predictions with respect to these variables are
subject to even greater uncertainty as the projection period lengthens. In
light of these inherent uncertainties, Ashland believes its asbestos
reserve represents the best estimate within a range of possible outcomes.
As a part of the process to develop Ashland's estimates of future asbestos
costs, a range of long-term cost models is developed. These models are
based on national studies that predict the number of people likely to
develop asbestos-related diseases and are heavily influenced by assumptions
regarding long-term inflation rates for indemnity payments and legal
defense costs, as well as other variables mentioned previously. Ashland has
estimated that it is reasonably possible that total future litigation
defense and claim settlement costs on an inflated and undiscounted basis
could range as high as approximately $1.9 billion, depending on the
combination of assumptions selected in the various models. If actual
experience is worse than projected relative to the number of claims filed,
the severity of alleged disease associated with those claims or costs
incurred to resolve those claims, Ashland may need to increase further the
estimates of the costs associated with asbestos claims and these increases
could potentially be material over time.
Ashland has insurance coverage for most of the litigation defense and
claim settlement costs incurred in connection with its asbestos claims, and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed. As a
result, increases in the asbestos reserve have been largely offset by
probable
M-9
insurance recoveries. The amounts not recoverable generally are due from
insurers that are insolvent, rather than as a result of uninsured claims or
the exhaustion of Ashland's insurance coverage.
Ashland has estimated the value of probable insurance recoveries
associated with Ashland's estimate of its asbestos liabilities. Such
recoveries are based on management's assumptions and estimates surrounding
the available or applicable insurance coverage. One such assumption is that
all solvent insurance carriers remain solvent. Although coverage limits are
resolved in the coverage-in-place agreement with Equitas Limited (Equitas)
and other London companies, which collectively provide a significant
portion of Ashland's insurance coverage for asbestos claims, there was a
disagreement with these companies over the timing of recoveries. In
estimating the value of future recoveries, Ashland has historically used
the least favorable interpretation of this agreement under which the
ultimate recoveries are extended for many years, resulting in a significant
discount being applied to value those recoveries. On June 16, 2006 an
arbitrator reached a decision essentially confirming that interpretation.
Ashland will continue to apply this methodology based on this arbitration
decision.
At September 30, 2006, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from insurers amounted to
$474 million, of which $65 million relates to costs previously paid.
Receivables from insurers amounted to $400 million at September 30, 2005.
The receivable was increased by $104 million during 2006, reflecting the
updated model used for purposes of valuing the reserve described above, and
its impact on the valuation of future recoveries from insurers. About 31%
of the estimated receivables from insurance companies at September 30, 2006
are expected to be due from Equitas and other London companies. Of the
remainder, approximately 97% is expected to come from companies or groups
that are rated A or higher by A. M. Best.
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, 2006, such locations included 72 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, 110 current and former operating
facilities (including certain operating facilities conveyed to MAP) and
about 1,230 service station properties, of which 218 are being actively
remediated. Ashland's reserves for environmental remediation amounted to
$199 million at September 30, 2006 and $176 million at September 30, 2005,
of which $168 million at September 30, 2006 and $145 million at September
30, 2005 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. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation expense
amounted to $57 million in 2006, $52 million in 2005 and $7 million in
2004.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods, changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Although it is not possible to predict with certainty the ultimate
costs of environmental remediation, Ashland currently estimates that the
upper end of the reasonably possible range of future costs for identified
sites could be as high as approximately $310 million. No individual
remediation location is material to Ashland, as its largest reserve for any
site is less than 10% of the remediation reserve.
OUTLOOK
Ashland is focused on growing as a diversified, global chemical
company--organically and through acquisitions. Ashland's strong financial
position and balanced approach to growth should create value for its
investors and deliver needed solutions to its customers.
Performance Materials should benefit from continued global economic
growth. In the Composite Polymers business, North America, Europe and China
are the three major, worldwide markets for unsaturated-polyester-resins.
Although this business faces softness in the North American market, about
40% of Ashland's revenues in this business are generated outside North
America. The European market has returned to growth after a slow 2005 and
China is showing good growth. Within the U.S. market, traditional
applications in the marine and residential construction segments are
slowing. Certain applications, such as composite windows and doors,
continue to thrive, primarily as a result of material substitution. In
addition, several other market segments remain strong--specifically, the
electrical, power, and infrastructure segments.
Distribution's performance will be largely determined by growth of the
North American economy. Ashland's focus will be on continued cost control
and efforts to grow volume. Distribution benefited early in fiscal 2006
from temporary supply
M-10
disruptions, and the resultant pricing volatility that followed Hurricanes
Katrina and Rita. Distribution's ability to execute well should help it
navigate through changing economic conditions.
Recent developments in Valvoline's market place are encouraging.
Ashland's price increases and recent reductions in base lube oil costs are
beginning to have a positive impact on margins. In addition, recent
cost-cutting efforts have eliminated $17 million of costs from Valvoline's
2007 budget. Valvoline should return to profitability beginning with the
December 2006 quarter.
The strong performance of Water Technologies in the September 2006
quarter is also encouraging. Recent cost-cutting efforts have eliminated
$10 million of costs from this business for fiscal 2007. In addition, Water
Technologies should benefit from its business model redesign, as well as
the E&PS business acquired at the end of May 2006.
Ashland's sales and operating revenues are normally subject to
seasonal variations. The following table compares operating income by
quarter for the three years ended September 30, 2006, 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) 2006 2005 2004
-------------------------------------------------------------------
QUARTERLY OPERATING INCOME
December 31 $ 46 $ 31 $ 28
March 31 49 65 35
June 30 47 67 37
September 30 28 21 41
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
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.
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.
M-11
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 butane and natural gas, 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 the Statements of Consolidated 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, 2006 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, 2006 would not significantly affect
Ashland's consolidated financial position, results of operations, cash
flows or liquidity.
M-12
ITEM 8. 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-31
Quarterly financial information .................................... F-33
Consolidated financial schedule:
Schedule II - Valuation and qualifying accounts ................. F-33
Five-year selected financial information ........................... F-34
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 of 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 F
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,
controls and risk management strategies, 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 2006 Proxy Statement.
Management assessed the effectiveness of Ashland's internal control
over financial reporting as of September 30, 2006. 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, 2006.
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 20, 2006
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, 2006 and
2005, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 2006. 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. and consolidated
subsidiaries' 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-32 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, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2006, 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.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Ashland Inc. and consolidated subsidiaries' internal control over financial
reporting as of September 30, 2006, 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 20, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 20, 2006
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, 2006, 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. and consolidated subsidiaries' 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, 2006, 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, 2006, 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, 2006 and 2005, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 2006 and our report dated November 20, 2006
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 20, 2006
F-4
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended September 30
(In millions except per share data) 2006 2005 2004
----------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues $ 7,233 $ 6,731 $ 5,776
Equity income - Note F 11 525 412
Other income 33 39 26
---------- ---------- ----------
7,277 7,295 6,214
COSTS AND EXPENSES
Cost of sales and operating expenses 6,030 5,545 4,721
Selling, general and administrative expenses 1,077 1,079 968
---------- ---------- ----------
7,107 6,624 5,689
---------- ---------- ----------
OPERATING INCOME 170 671 525
(Loss) gain on the MAP Transaction - Note E (a) (5) 1,284 -
Loss on early retirement of debt - Note E - (145) -
Net interest and other financing income (costs) - Note H 47 (82) (114)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 212 1,728 411
Income tax (expense) benefit - Note M (29) 230 (100)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 183 1,958 311
Income from discontinued operations (net of income taxes) - Note D 224 46 67
---------- ---------- ----------
NET INCOME $ 407 $ 2,004 $ 378
========== ========== ==========
EARNINGS PER SHARE - NOTE A
Basic
Income from continuing operations $ 2.57 $ 26.85 $ 4.44
Income from discontinued operations 3.16 0.64 0.97
---------- ---------- ----------
Net income $ 5.73 $ 27.49 $ 5.41
========== ========== ==========
Diluted
Income from continuing operations $ 2.53 $ 26.23 $ 4.36
Income from discontinued operations 3.11 0.62 0.95
---------- ---------- ----------
Net income $ 5.64 $ 26.85 $ 5.31
========== ========== ==========
(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 E for
further information.
See Notes to Consolidated Financial Statements.
F-5
Ashland Inc. and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30
(In millions) 2006 2005
------------------------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 1,820 $ 985
Available-for-sale securities - Note K 349 403
Accounts receivable (less allowances for doubtful accounts of
$40 million in 2006 and $33 million in 2005) 1,401 1,242
Inventories - Note A 532 439
Deferred income taxes - Note M 93 104
Other current assets 55 22
Current assets of discontinued operations - Note D - 562
--------- ----------
4,250 3,757
INVESTMENTS AND OTHER ASSETS
Goodwill and other intangibles - Note G 310 235
Asbestos insurance receivable (noncurrent portion) - Note P 444 370
Deferred income taxes - Note M 186 228
Other noncurrent assets 450 419
Noncurrent assets of discontinued operations - Note D - 976
---------- ----------
1,390 2,228
PROPERTY, PLANT AND EQUIPMENT - Note A
Cost
Land 82 79
Buildings 522 495
Machinery and equipment 1,260 1,137
Construction in progress 143 119
---------- ----------
2,007 1,830
Accumulated depreciation and amortization (1,057) (1,000)
---------- ----------
950 830
---------- ----------
$ 6,590 $ 6,815
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt - Note H $ 12 $ 12
Dividends payable 674 -
Trade and other payables 1,302 1,239
Income taxes 53 13
Current liabilities of discontinued operations - Note D - 281
---------- ----------
2,041 1,545
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Note H 70 82
Employee benefit obligations - Note Q 313 358
Asbestos litigation reserve (noncurrent portion) - Note P 585 521
Other long-term liabilities and deferred credits 485 482
Noncurrent liabilities of discontinued operations - Note D - 88
---------- ----------
1,453 1,531
STOCKHOLDERS' EQUITY - Notes N & O
Common stock, par value $.01 per share, 200 million shares authorized
Issued - 67 million shares in 2006 and 73 million shares in 2005 1 1
Paid-in capital 240 605
Retained earnings 2,899 3,251
Accumulated other comprehensive loss (44) (118)
---------- ----------
3,096 3,739
---------- ----------
$ 6,590 $ 6,815
========== ==========
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 (a) Total
------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ 68 $ 350 $ 1,961 $ (126) $ 2,253
Total comprehensive income (b) 378 20 398
Regular dividends, $1.10 per common share (77) (77)
Issued 3,310,204 common shares under
stock incentive and other plans (c) 4 128 132
----------- ---------- ----------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2004 72 478 2,262 (106) 2,706
Total comprehensive income (b) 2,004 (12) 1,992
Regular dividends, $1.10 per common share (79) (79)
Distribution of Marathon shares from the
MAP Transaction - Note E (936) (936)
Change in par value of common stock - Note N (74) 74 -
Issued 3,055,082 common shares under
stock incentive and other plans (c) 3 153 156
Repurchase of 1,768,600 common shares (100) (100)
----------- ---------- ----------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2005 1 605 3,251 (118) 3,739
Total comprehensive income (b) 407 74 481
Regular dividends, $1.10 per common share 2 (80) (78)
Special dividend, $10.20 per common share - Note N 5 (679) (674)
Issued 662,451 common shares under
stock incentive and other plans (c) 33 33
Repurchase of 6,670,930 common shares (405) (405)
----------- ---------- ----------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2006 $ 1 $ 240 $ 2,899 $ (44) $ 3,096
=========== ========== =========== ========== ==========
(a) At September 30, 2006 and 2005, the accumulated other comprehensive
loss (after tax) of $44 million for 2006 and $118 million for 2005 was
comprised of a minimum pension liability of $113 million for 2006 and
$160 million for 2005, net unrealized translation gains of $71 million
for 2006 and $43 million for 2005, and net unrealized losses on cash
flow hedges of $2 million for 2006 and $1 million for 2005.
(b) Reconciliations of net income to total comprehensive income follow.
(In millions) 2006 2005 2004
--------------------------------------------------------------------------------------
Net income $ 407 $ 2,004 $ 378
Minimum pension liability adjustment 76 (49) (21)
Related tax (expense) benefit (29) 19 8
Unrealized translation gains 27 19 32
Related tax benefit 1 - 1
Unrealized losses on cash flow hedges (1) (1) -
----------- ---------- -----------
Total comprehensive income $ 481 $ 1,992 $ 398
=========== ========== ===========
(c) Includes income tax benefits resulting from the exercise of stock
options of $7 million in 2006, $34 million in 2005 and $16 million in
2004.
See Notes to Consolidated Financial Statements.
F-7
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended September 30
(In millions) 2006 2005 2004
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 407 $ 2,004 $ 378
Results from discontinued operations (net of income taxes) (224) (46) (67)
Adjustments to reconcile income from continuing operations
to cash flows from operating activities
Depreciation and amortization 111 100 98
Deferred income taxes (1) (500) 104
Equity income from affiliates (11) (525) (412)
Distributions from equity affiliates 5 279 152
Loss (gain) on the MAP Transaction - Note E 5 (1,284) -
Loss on early retirement of debt - Note E - 145 -
Change in operating assets and liabilities (a) (141) (232) (210)
Other items (3) (5) -
---------- ---------- ----------
148 (64) 43
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of common stock 18 115 108
Excess tax benefits related to share-based payments - Note A 6 20 3
Repayment of long-term debt (13) (1,552) (100)
Repurchase of common stock (405) (100) -
(Decrease) increase in short-term debt - (40) 40
Cash dividends paid (78) (79) (77)
---------- ---------- ----------
(472) (1,636) (26)
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Additions to property, plant and equipment (175) (180) (137)
Purchase of operations - net of cash acquired (183) (135) (5)
Proceeds from sale of operations - 3,303 -
Purchases of available-for-sale securities (824) (402) -
Proceeds from sales and maturities of available-for-sale securities 876 1 -
Purchase of accounts receivable (revised - see Note A) - (150) -
Collections of accounts receivable purchased (revised - see Note A) - 150 -
Other - net 20 9 23
---------- ---------- ----------
(286) 2,596 (119)
---------- ---------- ----------
CASH (USED) PROVIDED BY CONTINUING OPERATIONS (610) 896 (102)
Cash provided (used) by discontinued operations (revised - see Note A)
Operating cash flows 197 53 143
Investing cash flows 1,248 (207) (21)
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 835 742 20
Cash and cash equivalents - beginning of year 985 243 223
---------- ---------- ----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,820 $ 985 $ 243
========== ========== ==========
(INCREASE) DECREASE IN OPERATING ASSETS (a)
Accounts receivable $ (76) $ (291) $ (149)
Inventories (56) (72) (9)
Other current assets 21 94 (60)
Investments and other assets (32) (247) (15)
INCREASE (DECREASE) IN OPERATING LIABILITIES (a)
Trade and other payables 42 106 (3)
Other current liabilities (90) (27) (11)
Noncurrent liabilities 50 205 37
---------- ---------- ----------
CHANGE IN OPERATING ASSETS AND LIABILITIES $ (141) $ (232) $ (210)
========== ========== ==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 9 $ 119 $ 116
Income taxes paid 140 299 84
Non-cash distribution of Marathon stock - 936 -
(a) Excludes changes resulting from operations acquired or sold.
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 where Ashland has the ability to exert significant
influence are accounted for by the equity method. All material intercompany
transactions and balances have been eliminated. Certain prior period data
has been reclassified in the consolidated financial statements and
accompanying notes to conform to current period presentation.
Ashland has separately disclosed in the Statements of Consolidated
Cash Flows the operating and investing portion of the cash flows
attributable to its discontinued operations, which in prior periods were
reported on a combined basis as a single amount. There were no financing
cash flows related to discontinued operations for the reported periods. In
addition, for the year ended September 30, 2005, the company added two
captions in the Investment section entitled "purchase of accounts
receivable" and "collections of accounts receivable purchased" of $150
million each. These new captions disclose the cash paid for the previously
disclosed repurchase of accounts receivable previously sold under Ashland's
sale of receivables facility and the subsequent collection of those
repurchased receivables.
On August 28, 2006, Ashland completed the sale of the stock of its
wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC), to
Oldcastle Materials, Inc. (Oldcastle). The operating results and assets and
liabilities related to APAC have been reflected as discontinued operations
in the consolidated financial statements for all periods presented. Unless
otherwise noted, amounts in these Notes to Consolidated Financial
Statements exclude amounts attributable to discontinued operations.
During 2006, Ashland redefined its reporting segments as it continues
to evolve into a diversified, global chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland Specialty
Chemical, have now been separately disclosed since these businesses serve
different markets and recent acquisitions have made Water Technologies a
much larger and more distinct part of Ashland. Performance Materials
includes three related business groups: Composite Polymers, Casting
Solutions, and Specialty Polymers and Adhesives. Water Technologies also
includes three related business groups: Drew Industrial, Drew Marine, and
Environmental and Process Solutions (which is the business acquired from
Degussa AG in May 2006). Disclosing Performance Materials and Water
Technologies separately provides greater visibility to Ashland's strategy
of expanding its products, services and geographical reach in key market
segments where it competes. For further information on this revised
disclosure see "Information by Industry Segment" immediately following the
Notes to Consolidated Financial Statements on pages F-31 and F-32 of this
document.
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 and environmental remediation. Although
management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances,
actual results could differ significantly from the estimates under
different assumptions or conditions.
Ashland's results are affected by domestic and international economic,
political, legislative, regulatory and legal actions. Economic conditions,
such as recessionary trends, inflation, interest and monetary exchange
rates, government fiscal policies, and changes in the prices of
hydrocarbon-based products and other raw materials, can have a significant
effect on operations. 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.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments maturing within
three months after purchase.
F-9
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
Securities are classified as held-to-maturity or available-for-sale on
the date of purchase. Ashland did not have any securities classified as
held-to-maturity as of September 30, 2006 and 2005. 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 loss, 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
caption "net interest and other financing income (costs)" 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 caption "net interest and other financing income (costs)"
in the Statements of Consolidated Income.
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) 2006 2005
------------------------------------------------------------------------------
Chemicals and plastics $ 540 $ 429
Lubricants 84 68
Other products and supplies 55 69
Excess of replacement costs over LIFO carrying values (147) (127)
---------- ----------
$ 532 $ 439
========== ==========
Inventories are carried at the lower of cost or market. Chemicals,
plastics and lubricants with a replacement cost of $393 million at
September 30, 2006, and $337 million at September 30, 2005, 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).
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.
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).
Asset impairment charges were $6 million in 2006 and were not significant
in 2005 and 2004.
In March 2005, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 47 (FIN 47), "Accounting for Conditional Asset
Retirement Obligations," an interpretation of FASB Statement No. 143,
"Accounting for Asset Retirement Obligations." FIN 47 requires that a
liability be established for all legal obligations associated with the
retirement of a tangible long-lived asset that result from the acquisition,
construction, or development and (or) the normal operation of a long-lived
asset. The adoption of FIN 47 during the current year did not have a
material effect on Ashland's financial position, results of operations or
cash flows.
F-10
DERIVATIVE INSTRUMENTS
Ashland regularly uses commodity-based and foreign currency derivative
instruments to manage its exposure to price fluctuations associated with
the purchase of butane and natural gas, 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 the Statements of Consolidated 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, 2006 does not have
significant credit risk on open derivative contracts.
REVENUE RECOGNITION
Revenues generally are recognized when persuasive evidence of an
arrangement exists, products are shipped or services are provided to
customers, the sales price is fixed or determinable and collectibility is
reasonably assured.
EXPENSE RECOGNITION
Cost of sales and operating expenses include material and production
costs, as well as the costs of inbound and outbound freight, purchasing and
receiving, inspection, warehousing, internal transfers, and all other
distribution network costs. Selling, general and administrative expenses
include sales and marketing costs, advertising, research and development,
customer support, environmental remediation, and corporate and divisional
administrative costs.
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
($68 million in 2006, $69 million in 2005 and $78 million in 2004) and
research and development costs ($48 million in 2006, $45 million in 2005
and $43 million in 2004) 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. Income taxes are accounted for under FASB Statement No. 109
(FAS 109), "Accounting for Income Taxes." The provision for income taxes
includes income taxes paid, currently payable or receivable, and those
deferred. Under FAS 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets
and liabilities, and are measured using enacted tax rates and laws that are
expected to be in effect when the differences reverse. Deferred tax assets
are also recognized for the estimated future effects of tax loss
carryforwards. The effect on deferred taxes of changes in tax rates is
recognized in the period in which the enactment date changes. Valuation
allowances are established when necessary on a jurisdictional basis to
reduce deferred tax assets to the amounts expected to be realized.
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.
F-11
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2006, the FASB issued Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes," an interpretation of FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
minimum recognition threshold and measurement attribute for the financial
statement recognition of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition for tax related positions. FIN 48 becomes effective for Ashland
on October 1, 2007. Ashland has not determined the effect, if any, the
adoption of FIN 48 will have on the consolidated financial statements.
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 the stockholders' equity section of the
Consolidated Balance Sheet as a component of accumulated other
comprehensive loss and are included in net earnings only upon sale or
liquidation of the underlying foreign subsidiary or affiliated company.
STOCK INCENTIVE PLANS
In December 2004, the FASB issued Statement No. 123R (FAS 123R), which
revised FAS 123, "Accounting for Stock-Based Compensation," by requiring
the expensing of share-based compensation over the vesting period of the
award based on the grant-date fair value of the award. FAS 123 had provided
companies the option of expensing such awards or disclosing the pro forma
effects of such expensing in the notes to financial statements. As of
October 1, 2002, Ashland began expensing employee stock options in
accordance with FAS 123 and its related amendments. Ashland elected the
modified prospective method of adoption, under which compensation costs
recorded in the year ended September 30, 2003 were the same as that which
would have been recorded had the recognition provisions of FAS 123 been
applied from its original effective date. Results for prior periods were
not restated. FAS 123R also required an additional caption in the financing
section of the Statement of Consolidated Cash Flows to present separately
the excess tax benefits from share-based payment arrangements. The adoption
of FAS 123R during 2006 did not have a material effect on Ashland's
financial position, results of operations or cash flows. In 2004, Ashland
began granting stock-settled stock appreciation rights (SARs), which are
expensed like stock options in accordance with FAS 123R. In addition to
stock options and SARs, Ashland grants nonvested stock awards to key
employees and directors, which are expensed over their vesting period.
EARNINGS PER SHARE
Following is the computation of basic and diluted earnings per share
(EPS) from continuing operations.
(In millions except per share data) 2006 2005 2004
-------------------------------------------------------------------------------------------
NUMERATOR
Numerator for basic and diluted EPS -
Income from continuing operations $ 183 $ 1,958 $ 311
========== ========== ==========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 71 73 70
Common shares issuable upon exercise of stock options
and stock appreciation rights 1 2 1
---------- ---------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 72 75 71
========== ========== ==========
EPS FROM CONTINUING OPERATIONS
Basic $ 2.57 $ 26.85 $ 4.44
Diluted 2.53 26.23 4.36
F-12
NOTE B - INFORMATION BY INDUSTRY SEGMENT
Ashland's businesses are managed along four industry segments:
Performance Materials, Distribution, Valvoline and Water Technologies.
Previously, Ashland operated its wholly owned subsidiary, APAC, as a
separate industry segment before it was divested on August 28, 2006.
Ashland also held, through June 30, 2005, a 38% interest in Marathon
Ashland Petroleum LLC (MAP), which was the primary component of its
Refining and Marketing segment. Information by industry segment is shown on
pages F-31 and F-32.
Performance Materials is a worldwide manufacturer and supplier of
specialty chemicals and customized services to the building and
construction, packaging and converting, transportation, marine and metal
casting industries. It is a technology leader in metal casting consumables
and design services; unsaturated polyester and vinyl ester resins and
gelcoats; and high-performance adhesives and specialty resins. Performance
Materials owns and operates 29 manufacturing facilities and participates in
10 manufacturing joint ventures in 15 countries.
Distribution distributes chemicals, plastics and composite raw
materials in North America and plastics in Europe. Deliveries are
facilitated at locations in North America through a network of 68 owned or
leased facilities, 59 third-party warehouses, rail terminals and tank
terminals and 13 locations that perform contract packaging activities for
Distribution. Distribution of thermoplastic resins in Europe is conducted
in 13 countries primarily through 17 third-party warehouses and one owned
warehouse.
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. The Valvoline(R) trademark
was federally registered in 1873 and is the oldest trademark for
lubricating oil in the United States. Valvoline is engaged in the "fast oil
change" business through owned and franchised service centers operating
under the Valvoline Instant Oil Change (VIOC) name.
Water Technologies is a supplier of chemical and non-chemical water
treatment solutions for industrial, municipal and commercial facilities. It
provides industrial, commercial and institutional water treatments,
wastewater treatment, pathogen control, paint and coating additives, pulp
and paper processing and mining chemistries. In addition, it also provides
boiler and cooling water treatments; fuel treatments; welding, refrigerant
and sealing products; and fire-fighting, safety and rescue products and
services for the merchant marine industry. Water Technologies owns and
operates 13 manufacturing facilities in 12 countries and participates in
four joint ventures. Water Technologies' diverse spectrum of products
competes globally in niche markets.
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 operated 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 E.
Information about Ashland's domestic and international operations
follows. Ashland has no material operations in any individual international
country and no single customer represented more than 10% of sales and
operating revenues in 2006, 2005 or 2004.
Revenues from Property, plant
external customers Net assets and equipment
------------------------------------- ---------------------- -----------------------
(In millions) 2006 2005 2004 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
United States $ 5,321 $ 5,515 $ 4,839 $ 2,333 $ 3,162 $ 721 $ 668
International 1,956 1,780 1,375 763 577 229 162
----------- ----------- ----------- ---------- ---------- ----------- ----------
$ 7,277 $ 7,295 $ 6,214 $ 3,096 $ 3,739 $ 950 $ 830
=========== =========== =========== ========== ========== =========== ==========
NOTE C - RELATED PARTY TRANSACTIONS
Ashland sold chemicals and lubricants to MAP and purchased petroleum
products from MAP. Such transactions were in the ordinary course of
business at negotiated prices comparable to those of transactions with
other customers and suppliers. In addition, Ashland and MAP provided
certain administrative services to each other, the net amounts of which
were not significant and are included in the sales amounts below. As
further described in Note E, Ashland transferred its remaining
F-13
NOTE C - RELATED PARTY TRANSACTIONS (CONTINUED)
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 year ended September 30, 2004. During 2006, 2005 and 2004
Ashland incurred customary third-party purchase and sale activity from its
various joint venture investments and other related parties in the normal
course of business. These transactions were not significant for each of
these fiscal years.
(In millions) 2005 2004
--------------------------------------------------------
Ashland's sales to MAP $ 19 $ 22
Ashland's purchases from MAP 153 229
NOTE D - DISCONTINUED OPERATIONS
APAC
On August 28, 2006, Ashland completed the sale of the stock of its
wholly owned subsidiary, APAC, to Oldcastle. The sale price of $1.30
billion was subject to adjustments for changes in working capital and
certain other accounts from September 30, 2005, until the closing date.
Oldcastle paid $34 million at closing as a preliminary estimate of the
working capital adjustment that was subsequently calculated at $5 million.
Per the agreement, Oldcastle has a certain period of time to review this
working capital calculation, therefore, future adjustments to the gain on
this sale are possible until final approval is received. Ashland's Board of
Directors authorized that a substantial portion of the $1.23 billion
estimated after-tax proceeds of the sale of APAC be distributed to the
shareholders of Ashland as a one-time special dividend with any remaining
proceeds being used to continue to support Ashland's current share
repurchase program. For further information on the special dividend and
current share repurchase program see Note N.
Proceeds net of expenses of approximately $11 million exceeded the
book investment and resulted in a pretax gain of $128 million. The sale of
APAC was a taxable transaction that resulted in $66 million being recorded
for the combined federal and state income tax obligation. Net deferred tax
liabilities totaling $27 million were reversed through the income tax
provision and included in the gain computation of the transaction. The
reversal of deferred taxes reflects the fact that Oldcastle assumed
Ashland's tax basis in these net assets as a result of this divestiture. In
addition, the sale of APAC resulted in a pretax curtailment gain of $34
million, or $21 million after-tax, related to the pension and
postretirement plans and is included as a component of the total gain
recorded as a result of the sale. For further information on the
curtailment gain and its impact on the pension and postretirement plan
obligations see Note Q. The total gain on the sale of APAC, including the
curtailment gain, amounted to $162 million pretax and $110 million
after-tax. As part of the agreement with Oldcastle, Ashland also retained
$78 million in net liabilities related to APAC's employee benefit
obligations and incentive compensation.
APAC qualifies as discontinued operations under FASB Statement No. 144
(FAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets." Accordingly, the operating results, net of tax, and assets and
liabilities of discontinued operations are presented separately in
Ashland's consolidated financial statements and the Notes to Consolidated
Financial Statements have been adjusted to exclude discontinued operations.
The amounts eliminated from continuing operations did not include
allocations of corporate expenses included in the selling, general and
administrative expenses caption in the Statements of Consolidated Income
and the related combined 39% U.S. federal (35%) and state (4%, net of
federal deductions) statutory income tax benefits of such expenses. These
corporate expenses were $41 million in 2006, $45 million in 2005 and $42
million in 2004. In accordance with a consensus of the Emerging Issues Task
Force (EITF 87-24), allocations of general corporate overhead may not be
allocated to discontinued operations for financial statement presentation.
OTHER
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. Additional reserves were
recorded in 2004 and 2006 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 P for further information on Ashland's
asbestos-related litigation.
Ashland recorded an after-tax charge of $2 million in 2004 to adjust
the gain on the sale of the discontinued operations of Ashland's Electronic
Chemicals business sold in 2003.
F-14
Components of amounts reflected in the September 30, 2005 Consolidated
Balance Sheet related to discontinued operations of APAC are presented in
the following table.
(In millions) 2005
---------------------------------------------------------------
ASSETS
Accounts receivable $ 358
Inventories 87
Deferred income taxes 18
Other current assets 99
-----------
Current assets of discontinued operations 562
Goodwill and other intangibles 413
Deferred income taxes (54)
Property, plant and equipment 592
Other noncurrent assets 25
-----------
Noncurrent assets of discontinued operations 976
-----------
TOTAL ASSETS OF DISCONTINUED OPERATIONS $ 1,538
===========
LIABILITIES
Trade and other payables $ 281
-----------
Current liabilities of discontinued operations 281
Other noncurrent liabilities 88
-----------
Noncurrent liabilities of discontinued operations 88
-----------
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS $ 369
===========
Components of amounts reflected in the Statements of Consolidated
Income related to discontinued operations are presented in the following
table for each of the years ended September 30.
(In millions) 2006 2005 2004
----------------------------------------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS
APAC (a) $ 2,730 $ 2,565 $ 2,567
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
APAC 176 75 137
Asbestos-related litigation reserves and expenses (2) (1) (29)
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS
APAC 162 - -
Electronic Chemicals - - (2)
---------- ---------- -----------
INCOME BEFORE INCOME TAXES 336 74 106
INCOME TAX (EXPENSE) BENEFIT
Benefit (expense) related to income (loss) from discontinued operations
APAC (61) (28) (50)
Asbestos-related litigation reserves and expenses 1 - 11
Expense related to gain (loss) on disposal of discontinued operations
APAC (52) - -
---------- ---------- -----------
INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES) $ 224 $ 46 $ 67
========== ========== ===========
(a) APAC revenues for 2006 were for the eleven months ended August 28,
2006.
F-15
NOTE E - MAP TRANSACTION
On June 30, 2005, Ashland completed the transfer of 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, 2005 closing price
of Marathon stock. Additionally, the transaction resulted in Ashland's
receipt of $2.4 billion in 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.
Proceeds net of expenses of $28 million exceeded the book investment
and resulted in a pretax gain of $1,284 million recorded in 2005. Even
though the Marathon common stock distribution went directly to Ashland
shareholders, for financial reporting purposes the Marathon stock was
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 was 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 qualified as discontinued operations under
FAS 144, the gain was 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.
Ashland has incurred approximately $14 million of Section 355(e) tax which
has been 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 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 was
included in the total pretax gain on the transaction. Deferred tax assets
previously recorded on these contingent liabilities were reversed through
the income tax provision for the transaction. Adjustments to the receivable
resulting from changes in the liability estimates have been and will
continue to be recorded in the "Gain on the MAP Transaction" line caption
on the income statement, while the accretion of the discount will be
reflected in interest income. At September 30, 2006, this receivable had
been reduced to $55 million and is included in other current and noncurrent
assets on Ashland's Consolidated Balance Sheets.
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
assumed 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 repurchase of accounts receivable
previously sold under its sale of receivables facility 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.
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 has been adjusted in
2006, and may continue to be adjusted in future periods. Adjustments to the
gain in subsequent periods will be reflected in the quarter they are
determined.
F-16
NOTE F - 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 E, Ashland transferred
its remaining interest in MAP to Marathon on June 30, 2005. MAP's 2005
summarized financial information as presented below is for the nine months
ended June 30, 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, 2006, 2005 and 2004, respectively. 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, 2006, Ashland's retained earnings included
$29 million of undistributed earnings from unconsolidated affiliates
accounted for on the equity method.
Other
(In millions) MAP affiliates Total
-----------------------------------------------------------------------------------
SEPTEMBER 30, 2006
Financial position
Current assets $ 170
Current liabilities (82)
----------
Working capital 88
Noncurrent assets 67
Noncurrent liabilities (13)
----------
Stockholders' equity $ 142
==========
Results of operations
Sales and operating revenues $ 426
Income from operations 40
Net income 27
Amounts recorded by Ashland
Investments and advances $ 61
Equity income 11
Distributions received 5
SEPTEMBER 30, 2005
Financial position
Current assets $ 154
Current liabilities (87)
----------
Working capital 67
Noncurrent assets 61
Noncurrent liabilities (9)
----------
Stockholders' equity $ 119
==========
Results of operations
Sales and operating revenues $ 38,195 (a) $ 384
Income from operations 1,408 (a) 31
Net income 1,396 (a) 19
Amounts recorded by Ashland
Investments and advances $ - $ 51 $ 51
Equity income 517 8 525
Distributions received 272 7 279
SEPTEMBER 30, 2004
Results of operations
Sales and operating revenues $ 40,672 $ 306
Income from operations 1,129 27
Net income 1,118 18
Amounts recorded by Ashland
Equity income $ 405 $ 7 $ 412
Distributions received 146 6 152
(a) Amounts are for the nine months ended June 30, 2005. See Note E for
further information.
F-17
NOTE G - GOODWILL AND OTHER INTANGIBLES
In accordance with FASB Statement No. 142 (FAS 142), "Goodwill and
Other Intangible Assets," Ashland conducts an annual review for impairment.
Impairment is to be examined more frequently if certain indicators are
encountered. In accordance with FAS 142, Ashland reviewed goodwill for
impairment based on reporting units, which are defined as operating
segments or groupings of businesses one level below the operating segment
level. Ashland has completed its most recent annual goodwill impairment
test required by FAS 142 as of July 1, 2006 and has determined that no
impairment exists.
The following is a progression of goodwill by segment for the years
ended September 30, 2006 and 2005.
Performance Water
(In millions) Materials Distribution Valvoline Technologies Total
--------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 $ 57 $ - $ 6 $ 39 $ 102
Acquisitions 43 1 18 - 62
----------- ----------- ---------- ---------- ----------
Balance at September 30, 2005 100 1 24 39 164
Acquisitions 6 - 5 31 42
Currency translation adjustment 4 - - - 4
----------- ----------- ---------- ---------- ----------
Balance at September 30, 2006 $ 110 $ 1 $ 29 $ 70 $ 210
=========== =========== ========== ========== ==========
Intangible assets consist of trademarks and trade names, patents and
licenses, non-compete agreements, sale contracts, customer lists and
intellectual property. Intangibles are amortized on a straight-line basis
over their estimated useful lives. The cost of trademarks and trade names
is amortized principally over 10 to 25 years, intellectual property over 5
to 17 years and other intangibles over 3 to 20 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,
2006 and 2005.
2006 2005
---------------------------------------- -----------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(In millions) amount amortization amount amount amortization amount
--------------------------------------------------------------------- -----------------------------------------
Trademarks and trade names $ 54 $ (20) $ 34 $ 56 $ (18) $ 38
Intellectual property 32 (6) 26 19 (4) 15
Other intangibles 49 (9) 40 25 (7) 18
----------- --------------- ------------ ------------ --------------- ------------
Total intangible assets $ 135 $ (35) $ 100 $ 100 $ (29) $ 71
=========== =============== ============ ============ =============== ============
Amortization expense recognized on intangible assets was $6 million
for 2006, $4 million for 2005 and $2 million for 2004. As of September 30,
2006, all of Ashland's intangible assets that had a carrying value were
being amortized except for certain trademarks and trade names that
currently have been determined to have indefinite lives. These assets had a
balance of $32 million as of September 30, 2006 and $23 million as of
September 30, 2005. In accordance with FAS 142, Ashland annually reviews
these assets to determine whether events and circumstances continue to
support the indefinite useful life. Estimated amortization expense for
future periods is $8 million in 2007, $8 million in 2008, $7 million in
2009, $6 million in 2010 and $5 million in 2011.
NOTE H - DEBT
(In millions) 2006 2005
--------------------------------------------------------------------------------------
Medium-term notes, due 2006-2019, interest at a weighted
average rate of 8.1% at September 30, 2006 (7.2% to 9.4%) $ 32 $ 42
8.80% debentures, due 2012 20 20
6.86% medium-term notes, Series H, due 2009 17 17
6.625% senior notes, due 2008 3 3
Other 10 12
---------- ----------
Total long-term debt 82 94
Current portion of long-term debt (12) (12)
---------- ----------
Long-term debt (less current portion) $ 70 $ 82
========== ==========
F-18
Aggregate maturities of long-term debt are $12 million in 2007, $5
million in 2008, $20 million in 2009, $3 million in 2010 and less than one
million in 2011. No short-term borrowings were outstanding at September 30,
2006 and 2005.
During 2006 Ashland entered into an in-substance defeasance of
approximately $49 million to repay current and long-term debt that had a
carrying value of $44 million on the balance sheet. Because the transaction
was not a legal defeasance the investment has been placed into a trust and
will be exclusively restricted to future obligations and repayments related
to these debt instruments. The investments have been classified on the
balance sheet as other current assets or other noncurrent assets based on
the contractual debt repayment schedule. At September 30, 2006, the
carrying value of the investments to defease debt, including other
defeasements that occurred in fiscal 2005, was $51 million and the carrying
value of the debt was $44 million.
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 $108 million of letters of
credit outstanding at September 30, 2006. The revolving credit agreement
contains a covenant limiting the total debt Ashland may incur from all
sources as a function of Ashland's stockholders' equity. The covenant's
terms would have permitted Ashland to borrow $4.6 billion at September 30,
2006, in addition to the actual total debt incurred at that time.
Permissible total Ashland debt under the covenant's terms increases (or
decreases) by 150% of any increase (or decrease) in stockholders' equity.
NET INTEREST AND OTHER FINANCIAL INCOME (COSTS)
(In millions) 2006 2005 2004
-------------------------------------------------------------------------------------------
Interest income $ 59 $ 15 $ 6
Interest expense (8) (90) (114)
Expenses on sales of accounts receivable - Note J - (4) (3)
Other financing costs (4) (3) (3)
---------- ---------- ----------
$ 47 $ (82) $ (114)
========== ========== ==========
NOTE I - LEASES
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation 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 and capital lease assets are included in
property, plant and equipment.
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, 2006 and rental expense under operating leases follow.
(In millions)
Future minimum rental payments Rental expense 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------
2007 $ 40 Minimum rentals
2008 35 (including rentals under
2009 29 short-term leases) $ 53 $ 59 $ 58
2010 18 Contingent rentals 3 3 3
2011 16 Sublease rental income (2) (2) (2)
---------- ---------- ----------
Later years 59 $ 54 $ 60 $ 59
---------- ========== ========== ==========
$ 197
==========
NOTE J - 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.
F-19
NOTE K - SECURITIES AND FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
Ashland uses commodity-based and foreign currency derivative
instruments as described in Note A. The fair value of open contracts was
not significant at September 30, 2006 and 2005.
FAIR VALUES
The carrying amounts and fair values of Ashland's significant
financial instruments at September 30, 2006 and 2005 are shown below. The
fair values of cash and cash equivalents, available-for-sale securities and
investments of captive insurance companies approximate their carrying
amounts based on quoted market prices. 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.
2006 2005
------------------------ -----------------------
Carrying Fair Carrying Fair
(In millions) amount value amount value
-------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,820 $ 1,820 $ 985 $ 985
Available-for-sale securities 349 349 403 403
Investments of captive insurance companies (a) 32 32 14 14
Liabilities
Long-term debt (including current portion) 82 90 94 106
(a) Included in other noncurrent assets in the Consolidated Balance Sheets.
AVAILABLE-FOR-SALE SECURITIES
The following table provides a summary of the available-for-sale
securities portfolio as of September 30, 2006 and 2005.
(In millions) Amortized Unrealized Unrealized Fair
As of September 30, 2006 cost gain loss value
-------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 60 $ - $ - $ 60
Corporate debt securities 202 - - 202
Other securities 87 - - 87
---------- ---------- ---------- ----------
Total $ 349 $ - $ - $ 349
========== ========== ========== ==========
(In millions) Amortized Unrealized Unrealized Fair
As of September 30, 2006 cost gain loss value
-------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 122 $ - $ - $ 122
Corporate debt securities 281 - - 281
---------- ---------- ---------- ----------
Total $ 403 $ - $ - $ 403
========== ========== ========== ==========
The net unrealized gain/(loss) on available-for-sale securities
included in other comprehensive income as of September 30, 2006 and 2005
was not significant. Ashland sold $876 million of available-for-sale
securities during fiscal year 2006 and realized gross gains and losses
accompanying these sales were 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,
2006 and 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.
F-20
NOTE L - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
In May 2006, Ashland acquired the water treatment business of Degussa
AG (Degussa), branded under the Stockhausen name, with five manufacturing
facilities operating in Germany, China, Brazil, Russia and the United
States. The acquisition allows Ashland's Water Technologies segment to
expand its technology base, product line and service levels while
continuing to develop its presence in key emerging international markets.
For its fiscal year ended December 31, 2005, Degussa reported sales and
operating revenues (translated to U.S. dollars) of $258 million and
operating income of $10 million. The transaction, denominated in Euros, was
valued at $162 million at the exchange rate on the acquisition date. A
summary of the purchase price allocation follows.
Assets
(In millions) (liabilities)
-----------------------------------------------------------
Accounts receivable $ 57
Inventories 33
Property, plant and equipment 56
Goodwill and other intangibles 59
Trade and other payables (21)
Other noncurrent assets (liabilities) - net (22)
-----------
$ 162
===========
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.
In November 2004, Ashland Composite Polymers, a business unit of
Performance Materials, 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.
Several other acquisitions were completed by Performance Materials,
Distribution, Valvoline and Water Technologies during the three years ended
September 30, 2006. 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,
including the Degussa acquisition, 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 August 28, 2006, Ashland completed the sale of the stock of its
wholly owned subsidiary, APAC, to Oldcastle. For further information on
this sale see Note D. 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 E for further information on this transaction. Also
during 2005, Distribution sold its ingestibles business, which did not have
a significant effect on Ashland's consolidated financial statements.
F-21
NOTE M - INCOME TAXES
A summary of the provision for income taxes related to continuing
operations follows.
(In millions) 2006 2005 2004
---------------------------------------------------------------------
Current
Federal $ (5) $ 214 $ (30)
State - 28 2
Foreign 35 28 25
---------- ---------- ----------
30 270 (3)
Deferred (1) (500) 103
---------- ---------- ----------
Income tax expense (benefit) $ 29 $ (230) $ 100
========== ========== ==========
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 $247 million at September 30, 2006. Because of significant
foreign tax credits, it is estimated that U.S. federal income taxes of
approximately $24 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) 2006 2005
---------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Employee benefit obligations $ 134 $ 189
Environmental, self-insurance and litigation reserves (net of receivables) 91 82
Compensation accruals 83 84
Uncollectible accounts receivable 10 10
Foreign net operating loss carryforwards 17 31
Other items 18 23
Valuation allowances (17) (31)
---------- ----------
Total deferred tax assets 336 388
---------- ----------
DEFERRED TAX LIABILITIES
Property, plant and equipment 53 53
Investment in unconsolidated affiliates 4 3
---------- ----------
Total deferred tax liabilities 57 56
---------- ----------
Net deferred tax asset $ 279 $ 332
========== ==========
Ashland's income tax expense for 2006 included $16 million in tax
benefits related to prior years. These benefits resulted primarily from the
resolution of domestic and foreign tax matters and the reevaluation of
income tax reserves related to prior years.
As described in Note E, 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.
F-22
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.
(In millions) 2006 2005 2004
-------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
United States $ 72 $ 1,584 $ 304
Foreign 140 144 107
---------- ---------- ----------
$ 212 $ 1,728 $ 411
========== ========== ==========
Income taxes computed at U.S. statutory rate (35%) $ 74 $ 605 $ 144
Increase (decrease) in amount computed resulting from
Tax free gain on MAP Transaction - (450) -
Reversal of net deferred tax liabilities due to the MAP Transaction - (335) -
Resolution and reevaluation of prior-year contingency issues (16) (39) (33)
Adjustment of prior year provision to return as filed (16) (3) (3)
Claim for prior-year research and development credits (1) (1) (15)
State income taxes - 6 14
Net impact of foreign results (5) 2 -
Business meals and entertainment 1 2 2
Deductible dividends under employee stock ownership plan (2) (2) (2)
Life insurance income (4) (3) (2)
Other items (2) (12) (5)
---------- ---------- ----------
Income tax expense (benefit) $ 29 $ (230) $ 100
========== ========== ==========
NOTE N - CAPITAL STOCK
On September 14, 2006 Ashland's Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of APAC
to the Ashland Common Stock shareholders as a one-time special dividend.
Each shareholder of record as of October 10, 2006, received $10.20 per
share, for a total of $674 million. This amount is accrued as dividends
payable in the Consolidated Balance Sheet at September 30, 2006.
Substantially all of the remaining proceeds were directed to be used to
repurchase Ashland Common Stock in accordance with the terms authorized by
Ashland's Board of Directors and as further described below.
The stock repurchases were made pursuant to two different programs
authorized by Ashland's Board of Directors. The first program, originally
approved on July 21, 2005, authorized the purchase of $270 million of
Ashland common stock in the open market. After 3.5 million shares at a cost
of $196 million had been purchased under the initial authorization, on
January 25, 2006, Ashland's Board of Directors increased the remaining
authorization by $176 million to $250 million. As of September 14, 2006,
Ashland had completed all repurchases to be made under this program.
The second program was authorized by Ashland's Board of Directors on
September 14, 2006, employing proceeds from the sale of APAC to repurchase
up to an additional 7 million shares. To facilitate this repurchase
program, Ashland entered into a stock trading plan with Credit Suisse
Securities (USA) LLC (Credit Suisse). The stock trading plan, amended and
restated on September 20, 2006, allows Credit Suisse to make daily
repurchases of stock starting on October 2, 2006, in accordance with the
instructions set forth in the filed plan and within the safe harbor from
insider trading liability provided under Exchange Act Rule 10b5-1.
Ashland repurchased 6.7 million shares for $405 million during fiscal
year 2006. Since the inception of the first described share repurchase
program on July 21, 2005 through September 30, 2006, Ashland had
repurchased a total of 8.4 million shares at a cost of $505 million.
Following the completion of the current share repurchase program Ashland
estimates it will have purchased approximately 18% of the shares
outstanding on June 30, 2005. The stock repurchase actions are consistent
with certain representations of intent made to the Internal Revenue Service
with respect to the transfer of MAP.
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.
The Ashland Inc. Shareholder Rights Plan dated May 16, 1996 (the
"Rights Plan") expired pursuant to its terms at the close of business on
May 16, 2006. The former Rights Plan provided that one Preferred Stock
Purchase Right to purchase one-thousandth of a share of Series A
Participating Cumulative Preferred Stock (a "Right") accompanied each
outstanding share of Ashland's Common Stock. Since the expiration of the
Rights Plan, Ashland's Common Stock has not been
F-23
NOTE N - CAPITAL STOCK (CONTINUED)
accompanied by a Right. In a related action, Ashland's Board of Directors
authorized amendments to Ashland's articles of incorporation, effective May
17, 2006, to eliminate the designation of, and all references to, the
Series A Participating Cumulative Preferred Stock from the Articles. At
September 30, 2006, 8.4 million common shares are reserved for issuance
under stock incentive and deferred compensation plans.
NOTE O - 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 ten 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.
Nonvested stock awards generally vest over a four to seven year period.
During 2006, Ashland granted 35,000 nonvested stock awards with a weighted
average fair value of $63.68 per share. 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. As of September 30, 2006,
there was $6 million of total unrecognized compensation costs related to
nonvested stock awards. That cost is expected to be recognized over a
weighted average period of 2.6 years.
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. The dividend yield reflects the assumption that the
current dividend payout will continue with no anticipated increases. The
expected life of the options is based on historical data and is not
necessarily indicative of exercise patterns that may occur.
(In millions except per share data) 2006 2005 2004
-----------------------------------------------------------------------------------------------------------
Weighted average fair value per share of options or SARs granted $ 17.24 $ 14.37 $ 12.65
Assumptions (weighted average)
Risk-free interest rate 4.4% 4.0% 3.4%
Expected dividend yield 1.7% 1.9% 2.0%
Expected volatility 26.3% 25.9% 25.9%
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.
2006 2005 2004
-------------------------- -------------------------- --------------------------
Number Weighted Number Weighted Number Weighted
of average of average of 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) 3,274 $ 39.74 5,165 $ 40.37 7,807 $ 37.17
Granted 23 65.48 688 58.73 603 54.65
Exercised (678) 33.37 (3,048) 37.93 (3,100) 35.29
Forfeitures and expirations (17) 48.30 (83) 38.63 (145) 36.04
MAP Transaction adjustment (b) - - 552 - - -
---------- ---------- ----------
Outstanding - end of year (a) 2,602 41.56 3,274 39.74 (b) 5,165 40.37
========== ========== ==========
Exercisable - end of year 2,181 39.21 2,170 34.30 4,067 39.37
(a) Shares of common stock available for future grants of options or awards
amounted to 4.0 million at September 30, 2006 and 496,000 at September
30, 2005. Exercise prices per share for options and SARs outstanding at
September 30, 2006 ranged from $22.45 to $28.04 for 530,000 shares,
from $30.00 to $39.58 for 638,000 shares, from $43.50 to $45.19 for
740,000 shares, and from $50.02 to $65.40 for 694,000 shares. The
weighted average remaining contractual life of the options and SARs was
6.4 years.
(b) As described in Note E, 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-24
The components of Ashland's pretax stock-based compensation expense
(net of forfeitures) and associated income tax benefits are as follows:
(In millions) 2006 2005 2004
------------------------------------------------------------------
Stock options $ 1 $ 3 $ 3
SARs 7 4 -
Nonvested stock awards 4 3 4
----------- ---------- ----------
$ 12 $ 10 $ 7
=========== ========== ==========
Income tax benefit $ 5 $ 4 $ 3
=========== ========== ==========
NOTE P - 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) 2006 2005 2004
-----------------------------------------------------------------------
Open claims - beginning of year 184 196 198
New claims filed 6 12 29
Claims settled (3) (6) (7)
Claims dismissed (25) (18) (24)
---------- ---------- ----------
Open claims - end of year 162 184 196
========== ========== ==========
Since October 1, 2003, Riley has been dismissed as a defendant in 80%
of the resolved claims. Amounts spent on litigation defense and claim
settlements averaged $1,428 per claim resolved in 2006, compared to $1,985
in 2005 and $1,655 in 2004. A progression of activity in the asbestos
reserve is presented in the following table.
(In millions) 2006 2005 2004
------------------------------------------------------------------------------
Asbestos reserve - beginning of period $ 571 $ 618 $ 610
Expense incurred 104 - 59
Amounts paid (40) (47) (51)
---------- ---------- ----------
Asbestos reserve - end of period $ 635 $ 571 $ 618
========== ========== ==========
Ashland retained Hamilton, Rabinovitz & Alschuler, Inc. (HR&A) to
assist in developing and periodically updating independent and accurate
reserve estimates for future asbestos claims and related costs given
various assumptions. The methodology used by HR&A to project future
asbestos costs is based largely on Ashland's recent experience, including
claim-filing and settlement rates, disease mix, enacted legislation, open
claims, and litigation defense and claim settlement costs. Ashland's claim
experience is compared to the results of previously conducted
epidemiological studies estimating the number of people likely to develop
asbestos-related diseases. Those studies were undertaken in connection with
national analyses of the population expected to have been exposed to
asbestos. Using that information, HR&A estimates a range of the number of
future claims that may be filed, as well as the related costs that may be
incurred in resolving those claims.
From the range of estimates, Ashland records the amount it believes to
be the best estimate of future payments for litigation defense and claim
settlement costs. During the most recent update of this estimate completed
during 2006, it was determined that the reserves for asbestos claims should
be increased by $104 million. This increase in the reserves was based on
the results of a non-inflated, non-discounted 51-year model developed with
the assistance of HR&A. This increase resulted in total reserves for
asbestos claims of $635 million at September 30, 2006, compared to $571
million at September 30, 2005.
Projecting future asbestos costs is subject to numerous variables that
are extremely difficult to predict. In addition to the significant
uncertainties surrounding the number of claims that might be received,
other variables include the type and severity of the disease alleged by
each claimant, the long latency period associated with asbestos exposure,
dismissal rates,
F-25
NOTE P - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
costs of medical treatment, the impact of bankruptcies of other companies
that are co-defendants in claims, uncertainties surrounding the litigation
process from jurisdiction to jurisdiction and from case to case, and the
impact of potential changes in legislative or judicial standards.
Furthermore, any predictions with respect to these variables are subject to
even greater uncertainty as the projection period lengthens. In light of
these inherent uncertainties, Ashland believes its asbestos reserve
represents the best estimate within a range of possible outcomes. As a part
of the process to develop Ashland's estimates of future asbestos costs, a
range of long-term cost models is developed. These models are based on
national studies that predict the number of people likely to develop
asbestos-related diseases and are heavily influenced by assumptions
regarding long-term inflation rates for indemnity payments and legal
defense costs, as well as other variables mentioned previously. Ashland has
estimated that it is reasonably possible that total future litigation
defense and claim settlement costs on an inflated and undiscounted basis
could range as high as approximately $1.9 billion, depending on the
combination of assumptions selected in the various models. If actual
experience is worse than projected relative to the number of claims filed,
the severity of alleged disease associated with those claims or costs
incurred to resolve those claims, Ashland may need to increase further the
estimates of the costs associated with asbestos claims and these increases
could potentially be material over time.
Ashland has insurance coverage for most of the litigation defense and
claim settlement costs incurred in connection with its asbestos claims, and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed. As a
result, increases in the asbestos reserve have been largely offset by
probable insurance recoveries. The amounts not recoverable generally are
due from insurers that are insolvent, rather than as a result of uninsured
claims or the exhaustion of Ashland's insurance coverage.
Ashland has estimated the value of probable insurance recoveries
associated with Ashland's estimate of its asbestos liabilities. Such
recoveries are based on management's assumptions and estimates surrounding
the available or applicable insurance coverage. One such assumption is that
all solvent insurance carriers remain solvent. Although coverage limits are
resolved in the coverage-in-place agreement with Equitas Limited (Equitas)
and other London companies, which collectively provide a significant
portion of Ashland's insurance coverage for asbestos claims, there was a
disagreement with these companies over the timing of recoveries. In
estimating the value of future recoveries, Ashland has historically used
the least favorable interpretation of this agreement under which the
ultimate recoveries are extended for many years, resulting in a significant
discount being applied to value those recoveries. On June 16, 2006 an
arbitrator reached a decision essentially confirming that interpretation.
Ashland will continue to apply this methodology based on this arbitration
decision.
At September 30, 2006, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from insurers amounted to
$474 million, of which $65 million relates to costs previously paid.
Receivables from insurers amounted to $400 million at September 30, 2005.
The receivable was increased by $104 million during 2006, reflecting the
updated model used for purposes of valuing the reserve described above, and
its impact on the valuation of future recoveries from insurers. About 31%
of the estimated receivables from insurance companies at September 30, 2006
are expected to be due from Equitas and other London companies. Of the
remainder, approximately 97% is expected to come from companies or groups
that are rated A or higher by A. M. Best.
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, 2006, such locations included 72 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, 110 current and former operating
facilities (including certain operating facilities conveyed to MAP) and
about 1,230 service station properties, of which 218 are being actively
remediated. Ashland's reserves for environmental remediation amounted to
$199 million at September 30, 2006 and $176 million at September 30, 2005,
of which $168 million at September 30, 2006 and $145 million at September
30, 2005 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. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation expense
amounted to $57 million in 2006, $52 million in 2005 and $7 million in
2004.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods,
F-26
changes in environmental regulations, the potential effect of continuing
improvements in remediation technology, and the number and financial
strength of other potentially responsible parties at multiparty sites.
Although it is not possible to predict with certainty the ultimate costs of
environmental remediation, Ashland currently estimates that the upper end
of the reasonably possible range of future costs for identified sites could
be as high as approximately $310 million. No individual remediation
location is material to Ashland, as its largest reserve for any site is
less than 10% of the remediation reserve.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various claims,
lawsuits and administrative proceedings pending or threatened against
Ashland and its current and former subsidiaries. Such actions are with
respect to commercial matters, product liability, toxic tort liability, and
other environmental matters, which seek remedies or damages, some of which
are for substantial amounts. While these actions are being contested, their
outcome is not yet predictable.
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. 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.
In September 2006, the FASB issued Financial Accounting Standard No.
158 (FAS 158), "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans," which requires an employer to recognize the
overfunded or underfunded status of a defined benefit pension or other
postretirement plan (other than a multiemployer plan) as an asset or
liability in its Consolidated Balance Sheet and to recognize changes in
that funded status in the year in which the changes occur through
comprehensive income, which is a component of stockholders' equity. FAS 158
also requires additional disclosures in the notes to the financial
statements about certain effects on net periodic benefit costs for the next
fiscal year that arise from delayed recognition of the gains or losses,
prior service costs or credits, and transition asset or obligation. FAS 158
is effective for Ashland on September 30, 2007 and will not have an impact
on the Statement of Consolidated Income, but will affect Ashland's
Consolidated Balance Sheet. If Ashland had adopted this statement as of
September 30, 2006, it would have increased accrued benefit liabilities by
$117 million with a corresponding deferred tax asset increase of $46
million and an additional reduction in comprehensive income of $71 million.
OTHER POSTRETIREMENT BENEFIT PLANS
Ashland and its subsidiaries sponsor health care 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 health care 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 expands 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 its postretirement benefit obligation as of that date. The
remeasurement
F-27
NOTE Q - EMPLOYEE BENEFIT PLANS (CONTINUED)
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 health care 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 health care 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 health care 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 care 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 $8 million in 2006, $9 million in 2005 and
$15 million in 2004. At September 30, 2006, the remaining unrecognized
prior service credit resulting from the changes amounted to $33 million,
and will reduce future costs by $4 million in 2007 and approximately $4
million annually thereafter through 2014. As a result of the sale of APAC
to Oldcastle during 2006, a curtailment gain of $34 million ($21 million
after-tax) was recognized to account for this divestiture's impact on the
plans.
The following table summarizes the components of pension and other
postretirement benefit costs, and the assumptions used to determine net
periodic benefit costs for the plans.
Pension benefits Other postretirement benefits
----------------------------------- -----------------------------------
(In millions) 2006 2005 2004 2006 2005 2004
---------------------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COSTS
Service cost $ 57 $ 53 $ 51 $ 7 $ 9 $ 9
Interest cost 84 78 73 12 16 17
Curtailment (1) - - (33) - -
Expected return on plan assets (99) (78) (66) - - -
Amortization of prior service credit - - - (8) (9) (15)
Amortization of net actuarial loss 40 33 29 1 3 5
---------- ----------- ---------- ---------- ---------- ----------
$ 81 $ 86 $ 87 $ (21) $ 19 $ 16
========== =========== ========== ========== ========== ==========
WEIGHTED AVERAGE PLAN ASSUMPTIONS (a)
Discount rate 5.42% 5.98% 6.20% 5.33% 6.00% 6.25%
Rate of compensation increase 4.46% 4.43% 4.43% - - -
Expected long-term rate of
return on plan assets 8.26% 8.35% 8.35% - - -
(a) The plan assumptions disclosed are a blended weighted average rate for
Ashland's U.S. and non-U.S. pension plans. The U.S. pension plan
represented approximately 88% of the projected benefit obligation at
September 30, 2006. Non-U.S. pension plans use assumptions generally
consistent with those of U.S. plans. Other postretirement benefit plans
are all U.S. plans.
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 benefit obligations for 2006
and 2005 follow.
F-28
Other postretirement
Pension plans benefit plans
----------------------- -----------------------
(In millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at October 1 $ 1,558 $ 1,330 $ 246 $ 298
Service cost 57 53 7 9
Interest cost 84 78 12 16
Curtailment (48) - (13) -
Participant contributions 1 1 12 9
Benefits paid (64) (56) (28) (31)
Medicare Part D Act - - - (58)
Changes in assumptions (53) 160 11 4
Foreign currency exchange rate changes 8 2 - -
Other - net 6 (10) (2) (1)
---------- ---------- ---------- ----------
Benefit obligations at September 30 $ 1,549 $ 1,558 $ 245 $ 246
========== ========== ========== ==========
CHANGE IN PLAN ASSETS
Value of plan assets at October 1 $ 1,143 $ 932 $ - $ -
Actual return on plan assets 107 131 - -
Employer contributions 105 121 16 22
Participant contributions 1 1 12 9
Benefits paid (58) (50) (28) (31)
Foreign currency exchange rate changes 7 1 - -
Other 6 7 - -
---------- ---------- ---------- ----------
Value of plan assets at September 30 $ 1,311 $ 1,143 $ - $ -
========== ========== ========== ==========
FUNDED STATUS OF THE PLANS
Unfunded benefit obligation $ (238) $ (415) $ (245) $ (246)
Unrecognized net actuarial loss 323 480 12 19
Unrecognized prior service cost (credit) 2 - (33) (76)
---------- ---------- ---------- ----------
Net amount recognized $ 87 $ 65 $ (266) $ (303)
========== ========== ========== ==========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET
Accrued benefit liabilities $ (100) $ (199) $ (266) $ (303)
Intangible assets 2 2 - -
Accumulated other comprehensive loss 185 262 - -
---------- ---------- ---------- ----------
Net amount recognized $ 87 $ 65 $ (266) $ (303)
========== ========== ========== ==========
WEIGHTED AVERAGE PLAN ASSUMPTIONS
Discount rate 5.66% 5.42% 5.64% 5.33%
Rate of compensation increase 3.74% 4.46% - -
The accumulated benefit obligation for all pension plans was $1,407
million at September 30, 2006 and $1,345 million at September 30, 2005.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows.
2006 2005
----------------------------------- -----------------------------------
Non- Non-
Qualified qualified Qualified qualified
(In millions) plans (a) plans Total plans (a) plans Total
----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 112 $ 95 $ 207 $ 1,355 $ 118 $ 1,473
Accumulated benefit obligation 98 86 184 1,171 106 1,277
Fair value of plan assets 73 - 73 1,069 - 1,069
(a) Includes qualified U.S. and non-U.S. pension plans. The significant
decline in amounts between 2005 and 2006 is due to the fact that plan
assets for Ashland's major U.S. pension plan exceed the accumulated
benefit obligation at September 30, 2006.
F-29
NOTE Q - EMPLOYEE BENEFIT PLANS (CONTINUED)
PLAN ASSETS
The expected long-term rate of return on U.S. pension plan assets for
2006 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 2006 by asset category and actual
allocations at September 30, 2006 and 2005 follow.
Target Actual at September 30
-------- ------------------------
(In millions) 2006 2006 2005
----------------------------------------------------------------------------
PLAN ASSETS ALLOCATION
Equity securities 70% 70% 71%
Debt securities 30% 25% 27%
Other - 5% 2%
-------- -------- ---------
100% 100% 100%
======== ======== =========
CASH FLOWS
In fiscal 2007, Ashland expects to contribute $51 million to its U.S.
pension plans and $7 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
----------------------------------------------------------------------------------------
2007 $ 66 $ 21 $ 25
2008 68 21 25
2009 72 22 26
2010 80 22 27
2011 81 23 28
2012-2016 470 117 147
OTHER PLANS
Ashland sponsors qualified savings plans to assist eligible employees
in providing for retirement or other future needs. Under such plans,
company contributions amounted to $17 million in 2006, $18 million in 2005
and $19 million in 2004.
F-30
Ashland Inc. and Consolidated Subsidiaries
INFORMATION BY INDUSTRY SEGMENT
Years Ended September 30
(In millions) 2006 2005 2004
--------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
Performance Materials $ 1,425 $ 1,369 $ 1,026
Distribution 4,070 3,810 3,199
Valvoline 1,409 1,326 1,297
Water Technologies 502 394 360
Intersegment sales (a)
Performance Materials (145) (143) (85)
Distribution (23) (22) (19)
Valvoline (3) (2) (1)
Water Technologies (2) (1) (1)
---------- ---------- -----------
7,233 6,731 5,776
Equity income
Performance Materials 10 7 7
Valvoline 1 1 -
Refining and Marketing - 517 405
---------- ---------- -----------
11 525 412
Other income
Performance Materials 4 17 8
Distribution 4 7 9
Valvoline 7 6 4
Water Technologies 4 4 8
Refining and Marketing - 3 (6)
Unallocated and other 14 2 3
---------- ---------- -----------
33 39 26
---------- ---------- -----------
$ 7,277 $ 7,295 $ 6,214
========== ========== ===========
OPERATING INCOME
Performance Materials $ 112 $ 88 $ 42
Distribution 120 99 56
Valvoline (21) 59 77
Water Technologies 14 11 14
Refining and Marketing (b) - 486 383
Unallocated and other (55) (72) (47)
---------- ---------- -----------
$ 170 $ 671 $ 525
========== ========== ===========
ASSETS
Performance Materials $ 841 $ 764 $ 640
Distribution 1,148 1,057 922
Valvoline 742 723 658
Water Technologies 468 233 202
Refining and Marketing - - 2,742
Discontinued operations - 1,569 1,428
Unallocated and other (c) 3,391 2,469 910
---------- ---------- -----------
$ 6,590 $ 6,815 $ 7,502
========== ========== ===========
(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 assets.
F-31
Ashland Inc. and Consolidated Subsidiaries
INFORMATION BY INDUSTRY SEGMENT (CONTINUED)
Years Ended September 30
(In millions) 2006 2005 2004
-----------------------------------------------------------------------------------------
INVESTMENT IN EQUITY AFFILIATES
Performance Materials $ 44 $ 38 $ 37
Valvoline 11 7 7
Water Technologies 3 4 3
Refining and Marketing - - 2,713
Unallocated and other 3 2 1
---------- ---------- -----------
$ 61 $ 51 $ 2,761
========== ========== ===========
EXPENSE (INCOME) NOT AFFECTING CASH
Depreciation and amortization
Performance Materials $ 31 $ 31 $ 30
Distribution 21 18 18
Valvoline 28 27 27
Water Technologies 17 13 11
Unallocated and other 14 11 12
---------- ---------- -----------
111 100 98
Other noncash items (d)
Performance Materials (16) (47)(e) 4
Distribution 7 (6) 3
Valvoline (1) (31)(e) 2
Water Technologies (4) (1)(e) 4
Refining and Marketing - (2,005)(e) (181)
Unallocated and other 9 200 (e) 12
---------- ---------- -----------
(5) (1,890) (156)
---------- ---------- -----------
$ 106 $ (1,790) $ (58)
========== ========== ===========
PROPERTY, PLANT AND EQUIPMENT - NET
Performance Materials $ 297 $ 262 $ 264
Distribution 192 176 166
Valvoline 237 236 215
Water Technologies 121 56 45
Unallocated and other 103 100 88
---------- ---------- -----------
$ 950 $ 830 $ 778
========== ========== ===========
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Performance Materials $ 58 $ 45 $ 45
Distribution 36 26 10
Valvoline 38 66 26
Water Technologies 23 19 17
Unallocated and other 20 24 39
---------- ---------- -----------
$ 175 $ 180 $ 137
========== ========== ===========
(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 operating activities from
continuing 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
Performance Materials, $(24) million for Valvoline, $(1,625) million
for Refining and Marketing, and $161 million included in "unallocated
and other."
F-32
QUARTERLY FINANCIAL INFORMATION
The following table presents quarterly financial information and per
share data relative to Ashland's common stock. Amounts for each quarter
have been amended to reflect the presentation of APAC as a discontinued
operation. See Note D for further information.
December 31 March 31 June 30 September 30
Quarters ended ------------------- ------------------- ------------------- ------------------
(In millions except per share data) 2005 2004 2006 2005 2006 2005(a) 2006(b) 2005(c)
--------------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 1,686 $ 1,565 $ 1,786 $ 1,674 $ 1,853 $ 1,779 $ 1,908 $ 1,712
Operating income 46 167 49 126 47 357 28 21
Income (loss) from
continuing operations 35 85 49 58 42 1,733 56 81
Net income (loss) 66 94 49 33 93 1,767 200 111
Basic earnings (loss) per share
Continuing operations $ .49 $ 1.19 $ .69 $ .80 $ .59 $ 23.67 $ .80 $ 1.10
Net income (loss) .92 1.30 .68 .45 1.31 24.13 2.85 1.50
Diluted earnings (loss) per share
Continuing operations $ .48 $ 1.17 $ .68 $ .79 $ .59 $ 23.19 $ .79 $ 1.08
Net income (loss) .91 1.28 .67 .44 1.29 23.65 2.82 1.48
Regular cash dividends per share $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275
Market price per common share
High $ 59.13 $ 60.17 $ 71.30 $ 68.85 $ 75.17 $ 72.20 $ 68.59 $ 65.25
Low 50.74 53.80 57.96 54.72 57.39 61.45 60.15 50.45
(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) Ashland sold APAC to Oldcastle Materials, Inc. in August 2006 for
approximately $1.3 billion, recording an after-tax gain on sale of
discontinued operations of $110 million.
(c) During the quarter, Ashland recorded $39 million in tax benefits
related to 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, 2006
Reserves deducted from asset accounts
Accounts receivable $ 33 $ 12 $ (11) $ 6 $ 40
Inventories 11 6 (1) - 16
----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2005
Reserves deducted from asset accounts
Accounts receivable $ 31 $ 12 $ (10) $ - $ 33
Inventories 10 3 (2) - 11
----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2004
Reserves deducted from asset accounts
Accounts receivable $ 31 $ 13 $ (14) $ 1 $ 31
Inventories 9 2 (1) - 10
----------------------------------------------------------------------------------------------------------------------------
F-33
Ashland Inc. and Consolidated Subsidiaries
FIVE-YEAR SELECTED FINANCIAL INFORMATION
Years Ended September 30
(In millions except per share data) 2006 2005 2004 2003 2002
----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Revenues
Sales and operating revenues $ 7,233 $ 6,731 $ 5,776 $ 5,165 $ 4,738
Equity income 11 525 412 292 181
Other income 33 39 26 46 35
Costs and expenses
Cost of sales and operating expenses (6,030) (5,545) (4,721) (4,189) (3,812)
Selling, general and administrative expenses (1,077) (1,079) (968) (1,031) (964)
---------- ---------- ---------- ---------- ----------
Operating income 170 671 525 283 178
(Loss) gain on the MAP Transaction (5) 1,284 - - -
Loss on early retirement of debt - (145) - - -
Net interest and other financing income (costs) 47 (82) (114) (128) (137)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 212 1,728 411 155 41
Income tax (expense) benefit (29) 230 (100) (52) (14)
---------- ---------- ---------- ---------- ----------
Income from continuing operations 183 1,958 311 103 27
Income (loss) from discontinued operations 224 46 67 (23) 101
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of accounting changes 407 2,004 378 80 128
Cumulative effect of accounting changes - - - (5) (11)
---------- ---------- ---------- ---------- ----------
Net income $ 407 $ 2,004 $ 378 $ 75 $ 117
========== ========== ========== ========== ==========
BALANCE SHEET INFORMATION
Current assets $ 4,250 $ 3,757 $ 2,302 $ 2,085 $ 1,922
Current liabilities 2,041 1,545 1,815 1,484 1,508
---------- ---------- ---------- ---------- ----------
Working capital $ 2,209 $ 2,212 $ 487 $ 601 $ 414
========== ========== ========== ========== ==========
Total assets $ 6,590 $ 6,815 $ 7,502 $ 7,006 $ 6,722
Short-term debt $ - $ - $ 40 $ - $ 10
Long-term debt (including current portion) 82 94 1,508 1,614 1,797
Stockholders' equity 3,096 3,739 2,706 2,253 2,173
---------- ---------- ---------- ---------- ----------
Capital employed $ 3,178 $ 3,833 $ 4,254 $ 3,867 $ 3,980
========== ========== ========== ========== ==========
CASH FLOW INFORMATION
Cash flows from operating activities from
continuing operations $ 148 $ (64) $ 43 $ 201 $ (41)
Additions to property, plant and equipment 175 180 137 65 71
Cash dividends 78 79 77 75 76
COMMON STOCK INFORMATION
Diluted earnings per share
Income from continuing operations $ 2.53 $ 26.23 $ 4.36 $ 1.50 $ 0.38
Net income 5.64 26.85 5.31 1.10 1.67
Regular cash dividends per share 1.10 1.10 1.10 1.10 1.10
Special cash dividend per share - Note N 10.20 - - - -
F-34