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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (859) 815-3333
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes[x] No
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes[x] No
At July 31, 2003, there were 68,251,752 shares of Registrant's Common
Stock outstanding. One Right to purchase one-thousandth of a share of
Series A Participating Cumulative Preferred Stock accompanies each
outstanding share of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Nine months ended
June 30 June 30
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(In millions except per share data) 2003 2002 2003 2002
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REVENUES
Sales and operating revenues $ 2,006 $ 1,997 $ 5,388 $ 5,315
Equity income 104 80 169 141
Other income 15 7 43 35
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2,125 2,084 5,600 5,491
COSTS AND EXPENSES
Cost of sales and operating expenses 1,648 1,602 4,430 4,285
Selling, general and administrative expenses 290 298 870 828
Depreciation, depletion and amortization 49 52 153 153
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1,987 1,952 5,453 5,266
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OPERATING INCOME 138 132 147 225
Net interest and other financial costs (31) (33) (97) (103)
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INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 107 99 50 122
Income taxes (36) (38) (17) (47)
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INCOME FROM CONTINUING OPERATIONS 71 61 33 75
Results from discontinued operations (net of income taxes) - Note B (1) 4 (94) 7
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INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 70 65 (61) 82
Cumulative effect of accounting change (net of income taxes) - Note C - - - (12)
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NET INCOME (LOSS) $ 70 $ 65 $ (61) $ 70
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BASIC EARNINGS (LOSS) PER SHARE - Note A
Income from continuing operations $ 1.04 $ .88 $ .48 $ 1.08
Results from discontinued operations (.02) .06 (1.38) .10
Cumulative effect of accounting change - - - (.16)
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Net income (loss) $ 1.02 $ .94 $ (.90) $ 1.02
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DILUTED EARNINGS (LOSS) PER SHARE - Note A
Income from continuing operations $ 1.03 $ .87 $ .48 $ 1.06
Results from discontinued operations (.02) .06 (1.37) .10
Cumulative effect of accounting change - - - (.16)
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Net income (loss) $ 1.01 $ .93 $ (.89) $ 1.00
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DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .825 $ .825
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30 September 30 June 30
(In millions) 2003 2002 2002
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 112 $ 90 $ 101
Accounts receivable 1,085 1,090 1,089
Allowance for doubtful accounts (40) (34) (36)
Inventories - Note A 512 456 469
Deferred income taxes 98 119 130
Current assets of discontinued operations held for sale 198 211 60
Other current assets 186 139 128
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2,151 2,071 1,941
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,401 2,350 2,406
Goodwill 519 510 507
Asbestos insurance receivable (noncurrent portion) 398 171 168
Noncurrent assets of discontinued operations held for sale - - 146
Other noncurrent assets 345 329 380
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3,663 3,360 3,607
PROPERTY, PLANT AND EQUIPMENT
Cost 2,949 2,920 2,912
Accumulated depreciation, depletion and amortization (1,725) (1,629) (1,603)
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1,224 1,291 1,309
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$ 7,038 $ 6,722 $ 6,857
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Debt due within one year $ 296 $ 201 $ 302
Trade and other payables 1,235 1,256 1,225
Current liabilities of discontinued operations held for sale 28 39 23
Income taxes 16 24 53
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1,575 1,520 1,603
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,564 1,606 1,600
Employee benefit obligations 493 509 400
Deferred income taxes 201 246 271
Reserves of captive insurance companies 184 166 182
Asbestos litigation reserve (noncurrent portion) 535 152 148
Noncurrent liabilities of discontinued operations held for sale - - 13
Other long-term liabilities and deferred credits 346 350 378
Commitments and contingencies - Notes E and F
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3,323 3,029 2,992
COMMON STOCKHOLDERS' EQUITY 2,140 2,173 2,262
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$ 7,038 $ 6,722 $ 6,857
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
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BALANCE AT OCTOBER 1, 2001 $ 69 $ 363 $ 1,920 $ (126) $ 2,226
Total comprehensive income (1) 70 18 88
Cash dividends (57) (57)
Issued common stock under
stock incentive plans 16 16
Repurchase of common stock (11) (11)
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BALANCE AT JUNE 30, 2002 $ 69 $ 368 $ 1,933 $ (108) $ 2,262
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BALANCE AT OCTOBER 1, 2002 $ 68 $ 338 $ 1,961 $ (194) $ 2,173
Total comprehensive income (1) (61) 76 15
Cash dividends (56) (56)
Issued common stock under
stock incentive plans 8 8
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BALANCE AT JUNE 30, 2003 $ 68 $ 346 $ 1,844 $ (118) $ 2,140
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(1) Reconciliations of net income (loss) to total comprehensive income follow.
Three months ended Nine months ended
June 30 June 30
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(In millions) 2003 2002 2003 2002
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Net income (loss) $ 70 $ 65 $ (61) $ 70
Minimum pension liability adjustment - - 19 -
Related tax expense - - (7) -
Unrealized translation gains 32 26 64 17
Related tax benefit (expense) - (2) - 1
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Total comprehensive income $ 102 $ 89 $ 15 $ 88
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At June 30, 2003, the accumulated other comprehensive loss of $118 million
(after tax) was comprised of net unrealized translation gains of $1 million
and a minimum pension liability of $119 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Nine months ended
June 30
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(In millions) 2003 2002
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CASH FLOWS FROM OPERATIONS
Income from continuing operations $ 33 $ 75
Expense (income) not affecting cash
Depreciation, depletion and amortization 153 153
Deferred income taxes 43 (104)
Equity income from affiliates (169) (141)
Distributions from equity affiliates 114 120
Other items (1) -
Change in operating assets and liabilities (1) (62) (96)
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111 7
CASH FLOWS FROM FINANCING
Proceeds from issuance of common stock 1 11
Repayment of long-term debt (191) (58)
Repurchase of common stock - (11)
Increase in short-term debt 243 85
Dividends paid (56) (57)
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(3) (30)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (84) (130)
Purchase of operations - net of cash acquired (5) (12)
Proceeds from sale of operations 5 -
Other - net (6) 1
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(90) (141)
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CASH PROVIDED (USED) BY CONTINUING OPERATIONS 18 (164)
Cash provided by discontinued operations 4 29
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22 (135)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 90 236
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 112 $ 101
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(1) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL REPORTING
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial reporting and Securities and Exchange Commission
regulations. Although such statements are subject to any year-end audit
adjustments which may be necessary, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form 10-K, as
amended, for the fiscal year ended September 30, 2002. Results of
operations for the periods ended June 30, 2003, are not necessarily
indicative of results to be expected for the year ending September 30,
2003.
INVENTORIES
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June 30 September 30 June 30
(In millions) 2003 2002 2002
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Chemicals and plastics $ 364 $ 335 $ 334
Construction materials 82 68 82
Petroleum products 75 58 55
Other products 60 51 53
Supplies 5 5 4
Excess of replacement costs over LIFO carrying values (74) (61) (59)
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$ 512 $ 456 $ 469
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EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (EPS) from continuing operations.
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Three months ended Nine months ended
June 30 June 30
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(In millions except per share data) 2003 2002 2003 2002
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NUMERATOR
Numerator for basic and diluted EPS - Income from
continuing operations $ 71 $ 61 $ 33 $ 75
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DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 68 69 68 69
Common shares issuable upon exercise of stock options 1 1 1 1
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Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 69 70 69 70
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BASIC EPS $ 1.04 $ .88 $ .48 $ 1.08
DILUTED EPS $ 1.03 $ .87 $ .48 $ 1.06
PRODUCT WARRANTIES
Because Ashland's products are generally sold without any extended
warranties, liabilities for product warranties are insignificant. Costs of
product warranties are generally expensed as incurred.
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK INCENTIVE PLANS
As of October 1, 2002, Ashland began expensing employee stock options in
accordance with Financial Accounting Standards Board (FASB) Statement No.
123 (FAS 123), "Accounting for Stock-Based Compensation," and its related
amendments. Ashland elected the modified prospective method of adoption,
under which compensation costs recorded in the periods ended June 30, 2003
are 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 have not been restated. Prior to October 1, 2002,
Ashland accounted for stock options under Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and
related Interpretations, and no expense was recorded. In addition to stock
options, Ashland grants nonvested stock awards to key employees and
directors, which are expensed over their vesting period under either APB 25
or FAS 123. The following table illustrates the effect on net income and
earnings per share if FAS 123 had been applied in 2002 to all outstanding
and unvested awards.
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Three months ended Nine months ended
June 30 June 30
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(In millions except per share data) 2003 2002 2003 2002
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Net income (loss) as reported $ 70 $ 65 $ (61) $ 70
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 1 - 3 -
Deduct: Total stock-based employee compensation expense
determined under FAS 123 for all awards, net of related
tax effects (1) (1) (3) (3)
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Pro forma net income (loss) $ 70 $ 64 $ (61) $ 67
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Earnings (loss) per share:
Basic - as reported $ 1.02 $ .94 $ (.90) $ 1.02
Basic - pro forma $ 1.02 $ .92 $ (.90) $ .97
Diluted - as reported $ 1.01 $ .93 $ (.89) $ 1.00
Diluted - pro forma $ 1.01 $ .92 $ (.89) $ .96
NOTE B - DISCONTINUED OPERATIONS
Ashland is subject to liabilities from claims alleging personal injury
caused by exposure to asbestos. During the quarter ended December 31, 2002,
Ashland increased its reserve for asbestos claims by $390 million to cover
litigation defense and claim settlement costs expected to be paid during
the next ten years. The reserve was increased by an additional $30 million
during the six months ended June 30, 2003, to maintain the reserve at a
level adequate to cover future payments over a rolling 10-year period.
Because insurance provides reimbursements for most of these costs and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed, these
increases in the asbestos reserve are expected to be offset in part by
probable insurance recoveries valued at $250 million. The resulting $170
million pretax charge to income (net of deferred income tax benefits of $66
million) was reflected as an after-tax loss from discontinued operations of
$104 million in the Statements of Consolidated Income. See Note F for
further discussion of Ashland's asbestos-related litigation.
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE B - DISCONTINUED OPERATIONS (CONTINUED)
Ashland announced on June 30, 2003, it had signed a definitive agreement to
sell the net assets of its Electronic Chemicals business and certain
related subsidiaries to Air Products in a transaction valued at
approximately $300 million before tax. Electronic Chemicals is a part of
Ashland Specialty Chemical and provides ultra pure chemicals and other
products and services to the worldwide semiconductor industry. The sale
reflects Ashland's strategy to optimize its business mix and focus greater
attention on the remaining specialty chemical businesses and other
transportation-related and construction operations where it can achieve
strategic advantage. Ashland's after-tax proceeds will be used primarily to
reduce debt.
On July 16, 2003, Honeywell International filed suit in a Delaware state
court seeking to enjoin this transaction. Honeywell claims, among other
things, that the transaction would violate the strategic alliance agreement
between Air Products and GEM Microelectronic Materials, a joint venture of
Honeywell and Texas Ultrapure Inc. On August 11, 2003, Teamsters Local No.
773 filed suit in a Pennsylvania federal court seeking to enjoin the
transaction, claiming it violates a collective bargaining agreement
concerning the Electronic Chemicals manufacturing facility in Easton,
Pennsylvania. Ashland expects the transaction to be completed, although
these legal proceedings may delay the projected closing date of August 29,
2003.
Components of amounts reflected in the income and cash flow statements and
balance sheets related to the discontinued operations of Electronic
Chemicals are presented in the following table. All assets and liabilities
of that business are classified as current starting with the September 30,
2002 balance sheet.
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Three months ended Nine months ended
June 30 June 30
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(In millions) 2003 2002 2003 2002
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INCOME STATEMENT DATA
Revenues $ 56 $ 56 $ 163 $ 157
Costs and expenses (51) (51) (151) (149)
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Operating income 5 5 12 8
Income taxes (1) (1) (2) (1)
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Results from discontinued operations $ 4 $ 4 $ 10 $ 7
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CASH FLOW DATA
Cash flows from operations $ 15 $ 13
Cash flows from investments (3) (6)
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Cash provided by discontinued operations $ 12 $ 7
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June 30 September 30 June 30
2003 2002 2002
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BALANCE SHEET DATA
Current assets of discontinued operations held for sale
Current assets $ 52 $ 62 $ 60
Investments and other assets 26 23 -
Property, plant and equipment - net 120 126 -
Noncurrent assets of discontinued operations held for sale
Investments and other assets - - 23
Property, plant and equipment - net - - 123
Current liabilities of discontinued operations held for sale
Current liabilities 15 27 23
Noncurrent liabilities 13 12 -
Noncurrent liabilities of discontinued operations held for sale - - 13
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - ACCOUNTING CHANGE - GOODWILL
As of October 1, 2001, Ashland adopted FASB Statement No. 142 (FAS 142),
"Goodwill and Other Intangible Assets." Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
subject to annual impairment tests. As a result of the adoption of FAS 142,
it was determined that the goodwill of Ashland Distribution was impaired.
Accordingly, an impairment loss of $14 million ($12 million net of income
taxes) was recorded as a cumulative effect of accounting change as of
October 1, 2001.
NOTE D - UNCONSOLIDATED AFFILIATES
Under Rule 3-09 of Regulation S-X, Ashland filed audited financial
statements for Marathon Ashland Petroleum LLC (MAP) for the year ended
December 31, 2002, on a Form 10-K/A on March 20, 2003. Unaudited income
statement information for MAP is shown below.
MAP is organized as a limited liability company that has elected to be
taxed as a partnership. Therefore, the parents are responsible for income
taxes applicable to their share of MAP's taxable income. The net income of
MAP reflected below does not include any provision for income taxes that
will be incurred by its parents.
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Three months ended Nine months ended
June 30 June 30
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(In millions) 2003 2002 2003 2002
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Sales and operating revenues $ 8,005 $ 6,775 $ 23,338 $ 17,823
Income from operations 281 217 457 398
Net income 276 214 446 391
Ashland's equity income 101 78 157 137
NOTE E - LEASES AND OTHER COMMITMENTS
LEASES
Under various operating leases, Ashland has guaranteed the residual value
of the underlying property that had an unamortized cost totaling $144
million at June 30, 2003. If Ashland had cancelled those leases at that
date, its maximum obligations under the residual value guarantees would
have amounted to $126 million. Ashland does not expect to incur any
significant charge to earnings under these guarantees, $78 million of which
relates to real estate. These lease agreements are with unrelated third
party lessors and Ashland has no additional contractual or other
commitments to any party relative to these leases.
FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities," was issued in January 2003. Beginning July 1, 2003, one of the
lessor entities will be consolidated in Ashland's financial statements
under FIN 46, resulting in an after-tax charge of $5 million for the
cumulative effect of this accounting change. Property, plant and equipment
will increase by $27 million and long-term debt will increase by $35
million as a result of the consolidation of the lessor entity. The ongoing
impact of the consolidation will not have a significant effect on Ashland's
earnings.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - LEASES AND OTHER COMMITMENTS (CONTINUED)
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others," was issued in November 2002. Upon entering new lease agreements
with residual value guarantees after December 31, 2002, Ashland is required
to record the fair value at inception of these guarantee obligations in
accordance with FIN 45. At June 30, 2003, the recorded value of such
obligations was not significant.
OTHER COMMITMENTS
Ashland has guaranteed 38% of MAP's payments for certain crude oil
purchases, up to a maximum guarantee of $95 million. At June 30, 2003,
Ashland's contingent liability under this guarantee amounted to $78
million. Although Ashland has not made and does not expect to make any
payments under this guarantee, it has recorded the fair value of this
guarantee obligation, which is not significant.
NOTE F - LITIGATION, CLAIMS AND CONTINGENCIES
ASBESTOS-RELATED LITIGATION
Ashland is subject to liabilities from claims alleging personal injury
caused by exposure to asbestos. Virtually all of those liabilities result
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, as well as the number of open claims, can fluctuate
significantly from period to period.
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Nine months ended
June 30 Years ended September 30
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(In thousands) 2003 2002 2001 2000
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Open claims - beginning of period 160 167 118 93
New claims filed 58 45 52 37
Claims settled (5) (15) (2) (9)
Claims dismissed (17) (37) (1) (3)
----------------------- ------------- ------------- -------------
Open claims - end of period 196 160 167 118
======================= ============= ============= =============
Since October 1, 1999, Riley has been dismissed as a defendant in 65% of
the resolved claims. Amounts spent on litigation defense and claim
settlements totaled $36 million for the nine months ended June 30, 2003,
compared to annual costs of $38 million in 2002, $15 million in 2001 and
$11 million in 2000.
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE F - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
During the December 2002 quarter, Ashland increased its reserve for
asbestos claims by $390 million to cover the litigation defense and claim
settlement costs expected to be paid during the next ten years. The reserve
was increased by an additional $30 million during the six months ended June
30, 2003, to maintain the reserve at a level adequate to cover future
payments over a rolling 10-year period. Prior to December 31, 2002, the
asbestos reserve was based on the estimated costs that would be incurred to
settle open claims. The estimates of future asbestos claims and related
costs were developed with the assistance of Hamilton, Rabinovitz &
Alschuler, Inc. (HR&A), nationally recognized experts in that field.
Reflecting the additional provisions, Ashland's reserve for asbestos claims
on an undiscounted basis amounted to $585 million at June 30, 2003,
compared to $195 million at June 30, 2002.
The methodology used by HR&A to project future asbestos costs was based
largely on Ashland's recent experience, including claim-filing and
settlement rates, disease mix, open claims, and litigation defense and
claim settlement costs. Ashland's claim experience was compared to the
results of previously conducted epidemiological studies estimating the
number of people likely to develop asbestos-related diseases. Those studies
were undertaken in connection with national analyses of the population
expected to have been exposed to asbestos. Using that information, HR&A
estimated the number of future claims that would be filed, as well as the
related costs that would be incurred in resolving those claims.
However, 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 that ten years is
the most reasonable period for recognizing a reserve for future costs, and
that costs that might be incurred after that period are not reasonably
estimable.
Because insurance provides reimbursements for most of these costs and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed, the
current year increases in the asbestos reserve are expected to be offset in
part by probable insurance recoveries valued at $250 million. At June 30,
2003, Ashland's receivable for recoveries of such costs from its insurers
amounted to $423 million, of which $33 million relates to costs previously
paid. Receivables from insurance companies amounted to $190 million at June
30, 2002.
Ashland retained the services of Tillinghast-Towers Perrin to assist
management in the estimation of probable insurance recoveries. Such
recoveries are based on assumptions and estimates surrounding the available
insurance coverage, including the continued viability of all solvent
insurance carriers. About 35% of the estimated receivables from insurance
companies at June 30, 2003, are expected to be due from Equitas Limited
(Equitas) and other London companies. Of the remainder, over 90% is
expected to come from companies or groups that are rated A or higher by A.
M. Best.
Although coverage limits are resolved in the coverage-in-place agreement
with Equitas and other London companies, there is a disagreement with these
companies over the timing of recoveries. The resolution of this
disagreement could have a material effect on the value of insurance
recoveries from those companies. In estimating the value of future
recoveries at June 30, 2003, Ashland used the least favorable
interpretation of this agreement and will continue to do so until such time
as the disagreement is resolved.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE F - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
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
June 30, 2003, such locations included 100 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, approximately 130 current and former
operating facilities (including certain facilities conveyed to MAP) and
about 1,220 service station properties. Ashland's reserves for
environmental remediation amounted to $167 million at June 30, 2003, and
reflect its estimates of the most likely costs that will be incurred over
an extended period to remediate identified conditions for which the costs
are reasonably estimable, without regard to any third-party recoveries.
Engineering studies, probability techniques, historical experience and
other factors are used to identify and evaluate remediation alternatives
and their related costs in determining the estimated reserves for
environmental remediation.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods, changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as remediation continues.
None of the remediation locations is individually material to Ashland as
its largest reserve for any site is less than $10 million. As a result,
Ashland's exposure to adverse developments with respect to any individual
site is not expected to be material, and these sites are in various stages
of ongoing remediation. Although environmental remediation could have a
material effect on results of operations if a series of adverse
developments occur in a particular quarter or fiscal year, Ashland believes
that the chance of such developments occurring in the same quarter or
fiscal year is remote.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various claims,
lawsuits and administrative proceedings pending or threatened against
Ashland and its current and former subsidiaries. Such actions are with
respect to commercial matters, product liability, toxic tort liability, and
other environmental matters, which seek remedies or damages, some of which
are for substantial amounts. While these actions are being contested, their
outcome is not predictable with assurance.
12
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
June 30 June 30
------------------------ --------------------------
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
APAC $ 683 $ 756 $ 1,615 $ 1,861
Ashland Distribution 733 670 2,081 1,875
Ashland Specialty Chemical 308 290 870 809
Valvoline 307 305 889 833
Intersegment sales
Ashland Distribution (6) (6) (16) (15)
Ashland Specialty Chemical (19) (18) (50) (47)
Valvoline - - (1) (1)
---------- ---------- ---------- ----------
2,006 1,997 5,388 5,315
Equity income
APAC 2 - 6 -
Ashland Specialty Chemical 1 1 5 3
Valvoline - 1 1 1
Refining and Marketing 101 78 157 137
---------- ---------- ---------- ----------
104 80 169 141
Other income
APAC 3 2 5 8
Ashland Distribution 3 2 17 14
Ashland Specialty Chemical 3 (1) 8 2
Valvoline 1 2 4 4
Refining and Marketing 4 - 4 2
Corporate 1 2 5 5
---------- ---------- ---------- ----------
15 7 43 35
---------- ---------- ---------- ----------
$ 2,125 $ 2,084 $ 5,600 $ 5,491
========== ========== ========== ==========
OPERATING INCOME
APAC $ 17 $ 42 $ (39) $ 64
Ashland Distribution 11 3 27 8
Ashland Specialty Chemical 3 20 21 50
Valvoline 24 25 56 53
Refining and Marketing (1) 100 66 145 111
Corporate (17) (24) (63) (61)
---------- ---------- ---------- ----------
$ 138 $ 132 $ 147 $ 225
========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP, and other activities
associated with refining and marketing.
13
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
OPERATING INFORMATION BY INDUSTRY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
June 30 June 30
------------------------ -------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
APAC
Construction backlog at June 30 (millions) (1) $ 1,824 $ 1,797
Hot-mix asphalt production (million tons) 9.8 11.4 21.0 25.3
Aggregate production (million tons) 8.1 8.5 20.5 22.2
Ready-mix concrete production (million cubic yards) 0.6 0.6 1.5 1.5
ASHLAND DISTRIBUTION (2)
Sales per shipping day (millions) $ 11.6 $ 10.5 $ 11.1 $ 10.0
Gross profit as a percent of sales 15.1% 15.6% 15.3% 16.3%
ASHLAND SPECIALTY CHEMICAL (2)
Sales per shipping day (millions) $ 4.9 $ 4.5 $ 4.6 $ 4.3
Gross profit as a percent of sales 33.1% 38.0% 33.8% 37.2%
VALVOLINE
Lubricant sales (million gallons) 49.2 53.7 142.2 145.5
Premium lubricants (percent of U.S. branded volumes) 19.8% 17.2% 18.5% 15.7%
REFINING AND MARKETING (3)
Refinery runs (thousand barrels per day)
Crude oil refined 951 973 878 930
Other charge and blend stocks 129 134 130 156
Refined product yields (thousand barrels per day)
Gasoline 582 598 544 602
Distillates 292 308 276 298
Asphalt 76 77 69 71
Other 138 131 123 122
----------- ---------- ---------- -----------
Total 1,088 1,114 1,012 1,093
Refined product sales (thousand barrels per day) (4) 1,346 1,351 1,311 1,299
Refining and wholesale marketing margin (per barrel) (5) $ 2.94 $ 2.18 $ 2.21 $ 1.89
Speedway SuperAmerica (SSA)
Retail outlets at June 30 1,802 2,081
Gasoline and distillate sales (million gallons) 882 911 2,608 2,679
Gross margin - gasoline and distillates (per gallon) $ .1229 $ .1116 $ .1134 $ .1032
Merchandise sales (millions) (6) $ 590 $ 612 $ 1,695 $ 1,736
Merchandise margin (as a percent of sales) 23.9% 25.5% 24.4% 24.5%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes APAC's proportionate share of the backlog of
unconsolidated joint ventures.
(2) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses, and depreciation and amortization relative to
manufacturing assets.
(3) Amounts represent 100% of MAP's operations, in which Ashland owns
a 38% interest.
(4) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(5) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(6) Effective January 1, 2003, SSA adopted EITF 02-16, "Accounting by
a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," which requires rebates from vendors to be
recorded as reductions to cost of sales. Rebates from vendors
recorded in SSA merchandise sales for periods prior to January 1,
2003 have not been restated and included $38 million in the three
months ended June 30, 2002; $46 million in the nine months ended
June 30, 2003; and $129 million in the nine months ended June 30,
2002.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Ashland reported income from continuing operations of $71 million for the
quarter ended June 30, 2003, compared to $61 million for the quarter ended
June 30, 2002. For the nine months ended June 30, 2003, Ashland reported
income from continuing operations of $33 million, compared to $75 million
for the nine months ended June 30, 2002. An analysis of operating income by
industry segment follows.
APAC
CURRENT QUARTER - APAC reported operating income of $17 million for the
June 2003 quarter, compared to $42 million for the June 2002 quarter. APAC
continues to suffer from adverse weather that has significantly hampered
construction activity. Twelve of the 14 states in APAC's operating area
experienced much higher than normal rainfall for the quarter, continuing
the pattern that has persisted throughout the fiscal year. In addition to
hampering the overall level of construction activity, the weather
conditions created significant inefficiencies in completing the
construction work that APAC was still able to perform. Net construction job
revenue (total revenue less subcontract costs) decreased 11% from the prior
year period, while production of hot-mix asphalt declined 14% and aggregate
production dropped 5%. In addition, the cost of liquid asphalt increased
15% compared to the June 2002 quarter.
YEAR-TO-DATE - APAC reported an operating loss of $39 million for the nine
months ended June 30, 2003, compared to operating income of $64 million for
the nine months ended June 30, 2002. The decline reflects the same factors
described in the current quarter comparison. Net construction job revenue
declined 14%, while production of hot-mix asphalt declined 17% and
production of aggregate dropped 8%. Operating expenses included a 15%
increase in the cost of liquid asphalt and higher fuel and power costs.
Construction backlog, which consists of work awarded and funded but not yet
performed, continues to grow and was at a record high for the June quarter
of $1.8 billion.
APAC has completed its strategic reorganization, reducing the number of
operating units to 24 from 38 and decreasing field overhead expenses by
approximately $8 million per year. In addition, financial shared services
were implemented for four more operating units during the quarter, bringing
to 11 the total number sharing financial services. This centralization of
resources, resulting from the Project PASS business redesign effort,
advances APAC's competitive position as a low-cost, operationally efficient
organization.
ASHLAND DISTRIBUTION
CURRENT QUARTER - Ashland Distribution reported operating income of $11
million for the June 2003 quarter compared to $3 million for the June 2002
quarter. Ashland Distribution continues to revitalize its business and to
improve service to customers by aggressively implementing quality
initiatives. Sales per shipping day increased 10% reflecting increased
prices, while the gross profit percentage declined 3% reflecting higher raw
material costs.
YEAR-TO-DATE - Ashland Distribution reported operating income of $27
million for the nine months ended June 30, 2003, compared to $8 million for
the same period of 2002. Sales per shipping day increased 11% reflecting a
6% increase in the average price per pound and a 5% increase in volumes.
The gross profit percentage declined 6% reflecting higher raw material
costs. A significant portion of the profits for both periods ($6 million in
2003 and $7 million in 2002) came from litigation settlements and gains on
asset sales.
15
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASHLAND SPECIALTY CHEMICAL
CURRENT QUARTER - Operating income for Ashland Specialty Chemical was $3
million in the June 2003 quarter and included an impairment charge of $10
million for a maleic anhydride production facility in Neville Island, Pa.
These results compared to operating income of $20 million in the June 2002
quarter. Sales per shipping day increased 9% reflecting higher product
prices. Although demand for durable goods dipped by a combined 2.7 percent
in April and May, adversely affecting sales volumes, volumes improved in
June. Ashland Specialty Chemical's gross profit percentage declined 13%
reflecting higher raw material costs. Composite polymers was hardest hit,
due to higher styrene costs. However, margins improved in June as
previously announced price increases took effect.
YEAR-TO-DATE - Ashland Specialty Chemical reported operating income of $21
million for the nine months ended June 30, 2003, compared to $50 million
for the same period of 2002. The decline reflects the same factors
described in the current quarter comparison. Sales per shipping day
increased 7% reflecting increased prices. However, the gross profit
percentage declined 9% reflecting higher raw material costs, especially for
composite polymers.
VALVOLINE
CURRENT QUARTER - Valvoline reported operating income of $24 million for
the June 2003 quarter compared to $25 million for the June 2002 quarter.
Although overall sales volumes declined, Valvoline increased its market
share in a very soft market. Premium product sales volumes increased 7
percent. Lower margins in the core lubricants business reflected higher raw
material costs. Valvoline Instant Oil Change (VIOC) had a record June
quarter, due in part to a 20% increase in non-oil change revenues and a 12%
increase in premium oil changes. In addition, results from Valvoline
International improved due to better volumes in key markets and
strengthening foreign currencies.
YEAR-TO-DATE - Valvoline reported operating income of $56 million for the
nine months ended June 30, 2003, compared to $53 million for the same
period of 2002. Results from Valvoline International improved on the
strength of higher earnings in Europe, Asia and Australia. Improved
earnings from VIOC reflected an 18% increase in non-oil change revenues and
a 14% increase in premium oil changes. Results for the core lubricants
business declined reflecting decreased lubricant volumes and lower margins
due to higher raw material costs.
REFINING AND MARKETING
CURRENT QUARTER - Operating income from Refining and Marketing, which
consists primarily of equity income from Ashland's 38% ownership interest
in MAP, amounted to $100 million for the quarter ended June 30, 2003,
compared to $66 million for the June 2002 quarter. Equity income from MAP's
refining and wholesale marketing operations increased $12 million. Demand
for petroleum products was soft in the quarter due to high crude oil prices
and a weak industrial economy. However, MAP refineries operated well, and
MAP's refining and wholesale marketing margin improved 76 cents per barrel
over the June 2002 quarter. This improvement was partially offset by higher
operating and administrative expenses. Equity income from MAP's retail
operations (Speedway SuperAmerica and a 50% interest in the Pilot Travel
Centers joint venture) increased $10 million, reflecting an $8 million gain
on the sale of 190 Speedway SuperAmerica stores and increased product
margins. The net costs of Ashland's retained refining and marketing
activities declined $12 million. The June 2003 quarter included gains of $4
million on petroleum crack-spread futures contracts, while the June 2002
quarter included $7 million in fines and settlement costs related to a 1997
fire at the St. Paul Park, Minnesota refinery.
16
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
REFINING AND MARKETING (CONTINUED)
YEAR-TO-DATE - Operating income from Refining and Marketing amounted to
$145 million for the nine months ended June 30, 2003, compared to $111
million for the comparable 2002 period. Equity income from MAP's refining
and wholesale marketing operations increased $7 million, reflecting a 32
cents per barrel increase in MAP's refining and wholesale marketing margin,
partially offset by higher operating and administrative expenses. Equity
income from MAP's retail operations increased $15 million, while the net
costs of Ashland's retained refining and marketing activities declined $14
million, reflecting the same factors described in the current quarter
comparison.
CORPORATE
Corporate expenses amounted to $17 million in the quarter ended June 30,
2003, compared to $24 million in the June 2002 quarter. The decline
reflects the impact of Ashland's program initiated last fall to reduce
general and administrative (G&A) costs by $25 million per year. Corporate
expenses on a year-to-date basis amounted to $63 million in the 2003
period, compared to $61 million in the 2002 period. The increase reflects
the net effect of an $8 million charge in the December 2002 quarter for
severance and other transition costs related to the cost-reduction program,
the expensing of employee stock options which began October 1, 2002, and
the cost savings from the G&A cost reduction program.
NET INTEREST AND OTHER FINANCIAL COSTS
For the quarter ended June 30, 2003, net interest and other financial costs
totaled $31 million, compared to $33 million for the June 2002 quarter. For
the year-to-date, net interest and other financial costs amounted to $97
million in the 2003 period, compared to $103 million in the 2002 period.
The decline reflects the repayment of currently maturing long-term debt
with lower rate short-term debt, and reduced interest rates.
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGE
As described in Notes B and F to the Condensed Consolidated Financial
Statements, Ashland's results from discontinued operations include charges
associated with estimated future asbestos liabilities less probable
insurance recoveries, as well as net income from the discontinued
operations of its Electronic Chemicals business. Such amounts are
summarized below.
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
June 30 June 30
----------------------- -------------------------
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Asbestos-related charges (net of deferred income tax benefits) $ (5) $ - $ (104) $ -
Net income of Electronic Chemicals business 4 4 10 7
---------- ---------- ----------- -----------
Results from discontinued operations (net of income taxes) $ (1) $ 4 $ (94) $ 7
========== ========== =========== ===========
As described in Note C to the Condensed Consolidated Financial Statements,
Ashland recognized an impairment loss of $12 million after income taxes
related to the goodwill of Ashland Distribution, as a result of the
adoption of FAS 142 as of October 1, 2001.
17
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity, amounted
to $111 million for the nine months ended June 30, 2003, compared to $7
million for the nine months ended June 30, 2002. Cash flows from Ashland's
wholly owned operations were down primarily as a result of lower earnings
from APAC. Cash distributions from MAP were also somewhat lower, amounting
to $108 million in the 2003 period and $119 million in the 2002 period.
However, income taxes paid by Ashland related to MAP's earnings were $142
million lower in the 2003 period than in the 2002 period. Ashland pays
income taxes on most of its share of the taxable earnings reported by MAP
in the following year, creating timing issues in Ashland's cash flows from
year to year. Ashland's capital requirements for net property additions and
dividends exceeded cash flows from operations by $23 million for the nine
months ended June 30, 2003.
Ashland's financial position has enabled it to obtain capital for its
financing needs and to maintain investment grade ratings on its senior debt
of Baa2 from Moody's and BBB from Standard & Poor's. Ashland has two
revolving credit agreements providing for up to $350 million in borrowings.
Under a shelf registration, Ashland can also issue an additional $545
million in debt and equity securities should future opportunities or needs
arise. While the revolving credit agreements contain a covenant limiting
new borrowings based on Ashland's stockholders' equity, these agreements
would have permitted an additional $1.3 billion of borrowings at June 30,
2003. Additional permissible borrowings are increased (decreased) by 150%
of any increase (decrease) in stockholders' equity.
On August 7, 2003, S&P revised its outlook on Ashland to negative from
stable, and lowered Ashland's commercial paper rating to A-3 from A-2. This
action will materially restrict, and could at times eliminate, the
availability of the commercial paper market to Ashland. S&P affirmed its
investment-grade long-term ratings for Ashland at BBB. On August 8, 2003,
Ashland borrowed $100 million under its 364-day revolving credit facility
that matures in June 2004, to repay maturing commercial paper. Ashland will
likely utilize a portion of its $250 million revolving credit facility,
which also matures in June 2004, to repay additional maturing commercial
paper. S&P's action does not trigger any obligations or other provisions
under Ashland's financing agreements or other contractual relationships.
At June 30, 2003, working capital (excluding debt due within one year)
amounted to $872 million, compared to $752 million at September 30, 2002,
and $640 million at June 30, 2002. This comparison is affected by the
classification of all of the assets and liabilities of Electronic Chemicals
as current at June 30, 2003, and September 30, 2002. 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 $74 million
at June 30, 2003, $61 million at September 30, 2002, and $59 million at
June 30, 2002. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 73% of current liabilities at June 30, 2003,
compared to 75% at September 30, 2002, and 72% at June 30, 2002.
CAPITAL RESOURCES
For the nine months ended June 30, 2003, property additions amounted to $84
million, compared to $130 million for the same period last year. Ashland
anticipates meeting its remaining 2003 capital requirements for property
additions and dividends from internally generated funds.
18
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CAPITAL RESOURCES (CONTINUED)
Ashland's debt level amounted to $1.9 billion at June 30, 2003, compared to
$1.8 billion at September 30, 2002, and $1.9 billion at June 30, 2002. Debt
as a percent of capital employed amounted to 46.5% at June 30, 2003,
compared to 45.4% at September 30, 2002, and 45.7% at June 30, 2002. At
June 30, 2003, Ashland's debt included $292 million of floating-rate
obligations, including $253 million of short-term commercial paper and $39
million of long-term debt, and the interest rates on an additional $153
million of fixed-rate, medium-term notes were effectively converted to
floating rates through interest rate swap agreements. In addition,
Ashland's costs under its sale of receivables program and various operating
leases are based on the floating-rate interest costs on $289 million of
third-party debt underlying those transactions. As a result, Ashland was
exposed to fluctuations in short-term interest rates on $734 million of
debt obligations at June 30, 2003.
ASBESTOS-RELATED LITIGATION AND ENVIRONMENTAL REMEDIATION
For a discussion of Ashland's asbestos-related litigation and environmental
remediation matters, see Note F to the Condensed Consolidated Financial
Statements.
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
various information in the Results of Operations, Capital Resources,
Asbestos-Related Litigation and Environmental Remediation sections of this
MD&A. Estimates as to operating performance, earnings, and scope and effect
of asbestos and environmental liabilities are based upon a number of
assumptions, including those mentioned in 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 asbestos
and environmental matters). Although Ashland believes its expectations are
based on reasonable assumptions, it cannot assure the expectations
reflected in MD&A 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 to the
Consolidated Financial Statements in Ashland's 2002 Annual Report and in
Ashland's Form 10-K for the fiscal year ended September 30, 2002, as
amended. Ashland undertakes no obligation to subsequently update or revise
these forward-looking statements.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland's market risk exposure at June 30, 2003 is generally consistent
with the types and amounts of market risk exposures presented in Ashland's
Form 10-K for the fiscal year ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly report,
Ashland, under the supervision and with the participation of its
management, including Ashland's Chief Executive Officer and its
Chief Financial Officer, evaluated the effectiveness of Ashland's
disclosure controls and procedures pursuant to Rule 13a-15(b) and
15d-15(b) promulgated under the Securities Exchange Act of 1934,
as amended. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures were effective.
(b) There were no significant changes in Ashland's internal control
over financial reporting, or in other factors, that occurred
during the period covered by this quarterly report that have
materially affected, or are reasonably likely to materially
affect, Ashland's internal control over financial reporting.
20
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - As of June 30, 2003, Ashland has been
identified as a "potentially responsible party" ("PRP") under Superfund or
similar state laws for potential joint and several liability for clean-up
costs in connection with alleged releases of hazardous substances
associated with 100 waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the United States Environmental Protection Agency or a state
agency, in which Ashland is typically participating as a member of a PRP
group. Generally, the type of relief sought includes remediation of
contaminated soil and/or groundwater, reimbursement for past costs of site
clean-up and administrative oversight, and/or long-term monitoring of
environmental conditions at the sites. The ultimate costs are not
predictable with assurance. For additional information regarding
environmental matters and reserves, see Note F to the Condensed
Consolidated Financial Statements.
ASBESTOS-RELATED LITIGATION - Ashland is subject to liabilities from
claims alleging personal injury caused by exposure to asbestos. For
additional information regarding liabilities arising from asbestos-related
litigation, see Note F to the Condensed Consolidated Financial Statements.
SHAREHOLDER DERIVATIVE LITIGATION - On August 16, 2002, Central
Laborers' Pension Fund, derivatively as a shareholder of Ashland,
instituted an action in the Circuit Court of Kentucky in Kenton County
against Ashland's then-serving Board of Directors. On motion of Ashland and
the other defendants, the case was removed to the United States District
Court, Eastern District of Kentucky, Covington Division. Plaintiff has
moved to remand the case to the state court. The action is purportedly
filed on behalf of Ashland, and asserts the following causes of action
against the Directors: breach of fiduciary duty, abuse of control, gross
mismanagement, and waste of corporate assets. The suit also names Paul W.
Chellgren, the then-serving Chief Executive Officer and Chairman of the
Board, and James R. Boyd, former Senior Vice President and Group Operating
Officer, as individual defendants, and it seeks to recover an unstated sum
from them individually alleging unjust enrichment from various transactions
completed during their tenure with Ashland. The suit further seeks an
unspecified sum from Mr. Chellgren individually based upon alleged
usurpation of corporate opportunities. The suit also names Mr. J. Marvin
Quin, Ashland's Chief Financial Officer, as well as three former employees
of Ashland's wholly-owned subsidiary, APAC, as individual defendants and
alleges that they participated in the preparation and filing of false
financial statements during fiscal years 1999 - 2001. The suit further
names Ernst & Young LLP ("E&Y"), as a defendant, alleging professional
accounting malpractice and negligence in the conduct of its audit of
Ashland's 1999 and 2000 financial statements, respectively, as well as
alleging that E&Y aided and abetted the individual defendants in their
alleged breach of duties. The complaint seeks to recover, jointly and
severally, from defendants an unstated sum of compensatory and punitive
damages. The complaint seeks equitable and/or injunctive relief to avoid
continuing harm from alleged ongoing illegal acts, and seeks a disgorgement
of defendants' alleged insider-trading gains, in addition to the reasonable
cost and expenses incurred in bringing the complaint, including attorneys'
and experts' fees.
ITEM 5. OTHER INFORMATION
On June 30, 2003, Ashland filed a Form 8-K disclosing that it had
signed a definitive agreement to sell the net assets of its Electronic
Chemicals business and certain related subsidiaries to Air Products. On
August 11, 2003, Teamsters Local Union No. 773 in Allentown, Pennsylvania
("Union") filed suit against Ashland in the United States District Court
for the Eastern District of Pennsylvania based upon an alleged breach of a
collective bargaining agreement between Ashland and the Union. The
collective
21
bargaining agreement at issue concerns Ashland's Electronic Chemicals
manufacturing facility in Easton, Pennsylvania. The lawsuit seeks, among
other remedies, a preliminary and permanent injuction preventing the
consumation of Air Products' proposed purchase of the net assets of
Ashland's Electronic Chemicals business and certain related subsidiaries.
Honeywell International has also filed suit in a Delaware state court
seeking to enjoin this proposed transaction, as was described in Ashland's
Form 8-K filed July 18, 2003. Ashland still expects the proposed
transaction to be completed, although the current legal proceedings may
delay the projected closing date of August 29, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
10.1 Ashland Inc. Deferred Compensation Plan
10.2 Ashland Inc. Deferred Compensation Plan for Non-Employee Directors
10.3 Eleventh Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees
10.4 Ashland Inc. Nonqualified Excess Pension Benefit Plan - 2003
Restatement
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland, and J. Marvin Quin, Chief Financial Officer of Ashland,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C.
Section 1350.
(b) Reports on Form 8-K
-------------------
During the quarter ended June 30, 2003, and between such date and the
filing of this Form 10-Q, Ashland filed or furnished the following reports
on Form 8-K:
(1) Form 8-K dated April 22, 2003 reporting Ashland's second quarter
results.
(2) Form 8-K dated May 2, 2003 containing a Regulation FD disclosure.
(3) Form 8-K dated May 23, 2003 containing a Regulation FD disclosure.
(4) Form 8-K dated June 27, 2003 containing a Regulation FD
disclosure.
(5) Form 8-K dated June 30, 2003 reporting the execution of an
agreement to sell the net assets of Ashland's Electronic Chemicals
business and certain related subsidiaries.
(6) Form 8-K dated July 18, 2003 reporting the filing of a lawsuit by
a third party seeking, among other remedies, a preliminary and
permanent injunction preventing the consummation of the proposed
sale of the net assets of Ashland's Electronic Chemicals business
and certain related subsidiaries.
(7) Form 8-K dated July 22, 2003 reporting Ashland's third quarter
results.
(8) Form 8-K dated July 23, 2003 containing a Regulation FD
disclosure.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ashland Inc.
------------------------------------------
(Registrant)
Date: August 13, 2003 /s/ J. Marvin Quin
------------------------------------------
J. Marvin Quin
Senior Vice President and Chief Financial
Officer (on behalf of the Registrant and
as principal financial officer)
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------------------------------------------------------------------
10.1 Ashland Inc. Deferred Compensation Plan
10.2 Ashland Inc. Deferred Compensation Plan for Non-Employee Directors
10.3 Eleventh Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees
10.4 Ashland Inc. Nonqualified Excess Pension Benefit Plan - 2003
Restatement
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland, and J. Marvin Quin, Chief Financial Officer of Ashland,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C.
Section 1350.
23