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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g): NONE
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 annual
report on Form 10-K or any amendment to this annual report on Form 10-K.
[x]
Indicate by check mark whether the Registrant is an accelerated filer.
Yes [x] No
At October 31, 2003, based on the New York Stock Exchange closing
price, the aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $2,549,347,022. 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, 2003, there were 68,603,477 shares of Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for its January
29, 2004 Annual Meeting of Shareholders are incorporated by reference into
Part III.
TABLE OF CONTENTS
Page
PART I ----
Item 1. Business.................................................... 1
APAC ..................................................... 1
Ashland Distribution........................................ 2
Ashland Specialty Chemical.................................. 2
Valvoline................................................... 3
Refining and Marketing...................................... 4
Miscellaneous............................................... 7
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Item X. Executive Officers of Ashland............................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters.................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 13
Item 8. Financial Statements and Supplementary Data................. 13
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 13
Item 9A. Controls and Procedures..................................... 13
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 13
Item 11. Executive Compensation...................................... 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters...... 14
Item 13. Certain Relationships and Related Transactions.............. 14
Item 14. Principal Accountant Fees and Services...................... 14
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 14
PART I
ITEM 1. BUSINESS
Ashland Inc. is a Kentucky corporation, organized on October 22, 1936,
with its principal executive offices located at 50 E. RiverCenter
Boulevard, Covington, Kentucky 41011 (Mailing Address: 50 E. RiverCenter
Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391) (Telephone: (859)
815-3333). The terms "Ashland" and the "Company" as used herein include
Ashland Inc. and its consolidated subsidiaries, except where the context
indicates otherwise.
Ashland's businesses are grouped into five industry segments: APAC,
Ashland Distribution, Ashland Specialty Chemical, Valvoline and Refining
and Marketing. Financial information about these segments for the three
fiscal years ended September 30, 2003 is set forth on pages F-24 and F-25
of this annual report on Form 10-K.
APAC performs asphalt and concrete contract construction work,
including highway paving and repair, excavation and grading, and bridge
construction, and produces asphaltic and ready-mix concrete, crushed stone
and other aggregate in the southern and midwestern United States.
Ashland Distribution distributes industrial chemicals and solvents,
plastics, composite materials and fine ingredients in North America and
plastics in Europe. Ashland Distribution also provides environmental
services. Ashland Specialty Chemical is focused on two primary chemistries:
thermoset and water. It manufactures and supplies specialty chemical
products and services to industries including the automotive, building and
construction, foundry, marine, paint, paper, ink, flexible packaging and
water treatment industries.
Valvoline is a producer and marketer of premium packaged motor oil and
automotive chemicals, including appearance products, antifreeze, filters,
rust preventives and coolants. In addition, Valvoline is engaged in the
"fast oil change" business through outlets operating under the Valvoline
Instant Oil Change(R) name.
Marathon Ashland Petroleum LLC ("MAP"), a joint venture with Marathon
Oil Company, operates seven refineries with a total crude oil refining
capacity of 935,000 barrels per day. Refined products are distributed
through a network of independent and company-owned outlets in the Midwest,
the upper Great Plains and the southeastern United States. Marathon Oil
Company holds a 62% interest in MAP, and Ashland holds a 38% interest in
MAP. Ashland accounts for its investment in MAP using the equity method.
At September 30, 2003, Ashland and its consolidated subsidiaries had
approximately 22,500 employees (excluding contract employees).
AVAILABLE INFORMATION. Ashland's Internet address is 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"). 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.
APAC
The APAC group of companies is the nation's largest asphalt and
concrete paving company and is a major supplier of construction materials.
APAC performs construction work, such as paving, repairing and resurfacing
highways, streets, airports, residential and commercial developments,
sidewalks and driveways, and grading and base work. In addition, it
performs a number of construction services such as excavation and related
activities in the construction of bridges and structures, drainage
facilities and underground utilities. APAC conducts its business through 24
market focused business units operating in 14 southern and midwestern
states. These business units provide construction services and materials
throughout the regions in which they operate. These market focused business
units are supported by management and administrative staff in Atlanta,
Georgia.
To deliver its services and products, APAC utilizes extensive
aggregate-producing properties and construction equipment. It currently has
96 aggregate production facilities, including 35 permanent operating quarry
locations; 65 ready-mix concrete plants; 239 hot-mix asphalt plants; and a
fleet of over 15,000 mobile equipment units, including heavy construction
equipment and transportation-related equipment. In certain market areas,
APAC is vertically integrated with asphalt, aggregate and ready-mix
operations, all complementing each other.
1
Raw aggregate generally consists of sand, gravel, granite, limestone
and sandstone. About 29% of the raw aggregate produced by APAC is used in
APAC's own contract construction work and the production of various
processed construction materials. The remainder is sold to third parties.
APAC also purchases substantial quantities of raw aggregate from other
producers whose proximity to the job site renders it economically
attractive. Most other raw materials, such as liquid asphalt, portland
cement and reinforcing steel, are purchased from third parties.
Approximately 77% of APAC's sales and operating revenues are
construction revenues, with the remaining 23% coming from sales of
construction materials. Approximately 84% of APAC's construction revenues
are derived directly from highway and other public sector sources, with the
remaining 16% coming from industrial and commercial customers and private
developers.
Climate and weather significantly affect revenues and margins in the
construction business. Due to its location, APAC tends to enjoy a
relatively long construction season. Most of APAC's operating income is
generated during the construction period of May to October.
Total backlog at September 30, 2003 was $1,745 million (including
APAC's $79 million proportionate share of work related to an unconsolidated
equity joint venture), compared to $1,691 million at September 30, 2002.
APAC includes a construction project in its backlog when a contract is
awarded or a firm letter of commitment is obtained and funding is in place.
The backlog at September 30, 2003 is considered firm, and a major portion
is expected to be completed during fiscal 2004.
ASHLAND DISTRIBUTION
Ashland Distribution Company ("Ashland Distribution") distributes
chemicals, plastics, reinforcements and resins, and fine ingredients in
North America and plastics in Europe. Suppliers include many of the world's
leading chemical manufacturers. Ashland Distribution specializes in
providing mixed truckloads and less-than-truckload quantities to customers
in a wide range of industries. Deliveries are facilitated through a network
of owned or leased facilities including 120 locations in North America.
Distribution of thermoplastic resins in Europe is conducted primarily
through 17 third-party warehouses located in 13 countries. 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, inks, adhesives, polymer, rubber,
industrial and institutional compounding, automotive, appliance and paper
industries.
PLASTICS - Ashland Distribution offers a broad range of thermoplastic
resins and specialties to processors in the United Sates, 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 thermosetting 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.
INGREDIENTS - Ashland Distribution markets food-grade ingredients to
food and beverage industry customers in North America. It also distributes
ingredients used by companies in the personal care and pharmaceutical
industries.
ENVIRONMENTAL SERVICES - Working in cooperation with chemical waste
service companies, Ashland Distribution provides customers with collection,
disposal and recycling of hazardous and non-hazardous waste streams.
Services are offered through a North American network of more than 80
distribution centers, including 10 storage facilities that have been fully
permitted by the United States Environmental Protection Agency ("USEPA").
ASHLAND SPECIALTY CHEMICAL
Ashland Specialty Chemical Company ("Ashland Specialty Chemical") is
focused on two primary chemistries: thermoset and water. Ashland Specialty
Chemical manufactures and supplies specialty chemical products and services
to industries including automotive, building and construction, foundry,
marine, paint, paper, ink and flexible packaging. Ashland Specialty
Chemical owns and operates 38 manufacturing facilities and participates in
12 manufacturing joint ventures in 20 countries.
2
THERMOSET CHEMISTRY
COMPOSITE POLYMERS - This business group manufactures and sells a
broad range of chemical-resistant, fire-retardant, general-purpose and
high-performance marine grades of unsaturated polyester and vinyl ester
resins and gelcoats for the reinforced plastics industry. Key markets
include the transportation, construction and marine industries. This
business group has manufacturing plants in Jacksonville and Fort Smith,
Arkansas; Los Angeles, California; Bartow, Florida; Pittsburgh and
Philadelphia, Pennsylvania; Johnson Creek, Wisconsin; Kelowna, British
Columbia, Canada; Kunshan, China; Porvoo and Lahti, Finland; Sauveterre,
France; Miszewo, Poland; Benicarlo, Spain; and, through separate joint
ventures has manufacturing plants in Sao Paolo, Brazil, and Jeddah, Saudi
Arabia. This business group also manufactures products through an Ashland
Specialty Chemical facility located in Mississauga, Ontario, Canada. The
Petrochemicals business, a group within the Composite Polymers business
group, manufactures maleic anhydride in Neal, West Virginia and also
markets maleic anhydride in North America.
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 business group serves the global metal casting industry from
9 owned and operated manufacturing sites which includes factories located
in Campinas, Brazil; Mississauga, Ontario, Canada; Changzhou, China; Milan,
Italy; Alava, Cantabria and Las Arenas, Spain; Kidderminster, England and
Cleveland, Ohio. Casting Solutions also has 9 joint venture manufacturing
facilities located in Vienna, Austria; Pons and Le Goulet, France; Bendorf
and Wuelfrath, Germany; Ulsan, South Korea; Alvsjo, Sweden and St. Gallen,
Switzerland.
SPECIALTY POLYMERS AND ADHESIVES - This business group manufactures
and sells adhesive systems to the building and construction,
transportation, and packaging and converting markets. Key technologies
include: emulsion polymer isocyanate adhesives for structural wood bonding;
elastomeric polymer adhesives and butyl rubber roofing tapes for commercial
roofing applications; polyurethane and epoxy structural adhesives for
bonding fiberglass reinforced plastics, composites, thermoplastics and
metals in automotive, recreational, and industrial applications; specialty
phenolic resins for paper impregnation and friction material bonding;
induction bonding systems for thermoplastic materials; acrylic polymers for
pressure-sensitive adhesives; urethane adhesives for flexible packaging
applications; and hot melt adhesives for various packaging applications. It
has manufacturing plants in Calumet City, Illinois; Norwood and Totowa, New
Jersey; Ashland and Columbus, Ohio; White City, Oregon; and Kidderminster,
England.
WATER CHEMISTRY
DREW INDUSTRIAL - This business group supplies 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 and mining industries and
additives to manufacturers of latex and paint. It conducts operations
throughout North America, Europe and the Far East and has manufacturing
plants in Kearny, New Jersey; Houston, Texas; Ajax, Ontario, Canada;
Viiala, Finland; Somercotes, England; Sydney, Australia; and Singapore;
and, through separate joint ventures, has production facilities in Seoul,
South Korea and Navi Mumbai, India.
DREW MARINE - This business group supplies technical products and
services for the global marine industry. Products and services worldwide
include a comprehensive line of marine chemicals and water treatment
testing, sealing products, welding and refrigeration products, and
firefighting, safety and rescue products for the world's merchant marine
fleet.
DISCONTINUED OPERATIONS
ELECTRONIC CHEMICALS - This business group was a leading manufacturer
and marketer of a variety of electronic materials and services for the
worldwide semiconductor industry. On August 29, 2003, Ashland completed the
sale of its Electronic Chemicals business in a cash transaction valued at
approximately $300 million.
OTHER MATTERS
For information on Ashland Distribution and Ashland Specialty Chemical
and federal, state and local statutes and regulations governing releases
into, or protection of, the environment, see "Item 1. Business -
Miscellaneous - Environmental Matters" and "Item 3. Legal Proceedings -
Environmental Proceedings" in this annual report on Form 10-K.
VALVOLINE
The Valvoline Company, a division of Ashland, is a marketer of
premium-branded automotive and commercial oils, automotive chemicals,
automotive appearance products and automotive services, with sales in more
than 120 countries. The Valvoline(R) trademark was federally registered in
1873 and is the oldest trademark for a lubricating oil in the United
States. Valvoline is comprised of the following business units:
3
NORTH AMERICAN: DO IT YOURSELF ("DIY") and DO IT FOR ME ("DIFM") - In
the United States and Canada, Valvoline markets premium automotive
lubricants and chemicals to the U.S. private passenger car and light truck
market through two large business units based on the consumer segments of
the market, "Do-It-Yourself" and "Do-It-For-Me." These two business units
market Valvoline(R) motor oil, one of the top selling brands in the United
States; synthetic SynPower(R) automotive chemicals; Eagle One(R) automotive
appearance products; Zerex(R) antifreeze; and Pyroil(R) automotive
chemicals. The DIY business unit 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. The DIFM business unit sells Valvoline
products to installers (such as car dealers and quick lubes) through a
network of independent distributors, 5 company-owned and operated "direct
market" operations and directly to large national account installers. This
business unit also established a chain of quick lubes branded "Valvoline
Express Care(R)." This chain consists of approximately 300 stores which are
independently owned and operated.
The DIFM business unit also has a strategic alliance with Cummins
Engine Company, Inc. ("Cummins") to distribute heavy-duty lubricants to the
commercial market. This business unit marketed R-12, an automotive
refrigerant that was phased out of production in 1995. Valvoline depleted
its inventory of R-12 in fiscal 2003.
EAGLE ONE - Eagle One markets its brand of premium automobile
appearance chemicals for "above-the-hood" applications. Products include
waxes, polishes, wheel cleaners and tire shine products. Eagle One markets
its products in North America through Valvoline's DIY and DIFM business
units and internationally through the Valvoline International business
unit.
VALVOLINE INTERNATIONAL - Valvoline International markets Valvoline
and Eagle One branded products through wholly-owned affiliates, joint
ventures, licensees, and independent distributors in over 120 countries
around the world. The profitability of the business is balanced
geographically, with over half of the profit coming from mature markets in
Europe and Australia. There are smaller, but rapidly growing, businesses in
emerging markets of China, India, and Mexico, including joint ventures with
Cummins in India and China. These businesses market lubricants for
servicing heavy duty engines and equipment. Supply for these businesses
comes from toll manufacturers and from company-owned plants in the United
States, Australia, and the Netherlands.
VALVOLINE INSTANT OIL CHANGE(R) ("VIOC") - VIOC is one of the largest
competitors in the expanding U.S. "fast oil change" service business,
providing Valvoline with a significant share of the installed segment of
the passenger car and light truck motor oil market. As of September 30,
2003, 357 company-owned and 372 franchised service centers were operating
in 38 states.
VIOC has continued its customer service innovation through its
upgraded and enhanced Maximum Vehicle Performance program ("MVP"). MVP is a
computer-based program that maintains system-wide service records on all
customer vehicles. MVP also contains a database on all car models, which
allows employees to make service recommendations based on a vehicle owner's
manual recommendations.
REFINING AND MARKETING
Refining and Marketing operations are conducted by MAP and its
subsidiaries, including its wholly-owned subsidiaries, Speedway
SuperAmerica LLC and Marathon Ashland Pipe Line LLC. MAP also participates
in the travel center business through its joint venture with Pilot
Corporation ("Pilot"). Marathon Oil Company ("Marathon") holds a 62%
interest in MAP and Ashland holds a 38% interest in MAP.
REFINING
MAP owns and operates seven refineries with an aggregate refining
capacity of 935,000 barrels of crude oil per calendar day (1 barrel = 42
United States gallons). The table below sets forth the location and daily
crude oil throughput capacity (measured in barrels) of each of MAP's
refineries as of September 30, 2003:
Garyville, Louisiana...........................................232,000
Catlettsburg, Kentucky.........................................222,000
Robinson, Illinois.............................................192,000
Detroit, Michigan.............................................. 74,000
Canton, Ohio................................................... 73,000
Texas City, Texas.............................................. 72,000
St. Paul Park, Minnesota....................................... 70,000
--------
Total ....................................................935,000
========
4
MAP's refineries include crude oil atmospheric and vacuum
distillation, fluid catalytic cracking, catalytic reforming,
desulfurization and sulfur recovery units. The refineries have the
capability to process a wide variety of crude oils and to produce typical
refinery products, including reformulated gasoline ("RFG"). In addition to
typical refinery products, the Catlettsburg refinery, an ISO-9000 certified
facility, manufactures base lube oil stocks and a wide range of
petrochemicals. For the twelve months ended September 30, 2003, 66% of
MAP's base lube oil production was purchased by Valvoline and 41% of MAP's
petrochemical production (excluding propylene) was purchased by Ashland
Distribution.
MAP also produces a wide range of asphalt products, petroleum pitch
aromatics, slack wax, extract and polymer grade propylene.
The table below sets forth MAP's refinery total input and refinery
production by product group for the three years ended September 30, 2003.
Refinery total inputs include crude oil and other feedstocks.
Years Ended September 30
---------------------------------------------------------
2003 2002 2001
---- ---- ----
Refinery Input
--------------
(in thousands of barrels per day) 1,033.1 1,080.9 1,051.0
---------------------------------
Refined Product Yields
----------------------
(in thousands of barrels per day)
---------------------------------
Gasoline..................... 553.9 594.0 560.5
Distillates.................. 278.4 292.9 278.7
Propane...................... 20.7 21.7 21.2
Feedstocks & Special Products 87.6 83.5 69.9
Heavy Fuel Oils.............. 23.1 21.3 44.7
Asphalt...................... 70.5 73.3 74.5
------- ------- ---------
Total............. 1,034.2 1,086.7 1,049.5
======= ======= =========
Planned maintenance activities requiring temporary shutdown of certain
refinery operating units are periodically performed at each refinery. MAP
initiated major turnarounds at the Robinson, Texas City and Garyville
refineries in the year ended September 30, 2003.
At its Catlettsburg, Kentucky refinery, MAP continues to make progress
on an approximately $400 million multi-year integrated investment program
to upgrade product yield realizations and reduce fixed and variable
manufacturing expenses. This program involves the expansion, conversion and
retirement of certain refinery processing units which, in addition to
improving profitability, will reduce the refinery's total gasoline pool
sulfur below 30 parts per million, thereby eliminating the need for
additional low sulfur gasoline compliance investments at the refinery based
on current regulations. The project is expected to be completed in the
March quarter of 2004.
MAP has announced approximately $300 million in new capital projects
for its Detroit, Michigan refinery. One of the projects, a $110 million
expansion project, is expected to raise the crude oil throughput at the
refinery by 35% to 100,000 barrels per day. Other projects are expected to
enable the refinery to produce new clean fuels and further control
regulated air emissions. Construction is expected to start in early 2004,
with completion scheduled for 2005. MAP will be obtaining financing to fund
these capital projects.
MARKETING
MAP's principal marketing areas for gasoline and distillates include
the Midwest, the upper Great Plains and the southeastern United States.
Gasoline and distillates are sold in 21 states. Gasoline is sold at
wholesale primarily to independent marketers, jobbers and chain retailers
who resell these products through several thousand retail outlets. MAP also
supplies approximately 3,850 jobber-dealer, open-dealer and lessee-dealer
locations using the Marathon(R) and Ashland(R) brand names.
Gasoline, distillates and aviation products are also sold to
utilities, railroads, river towing companies, commercial fleet operators,
airlines and governmental agencies. About one-half of MAP's propane is sold
into the home heating markets and the balance is purchased by industrial
consumers. Propylene and petrochemicals are marketed to customers in the
chemical industry. Base lube oils, slack wax and extract are sold
throughout the United States. Pitch is also sold domestically, but
approximately 12% of pitch products are exported into growing markets in
Canada, Mexico, India, and South America.
5
MAP markets asphalt through owned and leased terminals located
throughout the Midwest and Southeast. The MAP customer base includes
approximately 900 asphalt paving contractors, government entities (states,
counties, cities and townships) and asphalt roofing shingle manufacturers.
Retail sales of gasoline and diesel fuel are made through MAP's
wholly-owned subsidiary, Speedway SuperAmerica LLC ("SSA"). As of September
30, 2003, SSA had 1,791 retail outlets in 9 states in the Midwest which
sell petroleum products and convenience store merchandise primarily under
the brand names Speedway(R) and SuperAmerica(R). The retail locations sell
a variety of food, merchandise, cigarettes, candy and beverages. Several
locations also have on-premises brand-name restaurants.
During the twelve months ended September 30, 2003, 62% of SSA's
revenues (excluding excise taxes) were derived from the sale of gasoline
and diesel fuel, and the remainder were derived from the sale of
merchandise.
Pilot Travel Centers LLC ("PTC") is the largest operator of travel
centers in the United States with approximately 260 locations in 34 states.
The travel centers offer diesel fuel, gasoline and a variety of other
services associated with such locations, including on-premises brand-name
restaurants. In February 2003, PTC purchased 60 retail travel centers
located in 15 states, primarily in the Midwest, Southeast and Southwest.
Pilot and MAP each own a 50% interest in PTC.
MAP's retail marketing strategy is focused on SSA's Midwest
operations, additional growth in the Marathon(R) brand and continued growth
for PTC.
The table below shows the volume of MAP's consolidated refined product
sales for the three years ended September 30, 2003.
Years Ended September 30
-------------------------------------------------
2003 2002 2001
---- ---- ----
Refined Product Sales
---------------------
(in thousands of barrels per day)
---------------------------------
Gasoline.......................... 772.4 774.3 741.0
Distillates....................... 360.6 345.7 349.6
Propane........................... 20.3 22.7 21.5
Feedstocks & Special Products .... 94.9 80.3 68.1
Heavy Fuel Oils................... 23.2 22.0 46.3
Asphalt........................... 73.2 76.2 75.8
------- ------- -------
Total......... 1,344.6 1,321.2 1,302.3
======= ======= =======
Matching Buy/Sell Volumes
included in above..................... 68.3 69.3 43.7
MAP sells RFG in parts of its marketing territory, primarily Chicago,
Illinois; Louisville, Kentucky; Northern Kentucky; and Milwaukee,
Wisconsin. MAP also markets low-vapor-pressure gasolines in nine states.
SUPPLY AND TRANSPORTATION
The crude oil processed in MAP's refineries is obtained from
negotiated contract and spot purchases or exchanges. For the year ended
September 30, 2003, MAP's negotiated contract and spot purchases for
refinery input of crude oil produced in the United States averaged 403,400
barrels per day, including an average of 33,700 net barrels per day
acquired from Marathon. For the year ended September 30, 2003, MAP's
foreign crude oil requirements were met largely through purchases from
various foreign national oil companies, producing companies and traders.
Purchases of foreign crude oil represented 55% of MAP's crude oil
requirements for the year ended September 30, 2003.
MAP's ownership or interest in domestic pipeline systems in its
refining and marketing areas is significant. MAP owns, leases or has an
ownership interest in 6,786 miles of pipelines in 12 states. This network
transports crude oil and refined products to and from terminals, refineries
and other pipelines and includes 3,073 miles of crude oil trunk lines and
3,713 miles of refined product lines.
MAP has a 46.7% ownership interest in LOOP LLC ("LOOP"), which is the
owner and operator of the only U.S. deepwater port facility capable of
receiving crude oil from very large crude carriers. Ashland has retained a
4% ownership interest in LOOP. MAP also owns a 49.9% ownership interest in
LOCAP LLC ("LOCAP"), which is the owner and operator of a crude oil
pipeline connecting LOOP to the Capline system. Ashland has retained an
8.62% ownership interest in LOCAP. In addition, MAP has a 37.2% ownership
interest in the Capline system. These port and pipeline systems provide MAP
with access to common carrier transportation from the Louisiana Gulf Coast
to
6
Patoka, Illinois. At Patoka, the Capline system connects with other common
carrier pipelines owned by MAP that provide transportation to MAP's
refineries in Illinois, Kentucky, Michigan, Minnesota and Ohio.
Ohio River Pipe Line LLC ("ORPL"), a subsidiary of MAP, is building a
pipeline from Kenova, West Virginia to Columbus, Ohio. The pipeline will be
an interstate common carrier pipeline. The pipeline will be known as
Cardinal Products Pipeline and is expected to initially move about 36,000
barrels per day of refined petroleum into the central Ohio region. The
majority of the construction work on the pipeline has been completed, with
start-up of the pipeline expected late in the quarter ending December 31,
2003.
In February 2003, MAP increased its ownership in Centennial Pipeline
LLC from 33.3% to 50%. The remaining 50% is owned by TE Products Pipeline
Company, Limited Partnership.
MAP also has a 33.3% ownership interest in Minnesota Pipe Line
Company, which operates a crude oil pipeline in Minnesota. Minnesota Pipe
Line Company provides MAP with access to crude oil common carrier
transportation from Clearbrook, Minnesota, to Cottage Grove, Minnesota,
which is in the vicinity of MAP's St. Paul Park, Minnesota refinery.
MAP's marine transportation operations include towboats and barges
that transport refined products on the Ohio, Mississippi and Illinois
rivers, their tributaries and the Intracoastal Waterway. MAP also leases
and owns railcars in various sizes and capacities for movement and storage
of petroleum products and a large number of tractors, tank trailers and
general service trucks.
In addition, MAP owns and operates 87 terminal facilities from which
it sells a wide range of petroleum products. These facilities are supplied
by a combination of barges, pipeline, truck and/or rail.
OTHER MATTERS
For information on MAP and federal, state and local statutes and
regulations governing releases into the environment or protection of the
environment, see "Item 1. Business - Miscellaneous - Environmental Matters"
in this annual report on Form 10-K.
In connection with the formation of MAP, Ashland and Marathon entered
into a Put/Call, Registration Rights and Standstill Agreement (the
"Put/Call Agreement"). The Put/Call Agreement provides that at any time
after December 31, 2004, Ashland will have the right to sell to Marathon
all of Ashland's ownership interest in MAP, for an amount in cash and/or
Marathon debt or equity securities equal to the product of 85% (90% if
equity securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could be made
at closing, or, at Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any time after December
31, 2004, Marathon will have the right to purchase Ashland's ownership
interest in MAP, for an amount in cash equal to the product of 115% of the
fair market value of MAP at that time, multiplied by Ashland's percentage
interest in MAP.
MISCELLANEOUS
ENVIRONMENTAL MATTERS
Ashland has implemented a company-wide 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 maintain
environmental compliance in accordance with applicable laws and
regulations. This responsibility is carried out via training; widespread
communication of EH&S policies, information and regulatory updates;
formulation of relevant policies, procedures and work practices; design and
implementation of EH&S management systems; internal auditing by an
independent auditing group within the EH&S department; monitoring of
legislative and regulatory developments that may affect Ashland's
operations; assistance to the operating divisions in identifying compliance
issues and opportunities for voluntary actions that go beyond compliance;
and incident response planning and implementation.
Federal, state and local laws and regulations relating to the
protection of the environment have a significant impact on how Ashland
conducts its businesses. New laws are being enacted and regulations are
being adopted by various regulatory agencies on a continuing basis, and the
costs of compliance with these new rules cannot be estimated until the
manner in which they will be implemented has been more accurately defined.
In addition, most foreign countries in which Ashland conducts business have
laws dealing with similar matters.
At September 30, 2003, Ashland's reserves for environmental
remediation amounted to $174 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
7
studies, probability techniques, historical experience and other factors
are used to identify and evaluate remediation alternatives and their
related costs in determining the estimated reserves for environmental
remediation. Environmental remediation reserves are subject to numerous
inherent uncertainties that affect Ashland's ability to estimate its share
of the costs. Such uncertainties involve the nature and extent of
contamination at each site, the extent of required cleanup efforts under
existing environmental regulations, widely varying costs of alternate
cleanup methods, changes in environmental regulations, the potential effect
of continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as environmental remediation
continues. No individual remediation location is material to Ashland as its
largest reserve for any site is less than 10% of the remediation reserve.
As a result, Ashland's exposure to adverse developments with respect to any
individual site is not expected to be material, and these sites are in
various stages of ongoing remediation. Although environmental remediation
could have a material effect on results of operations if a series of
adverse developments occurs in a particular quarter or fiscal year, Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.
In connection with the formation of MAP, Marathon and Ashland each
retained responsibility for certain environmental costs arising out of
their respective prior ownership and operation of the facilities
transferred to MAP. In certain situations, various threshold provisions
apply, eliminating or reducing the financial responsibility of the
contributing party until certain levels of expenditure have been reached.
In other situations, sunset provisions gradually diminish the level of
financial responsibility of the contributing party over time.
AIR - 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. Ashland's businesses maintain numerous
permits pursuant to these clean air laws and have implemented systems to
oversee ongoing compliance efforts.
In July 1997, the USEPA promulgated revisions to the National Ambient
Air Quality Standards ("NAAQS") for ground level ozone and particulate
matter which could have a significant effect on certain of Ashland's
chemical manufacturing and distribution businesses, and on MAP. The USEPA
has begun to implement the new ozone and particulate matters standards,
which could result in areas of the country, where Ashland and MAP conduct
operations, being designated as not in compliance with the NAAQS. Until
these revisions have been more fully implemented, it is not currently
possible to estimate any potential financial impact that the revised
standards may have on Ashland's or MAP's operations.
WATER - Ashland's businesses maintain numerous discharge permits, as
the National Pollutant Discharge Elimination System of the Clean Water Act
and state programs require, and have implemented systems to oversee their
compliance efforts. In addition, several of MAP's operations, in particular
its barge and terminal facilities, are regulated under the Oil Pollution
Act of 1990.
SOLID WASTE - Ashland's businesses are subject to the Resource
Conservation and Recovery Act ("RCRA"), which establishes standards for the
management of solid and hazardous wastes. 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.
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. MAP operates, and in the past has
operated, certain retail outlets where, during the normal course of
business, releases of petroleum products from underground storage tanks
have occurred. Federal and state laws require that contamination caused by
such releases at these sites be assessed and, if necessary, remediated to
meet applicable standards.
RESEARCH
Ashland conducts a program of research and development to invent and
improve products and processes and to improve environmental controls for
its existing facilities. It maintains research facilities in Dublin, Ohio;
Lexington, Kentucky; and Atlanta, Georgia. Research and development costs
are expensed as they are incurred and totaled $36 million in fiscal 2003
($34 million in 2002 and $33 million in 2001).
8
COMPETITION
In all its operations, Ashland is subject to intense competition both
from companies in the industries in which it operates and from products of
companies in other industries.
The majority of the business for which APAC competes is obtained by
competitive bidding. There are a substantial number of competitors in the
markets in which APAC operates and, as a result, all of APAC's goods and
services are marketed under highly competitive conditions. Factors which
influence APAC's competitiveness are price, reputation for quality, the
availability of aggregate materials, the geographic location of plants and
aggregate materials, machinery and equipment, knowledge of local market
conditions and estimating abilities.
Each of Ashland Distribution's lines of business (chemicals, plastics,
ingredients, composites, and environmental services), competes with
national, regional and local companies throughout North America. The
plastics distribution business also competes in Europe. Competition within
each line of business is based primarily on price and reliability of
supply.
Ashland Specialty Chemical's businesses compete globally in selected
niche markets, largely on the basis of technology and service. The number
of competitors in the specialty chemical business varies from product to
product, and it is not practical to identify such competitors because of
the broad range of products and markets served by those products. However,
many of Ashland Specialty Chemical's businesses hold proprietary
technology, and Ashland believes it has a leading or strong market position
in most of its specialty chemical products. Ashland Specialty Chemical's
petrochemicals business is largely a commodities business, with pricing and
quality being the most important factors.
Valvoline competes in the highly competitive lubricants business
principally through premium products and services, distribution capability,
a focused "master" brand strategy, advertising and sales promotion. Some of
the major brands of motor oils and lubricants Valvoline competes with
internationally are Havoline(R), Castrol(R), Pennzoil(R) and Quaker
State(R). The highly competitive consumer products car care business is
primarily composed of maintenance chemicals, appearance products and tire
cleaners. Valvoline competes primarily in this market through specific
product performance benefits, distribution capability and advertising and
sales promotion. In the highly competitive "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; increasing market
presence through VIOC and Valvoline Express Care outlets; as well as
quality of service, speed, location, convenience and sales promotion.
MAP competes with a large number of companies to acquire crude oil for
refinery processing and in the distribution and marketing of a full array
of petroleum products. MAP believes it ranks among the top ten U.S.
petroleum companies on the basis of crude oil refining capacity as of
September 30, 2003. MAP competes in four distinct markets for the sale of
refined products - wholesale, spot, branded and retail distribution. MAP
believes it competes with approximately 40 companies in the wholesale
distribution of petroleum products to private brand marketers and large
commercial and industrial consumers; approximately 80 companies in the sale
of petroleum products in the spot market; approximately 10
refiner/marketers in the supply of branded petroleum products to dealers
and jobbers; and approximately 600 petroleum product retailers in the
retail sale of petroleum products. MAP also competes in the convenience
store industry through SSA's retail outlets and in the travel center
industry through its ownership in PTC. The retail outlets offer consumers
gasoline, diesel fuel (at selected locations) and a variety of food,
merchandise, cigarettes, candy and beverages.
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 which
could cause actual results to differ materially from those contained in
such statements are discussed under "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
revenues and operations see "Item 1. Business - Miscellaneous - Marketing
Conditions" below.
9
MARKETING CONDITIONS
Domestic and international political, legislative, regulatory and
legal changes may adversely affect Ashland's results of operations.
Political actions may include changes in the policies of the Organization
of Petroleum Exporting Countries or other developments involving or
affecting oil-producing countries, including terrorist activities, military
conflict, embargoes, internal instability or actions or reactions of the
U.S. government in anticipation of, or in response to, such actions.
Profitability of MAP depends largely on the margin between the cost of
crude oil and other feedstocks refined and the selling prices of refined
products. MAP is a purchaser of crude oil in order to satisfy its refinery
throughput requirements. As a result, MAP's overall profitability could be
adversely affected by increases in crude oil and other feedstock prices
that are not recovered in the market place through higher prices. Reference
should be made to the Refining and Marketing section of the Management's
Discussion and Analysis section in this annual report on Form 10-K for a
discussion of the impact of crude oil costs on MAP's operating performance.
While Ashland maintains reserves for anticipated liabilities and carries
various levels of insurance, Ashland could be affected by civil, criminal,
regulatory or administrative proceedings and claims relating to asbestos,
environmental remediation and other matters. Additional information
concerning Ashland's asbestos-related litigation and environmental
remediation may be found in Note M of Notes to Consolidated Financial
Statements in this annual report on Form 10-K.
Ashland's operations are 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
violation of these laws and regulations occur, Ashland may be forced to pay
substantial fines, to complete additional costly projects, or to modify or
curtail its operations to limit contaminant emissions.
The profitability of Ashland's businesses is particularly susceptible
to downturns in the economy, particularly downturns in the segments of the
U.S. economy related to the purchase and sale of durable goods, including
housing, construction, automotive, and marine. Both overall demand for
Ashland's products and its profit margins may decline as a direct result of
an economic recession, inflation, changes in the prices of hydrocarbons and
other raw materials (e.g., crude oil and petroleum and chemical products),
consumer confidence, interest rates or governmental fiscal policies. In
addition, Ashland's profitability may experience significant changes as a
result of variations in sales, changes in product mix or pricing
competition.
In addition, changes in climate and weather can significantly affect
the performance of several of Ashland's operations. Extreme variations from
normal climatic conditions could have a significant effect on the operating
results of APAC's construction operations. In particular, unfavorable
weather conditions will delay the completion of construction projects and
may require the use of additional resources. In addition, most of the
refined products sold by MAP and Valvoline are seasonal in nature, and thus
demand for those products may decline due to significant changes in
prevailing climate and weather conditions. MAP's production or distribution
operations are also subject to disruption by extreme weather conditions
such as floods, frozen rivers or hurricanes. In addition, adverse weather
conditions which impair driving conditions, such as winter storms, can
result in reduced retail sales of gasoline.
ITEM 2. PROPERTIES
Ashland's corporate headquarters, which is leased, is located in
Covington, Kentucky. Principal offices of other major operations are
located in Atlanta, Georgia (APAC); Dublin, Ohio (Ashland Distribution and
Ashland Specialty Chemical); Lexington, Kentucky (Valvoline); and Russell,
Kentucky (Administrative Services). All of these offices are leased, except
for the Russell office, which is 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 F of Notes to Consolidated Financial Statements
in this annual report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - (1) Under the federal Comprehensive
Environmental Response Compensation and Liability Act (as amended) and
similar state laws, Ashland may be subject to joint and several liability
for clean-up costs in connection with alleged releases of hazardous
substances at sites where it has been identified as a "potentially
responsible party" ("PRP"). As of September 30, 2003, Ashland had been
named a PRP at 100 waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the USEPA or a state agency, in which Ashland is typically
participating as a member of a PRP group.
10
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 M of
Notes to Consolidated Financial Statements and "Item 1. Business -
Miscellaneous - Environmental Matters" in this annual report on Form 10-K.
(2) On May 13, 2002, Ashland entered into a plea agreement with the
U.S. Attorney's Office for the District of Minnesota and the Environmental
Crimes Section of the U.S. Department of Justice regarding a May 16, 1997
sewer fire at the St. Paul Park, Minnesota refinery, which is now owned by
MAP. As part of the plea agreement, Ashland entered guilty pleas to two
federal misdemeanors, paid a $3.5 million fine related to violations of the
CAA, paid $3.55 million as restitution to the employees injured in the
fire, and paid $200,000 as restitution to the responding rescue units.
Ashland also agreed to complete certain upgrades to the St. Paul Park
refinery's process sewers, junction boxes and drains to meet standards
established by Subpart QQQ of the New Source Performance Standards of the
CAA (the "Refinery Upgrades").
In addition, as part of the plea agreement, Ashland entered into a
deferred prosecution agreement, wherein prosecution of a separate count of
the indictment charging Ashland with violating Subpart QQQ was deferred for
four years. The deferred prosecution agreement provides that if Ashland
satisfies the terms and conditions of the plea agreement and completes the
Refinery Upgrades, the deferred prosecution agreement will terminate and
the United States will dismiss that count with prejudice. If, however, it
is determined by the court that Ashland willfully violated any term or
condition of the plea agreement during the deferral period, the United
States may re-initiate prosecution of the deferred count of the indictment,
using an admission made by Ashland for purposes of the plea agreement that
Ashland knowingly operated the St. Paul Park refinery in violation of
certain Subpart QQQ standards.
As part of its sentence, Ashland was placed on probation for five
years. The primary condition of probation is an obligation not to commit
future federal, state, or local crimes. If Ashland were to commit such a
crime, it would be subject not only to prosecution for that new violation,
but the government could also seek to revoke Ashland's probation. The
probation office has retained an independent environmental consultant to
review and monitor Ashland's compliance with applicable environmental
requirements and the terms and conditions of probation. The court also
included other customary terms and restrictions of probation in its
probation order.
(3) Pursuant to a 1988 RCRA Administrative Consent Order ("Consent
Order"), Ashland is remediating soil and groundwater at a former chemical
distribution facility site in Lansing, Michigan. The USEPA is asserting
that Ashland has not complied with certain provisions of the Consent Order
and has indicated that it may seek to assess penalties against Ashland.
Ashland disputes USEPA's assertions. No formal penalty proceeding has been
initiated.
ASBESTOS-RELATED LITIGATION - For information regarding liabilities
arising from asbestos-related litigation, see "Management's Discussion and
Analysis - Application of Critical Accounting Policies - Asbestos-related
litigation" and Note M of Notes to Consolidated Financial Statements in
this annual report on Form 10-K.
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 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
11
addition to the reasonable cost and expenses incurred in bringing the
complaint, including attorneys' and experts' fees.
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, 2003.
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 members of Ashland's
Executive Committee and other executive officers).
JAMES J. O'BRIEN (age 49) 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 President of The Valvoline Company.
GARY A. CAPPELINE (age 54) is Senior Vice President and Group
Operating Officer of Ashland and President of Ashland Specialty Chemical
Company, and has served in such capacities since 2003 and 2002,
respectively. During the past five years, he has also served as a chemical
industry partner at Bear Stearns Merchant Bank, President of AlliedSignal
Specialty Chemicals and Group Vice President, Pigments and Additives of
Engelhard Corp.
DAVID J. D'ANTONI (age 58) is Senior Vice President and Group
Operating Officer of Ashland and President of APAC, Inc. and has served in
such capacities since 1988, 1999 and 2003, respectively. During the past
five years, he has also served as President of Ashland Chemical Company.
DAVID L. HAUSRATH (age 51) is Vice President and General Counsel of
Ashland and has served in such capacities since 1998 and 1999,
respectively. During the past five years, he has also served as Associate
General Counsel of Ashland.
J. DAN LACY (age 56) is Vice President - Corporate Affairs of Ashland
and has served in such capacity since 1986. It is anticipated that Mr. Lacy
will retire on December 31, 2003.
J. MARVIN QUIN (age 56) is Senior Vice President and Chief Financial
Officer of Ashland and has served in such capacities since 1992.
RICHARD P. THOMAS (age 57) is Vice President and Secretary of Ashland
and has served in such capacities since 1998 and 1999, respectively. During
the past five years, he has also served as Associate General Counsel of
Ashland and Administrative Vice President and General Counsel of Ashland
Petroleum Company. It is anticipated that Mr. Thomas will retire on March
31, 2004.
KENNETH L. AULEN (age 54) is Administrative Vice President and
Controller of Ashland and has served in such capacities since 1992. It is
anticipated that Mr. Aulen will retire in the March quarter of fiscal 2004.
SAMUEL J. MITCHELL (age 42) is Vice President of Ashland and President
of The Valvoline Company and has served in such capacities since 2002.
During the past five years, he has also served as Vice President - Retail
Business, Vice President of Marketing and Director of Marketing - The
Valvoline Company.
FRANK L. WATERS (age 42) is Vice President of Ashland and President of
Ashland Distribution Company and has served in such capacities since 2002.
During the past five years, he has also served as Vice President of Ashland
Plastics - Europe and Director of Sales for Ashland Distribution's Fine
Ingredients Division.
Each executive officer is elected by the Board of Directors of Ashland
to a term of one year, or until his successor is duly elected, at the
annual meeting of the Board of Directors, except in those instances where
the officer is elected other than at an annual meeting of the Board of
Directors, in which case his 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 STOCK AND RELATED SECURITY
HOLDER MATTERS
There is hereby incorporated by reference the information appearing in
Note P of Notes to Consolidated Financial Statements in this annual report
on Form 10-K.
12
At September 30, 2003, there were approximately 16,800 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, Cincinnati, Pacific and Philadelphia stock
exchanges.
ITEM 6. SELECTED FINANCIAL DATA
See Five-Year Selected Financial Information on page F-26.
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-12.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Quantitative and Qualitative Disclosures About Market Risk on
pages M-11 and M-12.
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
(a) As of September 30, 2003, 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 fiscal quarter ended September 30, 2003 that have
materially affected, or are reasonably likely to materially
affect, Ashland's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear
under the caption "Ashland Inc.'s Board of Directors - Nominees for
Election at the 2004 Annual Meeting" and the information regarding Section
16 beneficial ownership reporting compliance in Ashland's definitive Proxy
Statement for its January 29, 2004 Annual Meeting of Shareholders, which
will be filed with the SEC within 120 days after September 30, 2003 ("Proxy
Statement"). 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.
Ashland has adopted a Code of Business Conduct (the "Code"). The Code
applies to Ashland's directors, all employees of Ashland and its subsidiary
companies, including the principal executive officer, principal financial
officer, principal accounting officer and persons performing similar
functions ("Key Personnel"). The Code is posted on Ashland's website.
Ashland will satisfy any disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, any provision of the Code with
respect to its Key Personnel or directors by disclosing the nature of such
amendment or waiver on its website or in a current report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear
under the captions "Executive Compensation," "Compensation of Directors"
and "Miscellaneous - Personnel and Compensation Committee Interlocks and
Insider Participation" in Ashland's Proxy Statement.
13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
There is hereby incorporated by reference the information to appear
under the caption "Ashland Common Stock Ownership of Directors and Certain
Officers of Ashland" and the information regarding the ownership of
securities of Ashland 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, 2003. Except
as disclosed in the narrative to the table, all plans were approved by
shareholders of Ashland.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Plan Category Number of securities to Weighted-average future issuance under
------------- be issued upon exercise exercise price of equity compensation
of outstanding options, outstanding options, plans(excluding
warrants and rights warrants and rights securities reflected in
------------------- -------------------- column (a))
-----------
(a) (b) (c)
Equity compensation plans
approved by security 6,971,774 $37.56 2,712,816 (2)
holders.....................
Equity compensation plans
not approved by security 835,291 $33.89 0
holders (1)................. --------- ------ ---------
Total............... 7,807,065 $37.17 2,712,816
========= ====== =========
(1) The Ashland Inc. Stock Option Plan for Employees of Joint Ventures
is the only equity compensation plan of Ashland not approved by
Ashland's shareholders. This plan was approved by Ashland's Board
of Directors on September 17, 1998 and is specifically designed to
grant stock options 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
authorizes the issuance of the shares at the time the stock
options are granted. A recipient of such stock options will have
the right to purchase Ashland Common Stock at a price and on terms
specified by the Personnel and Compensation Committee of Ashland's
Board of Directors. The stock options listed in the table above
have been granted to certain MAP employees and were registered
with the SEC.
(2) Includes 489,074 shares available for issuance under the Deferred
Compensation Plan for Employees, and 364,154 shares available for
issuance under the Deferred Compensation Plan for Non-Employee
Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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
"Item 2: Ratification of Auditors" and "Audit Committee Report" in
Ashland's Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
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.
14
(3) Exhibits
3.1 Third Restated Articles of Incorporation of Ashland (filed as
Exhibit 3 to Ashland's Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference).
3.2 By-laws of Ashland, effective as of November 15, 2002 (filed as
Exhibit 3.2 to Ashland's annual report on Form 10-K for the fiscal
year ended September 30, 2002 and incorporated herein by
reference).
4.1 Ashland agrees to provide the SEC, upon request, copies of
instruments defining the rights of holders of long-term debt of
Ashland and all of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed with
the SEC.
4.2 Indenture, dated as of August 15, 1989, as amended and restated as
of August 15, 1990, between Ashland and Citibank, N.A., as Trustee
(filed as Exhibit 4.2 to Ashland's annual report on Form 10-K for
the fiscal year ended September 30, 2001 and incorporated herein
by reference).
4.3 Indenture, dated as of September 7, 2001, between Ashland and U.S.
Bank National Association, as Trustee (filed as Exhibit 4.3 to
Ashland's annual report on Form 10-K for the fiscal year ended
September 30, 2001 and incorporated herein by reference).
4.4 Rights Agreement, dated as of May 16, 1996, between Ashland Inc.
and the Rights Agent, together with Form of Right Certificate
(filed as Exhibit 4.4 to Ashland's annual report on Form 10-K for
the fiscal year ended September 30, 2001 and incorporated herein
by reference).
The following Exhibits 10.1 through 10.12 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 Amended Stock Incentive Plan for Key Employees of Ashland Inc. and
its Subsidiaries (filed as Exhibit 10.1 to Ashland's annual report
on Form 10-K for the fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.2 Ashland Inc. Deferred Compensation Plan for Non-Employee Directors
(filed as Exhibit 10.2 to Ashland's Form 10-Q for the quarter
ended June 30, 2003 and incorporated herein by reference).
10.3 Ashland Inc. Deferred Compensation Plan (filed as Exhibit 10.1 to
Ashland's Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference).
10.4 Eleventh Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees (filed as Exhibit 10.3 to
Ashland's Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference).
10.5 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).
10.6 Form of Ashland Inc. Executive Employment Contract between Ashland
Inc. and certain executives of Ashland (filed as Exhibit 10.6 to
Ashland's annual report on Form 10-K for the fiscal year ended
September 30, 2002 and incorporated herein by reference).
10.7 Form of Indemnification Agreement between Ashland Inc. and members
of its Board of Directors.
10.8 Ashland Inc. Nonqualified Excess Benefit Pension Plan (filed as
Exhibit 10.4 to Ashland's Form 10-Q for the quarter ended June 30,
2003 and incorporated herein by reference).
10.9 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).
10.10 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).
15
10.11 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).
10.12 Amended and Restated Ashland Inc. Incentive Plan (filed as Exhibit
10.15 to Ashland's annual report on Form 10-K for the fiscal year
ended September 30, 2002 and incorporated herein by reference).
10.13 Amended and Restated Limited Liability Company Agreement of
Marathon Ashland Petroleum LLC dated as of December 31, 1998
(filed as Exhibit 10.17 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 1999 and incorporated
herein by reference).
10.14 Put/Call, Registration Rights and Standstill Agreement as amended
to December 31, 1998 among Marathon Oil Company, USX Corporation,
Ashland Inc. and Marathon Ashland Petroleum (filed as Exhibit
10.18 to Ashland's annual report on Form 10-K for the fiscal year
ended September 30, 1999 and incorporated herein by reference).
11 Computation of Earnings Per Share (appearing on page F-9 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 auditors.
24 Power of Attorney, including resolutions of the Board of
Directors.
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.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(B) REPORTS ON FORM 8-K
During the quarter ended September 30, 2003, and between such date and
the filing of this annual report on Form 10-K, Ashland filed or furnished
the following reports on Form 8-K.
(1) A report on 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.
(2) A report on Form 8-K dated July 22, 2003 reporting Ashland's third
quarter results.
(3) A report on Form 8-K dated July 23, 2003 containing a Regulation
FD disclosure.
(4) A report on Form 8-K dated August 20, 2003 reporting that Ashland
had signed a definitive agreement to sell the net assets of its
Electronic Chemicals business group to Air Products and Chemicals,
Inc.
(5) A report on Form 8-K dated August 27, 2003 containing a Regulation
FD disclosure.
(6) A report on Form 8-K dated August 29, 2003 reporting that Ashland
had completed the sale of its Electronic Chemicals business group
to Air Products and Chemicals, Inc.
(7) A report on Form 8-K dated October 1, 2003 containing a Regulation
FD disclosure.
(8) A report on Form 8-K dated October 21, 2003 reporting Ashland's
fourth quarter and fiscal 2003 results.
(9) A report on Form 8-K dated October 23, 2003 containing a
Regulation FD disclosure.
(10) A report on Form 8-K dated November 26, 2003, as amended by a Form
8-K/A dated November 26, 2003, containing a Regulation FD
disclosure.
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ASHLAND INC.
(Registrant)
By:
/s/ J. Marvin Quin
-----------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer
Date: December 1, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, in the capacities indicated, on December 1, 2003.
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/ KENNETH L. AULEN Administrative Vice President, Controller and
- -------------------------------------------- Principal Accounting Officer
KENNETH L. AULEN
* Director
- --------------------------------------------
ERNEST H. DREW
* Director
- --------------------------------------------
ROGER W. HALE
* Director
- --------------------------------------------
BERNADINE P. HEALY
* Director
- --------------------------------------------
MANNIE L. JACKSON
* Director
- --------------------------------------------
PATRICK F. NOONAN
* Director
- --------------------------------------------
JANE C. PFEIFFER
* Director
- --------------------------------------------
WILLIAM L. ROUSE, JR.
* Director
- --------------------------------------------
GEORGE A. SCHAEFER, JR.
17
* Director
- --------------------------------------------
THEODORE M. SOLSO
* Director
- --------------------------------------------
MICHAEL J. WARD
*By: /s/ David L. Hausrath
---------------------
David L. Hausrath
Attorney-in-Fact
Date: December 1, 2003
18
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) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
SALES AND OPERATING REVENUES
APAC $ 2,400 $ 2,652 $ 2,624
Ashland Distribution 2,804 2,535 2,849
Ashland Specialty Chemical 1,170 1,094 1,055
Valvoline 1,235 1,152 1,092
Intersegment sales (91) (85) (92)
---------- ---------- -----------
$ 7,518 $ 7,348 $ 7,528
========== ========== ===========
OPERATING INCOME
APAC $ (42) $ 122 $ 55
Ashland Distribution 32 1 35
Ashland Specialty Chemical 31 70 38
Valvoline 87 77 81
Refining and Marketing (1) 263 143 707
Corporate (105) (92) (85)
---------- ---------- -----------
$ 266 $ 321 $ 831
========== ========== ===========
OPERATING INFORMATION
APAC
Construction backlog at September 30 (millions) (2) $ 1,745 $ 1,691 $ 1,629
Hot-mix asphalt production (million tons) 32.5 36.7 36.7
Aggregate production (million tons) 28.7 31.0 28.7
Ready-mix concrete production (million cubic yards) 2.0 2.1 2.3
Ashland Distribution (3)
Sales per shipping day (millions) $ 11.1 $ 10.1 $ 11.2
Gross profit as a percent of sales 15.3% 16.1% 15.9%
Ashland Specialty Chemical (3)
Sales per shipping day (millions) $ 4.6 $ 4.3 $ 4.2
Gross profit as a percent of sales 33.7% 37.0% 34.1%
Valvoline
Lubricant sales (million gallons) 193.5 199.0 187.4
Premium lubricants (percent of U.S. branded volumes) 18.5% 16.1% 11.7%
Refining and Marketing (4)
Refinery runs (thousand barrels per day)
Crude oil refined 900 930 912
Other charge and blend stocks 133 151 139
Refined product yields (thousand barrels per day)
Gasoline 554 594 560
Distillates 278 293 279
Asphalt 71 73 75
Other 131 127 136
---------- ---------- -----------
Total 1,034 1,087 1,050
Refined product sales (thousand barrels per day) (5) 1,345 1,321 1,302
Refining and wholesale marketing margin (per barrel) (6) $ 2.59 $ 1.82 $ 5.17
Speedway SuperAmerica (SSA)
Retail outlets at September 30 1,791 2,063 2,145
Gasoline and distillate sales (million gallons) 3,423 3,622 3,587
Gross margin - gasoline and distillates (per gallon) $ .1191 $ .1040 $ .1218
Merchandise sales (millions) (7) $ 2,281 $ 2,381 $ 2,186
Merchandise margin (as a percent of sales) 24.5% 24.2% 23.3%
- --------------------------------------------------------------------------------
(1) Includes Ashland's equity income from Marathon Ashland Petroleum
LLC (MAP), amortization related to Ashland's excess investment in
MAP, and other activities associated with refining and marketing.
(2) Includes APAC's proportionate share of the backlog of
unconsolidated joint ventures.
(3) 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.
(4) Amounts represent 100% of MAP's operations, in which Ashland owns
a 38% interest.
(5) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(6) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(7) 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 $46 million in 2003, $170
million in 2002 and $128 million in 2001.
M-1
RESULTS OF OPERATIONS
Ashland's net income amounted to $75 million in 2003, $117 million in
2002 and $417 million in 2001. Income from continuing operations (which
excludes discontinued operations and the cumulative effect of accounting
changes) amounted to $94 million in 2003, $115 million in 2002 and $390
million in 2001. As discussed in Note A to the Consolidated Financial
Statements, Ashland adopted certain pronouncements of the Financial
Accounting Standards Board (FASB) during the last three years that have
resulted in changes in Ashland's accounting methods. One of those changes
was expensing of employee stock options in accordance with FASB Statement
No. 123 (FAS 123), "Accounting for Stock-Based Compensation," and its
related amendments as of October 1, 2002. A second change involved goodwill
no longer being amortized under the provisions of FASB Statement No. 142
(FAS 142), "Goodwill and Other Intangible Assets," as of October 1, 2001.
Although Ashland also adopted FASB Interpretation No. 46 (FIN 46) on July
1, 2003, FIN 46 did not have any significant effect on Ashland's income
from continuing operations.
The following table compares Ashland's reported results for the three
years ended September 30, 2003, with pro forma financial information
assuming that these changes in accounting methods occurred on October 1,
2000. Pro forma expense under FAS 123 would have amounted to $7 million in
2002 and $5 million in 2001. Ashland's segments also recognized goodwill
amortization of $41 million in 2001 ($25 million for APAC, $7 million for
Ashland Distribution, $8 million for Ashland Specialty Chemical and $1
million for Valvoline). In addition, part of Ashland's excess investment in
Marathon Ashland Petroleum LLC (MAP) was accounted for as goodwill and was
being amortized at a rate of $10 million a year prior to the adoption of
FAS 142.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
As reported $ 266 $ 321 $ 831
Pro forma 266 314 877
INCOME FROM CONTINUING OPERATIONS
As reported 94 115 390
Pro forma 94 111 432
APAC
During 2003, the APAC construction companies reported an operating
loss of $42 million, compared to income of $122 million in 2002. In many of
the states in which APAC operates, rainfall during 2003 was among the
highest levels on record in the past 109 years as measured by the National
Climatic Data Center. In addition to hampering the overall level of
construction activity, the weather conditions resulted in significant
levels of rework and created significant inefficiencies in completing the
construction work that APAC performed. Earnings from construction jobs were
down significantly, reflecting an 11% decrease in net construction revenues
(total construction revenues less subcontract costs) and a related increase
in overhead costs that were not allocated to individual jobs. As a result
of weather-related cost increases and construction delays, APAC established
reserves for job losses on several projects, including $14 million related
to a large highway construction project in Virginia. Margins of the asphalt
plants were also down due to an 11% decrease in production and
significantly higher costs for liquid asphalt and fuel. In addition, APAC
recognized an impairment charge of $9 million associated with non-strategic
businesses identified for sale. Costs associated with Project PASS, APAC's
process redesign initiative, amounted to $20 million in 2003, compared to
$17 million in 2002.
APAC generated operating income of $122 million in 2002, compared to
$55 million in 2001. The improvement reflected the net effects of better
operating results, the change in accounting for goodwill, costs associated
with APAC's business process redesign initiative, and a non-recurring
charge of $18 million in 2001 to correct previously reported earnings of
the Manassas, Virginia division. Results from construction jobs and the
asphalt plants improved, reflecting better margins. These margin
improvements resulted from more efficient production and favorable weather
conditions, lower costs for liquid asphalt, fuel and power, as well as most
of the low-margin work obtained in acquisitions being completed in 2001.
Goodwill amortization amounted to $25 million in 2001, but the expense
reduction from eliminating that amortization was largely offset by costs of
$17 million in 2002 associated with the process redesign initiative.
During an internal investigation of financial activities at APAC's
Manassas division in the March 2001 quarter, it was discovered that the
division's earnings had been intentionally overstated by $18 million. That
overstatement was corrected in 2001 and local management of the division
was replaced. Independent investigations confirmed that the problems
related primarily to the improper recognition of revenues and failure to
recognize certain costs over a period of about two years. No evidence of
any impact on, or involvement by, outside parties, customers or suppliers
was discovered.
M-2
ASHLAND DISTRIBUTION
Operating income from Ashland Distribution amounted to $32 million in
2003, compared to $1 million in 2002. Overall sales were up 11% (of which
5% came from higher volumes) despite a continuing sluggish industrial
production environment, which more than offset the effects of a reduction
in margins resulting from cost increases for petroleum-based raw materials.
Reported results for 2003 included $6 million of gains from property sales
and litigation settlements, as well as a charge of $5 million for staff
reductions under Ashland's Top-Quartile Cost Structure (TQCS) program. As
discussed below, results of Ashland Distribution for 2002 included income
of $7 million from the settlement of the sorbate antitrust litigation.
Ashland Distribution's operating income amounted to $1 million in
2002, compared to $35 million in 2001. Overall sales were off 11%,
reflecting weak markets and internal execution problems related to the
implementation of an enterprise resource planning system. Ashland
Distribution is the most sensitive of all of Ashland's businesses to
industrial output, which remained soft in comparison to prior years.
However, sales in the September 2002 quarter exceeded the amount for that
period in 2001, and were also up 13% from the low point experienced in the
December 2001 quarter. Reported results for 2002 included income of $7
million from the settlement of the sorbate class action antitrust suit,
compared to income of $11 million from a similar class action involving
citric acid in 2001. Results for 2001 also included charges of $7 million
for goodwill amortization and write-offs prior to the change in accounting.
ASHLAND SPECIALTY CHEMICAL
Operating income from Ashland Specialty Chemical amounted to $31
million in 2003, compared to $70 million in 2002. Although overall sales
were up 7%, the individual businesses reported mixed results. Earnings from
most of the core thermoset businesses (Composite Polymers, Specialty
Polymers & Adhesives and Maleic) were down, reflecting raw material cost
increases that were not completely recovered in the marketplace. However,
results from Castings Solutions and Drew Industrial were up reflecting
sales increases of 10% and 8%, combined with more stable margins. In spite
of higher sales, operating income from Drew Marine was down largely due to
the effects of the weakening U.S. dollar on margins. The sales of Drew
Marine are principally in U.S. dollars, while most of its costs are
denominated in foreign currencies. In addition, the earnings of Ashland
Specialty Chemical for 2003 included an impairment charge of $10 million
for a maleic anhydride production facility, as well as a charge of $5
million for staff reductions under Ashland's TQCS program.
Ashland Specialty Chemical's operating income increased to $70 million
in 2002, a significant increase from its recession-weakened results of $38
million in 2001. Despite softness in unit volumes, Ashland Specialty
Chemical achieved steady improvement throughout 2002. Results improved from
performance materials (unsaturated polyester resins, foundry chemicals and
adhesives) and water treatment chemicals and services. Results of Ashland
Specialty Chemical for 2001 included a charge of $8 million for goodwill
amortization and write-downs prior to the change in accounting.
VALVOLINE
Operating income from Valvoline amounted to a record $87 million in
2003, compared to $77 million in 2002. Branded lubricant volume was up
slightly, but the mix improved considerably with higher margin premium
lubricants (MaxLife, Durablend and SynPower) accounting for 18.5% of the
total in 2003, compared to 16.1% in 2002. Significant improvements were
also achieved from Valvoline International, Valvoline Instant Oil Change
(VIOC) and automotive system fluids. Valvoline International had better
volumes and margins in Europe and Australia, and their improved operating
results were further enhanced by strengthening foreign currency translation
rates. VIOC reported its second consecutive year of record earnings,
reflecting a growing number of oil changes using premium lubricants and
increased revenues from transmission, cooling, fuel and air quality system
services. Valvoline also sold its remaining inventory of R-12 refrigerant
at a small profit.
At September 30, 2003, VIOC operated 357 company-owned service
centers, compared to 363 centers in 2002 and 364 centers in 2001. The VIOC
franchising program continues to expand, with 372 centers open at September
30, 2003, compared to 335 centers in 2002 and 311 centers in 2001. VIOC's
future growth will continue to focus principally on expanding the number of
franchised rather than company-owned centers.
Valvoline's operating income was $77 million in 2002, compared to $81
million in 2001. The decline was attributable entirely to lower sales of
R-12 automotive refrigerant that contributed essentially no gross profit to
2002 results, compared to $13 million in 2001. However, strong results from
core lubricants, automotive chemicals and Valvoline International, as well
as a record year from VIOC in 2002, largely offset the reduced earnings
from sales of R-12. Lubricant volumes were up 6% and sales of premium
lubricants continued to grow. Increasing numbers of premium oil changes
also contributed to VIOC's record year. Earnings from automotive chemicals
and Valvoline International both recovered strongly from their weakened
levels in 2001.
M-3
REFINING AND MARKETING
Operating income from Refining and Marketing, which consists primarily
of equity income from Ashland's 38% ownership interest in MAP, amounted to
$263 million in 2003, compared to $143 million in 2002. Equity income from
MAP's refining and wholesale marketing operations was up $92 million,
principally reflecting an increase of 77 cents a barrel in their refining
and wholesale marketing margin and higher operating expenses. Equity income
from MAP's retail operations (Speedway SuperAmerica and a 50% interest in
the Pilot Travel Centers joint venture) increased by $20 million,
reflecting a gain of $8 million on the sale of SSA's southern stores and
higher product and merchandise margins for PTC.
Operating income from Refining and Marketing was $143 million in 2002,
down from a record $707 million in 2001. Equity income from MAP's refining
and wholesale marketing operations was down $585 million due principally to
weak refining margins. The reduction of $3.35 a barrel in MAP's refining
and wholesale marketing margin resulted from an industry-wide decline in
demand for petroleum products and a narrow differential between sweet and
sour crude oil prices. Sour crude oils typically account for about 60% of
MAP's crude oil slate. Equity income from MAP's retail operations improved
slightly, reflecting the net effects of higher sales volumes of products
and merchandise, improved merchandise margins and lower product margins.
Equity income from MAP for 2001 also included a charge of $10 million for
goodwill amortization.
CORPORATE
Corporate expenses were $105 million in 2003, $92 million in 2002 and
$85 million in 2001. The increase in such expenses in 2002 compared to 2001
resulted from additional reserves for environmental, litigation and
severance costs, which more than offset a reduction in incentive and
deferred compensation costs. The increase in 2003 compared to 2002 includes
severance and other transition costs of $19 million related to Ashland's
TQCS and other cost reduction programs, increased incentive and deferred
compensation costs and $6 million related to the expensing of employee
stock options. Those increases were partially offset by lower ongoing
administrative costs in 2003, as well as the additional reserves that were
included in 2002 costs.
NET INTEREST AND OTHER FINANCIAL COSTS
The following table summarizes the components of net interest and
other financial costs.
(In millions) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST AND OTHER FINANCIAL COSTS
Interest expense $ 123 $ 135 $ 162
Expenses on sales of accounts receivable 3 4 8
Loss on early retirement of debt - - 5
Other financial costs 3 3 2
Interest income (1) (4) (2)
---------- ----------- ----------
$ 128 $ 138 $ 175
========== =========== ==========
Ashland's long-term debt declined from $2.0 billion at October 1, 2000
to $1.6 billion at the end of fiscal 2003, which accounted for a reduction
in interest expense of $17 million in 2002 and an additional $12 million in
2003. Lower interest rates on short-term borrowings also brought interest
expense down from prior year levels by $11 million in 2002. Expenses on
sales of accounts receivable also reflect declining interest rates since
that program was implemented.
INCOME TAXES
Ashland's overall effective income tax rate declined from 37.2% in
2002 to 31.9% in 2003. Recurring nontaxable income, such as equity income
from foreign operations, had a larger effect on the effective rate in 2003
due to the reduced level of earnings. In addition, the changed investment
climate resulted in nontaxable income being realized under life insurance
policies during 2003, compared to 2002 when nondeductible losses were
incurred. These life insurance policies are the underlying investments
behind Ashland's deferred compensation programs.
Ashland's overall effective income tax rate amounted to 37.2% in 2002,
compared to 40.5% in 2001. The reduction resulted principally from the
change in accounting for goodwill, reduced state income taxes and a lower
tax rate on foreign results. The accounting change eliminated the
amortization for financial reporting purposes, and most of that
amortization was not deductible for income tax purposes. In addition, state
income tax rates actually experienced were lower than those previously
assumed in the deferred tax calculations. Those reductions resulted
M-4
from changing apportionment factors related to MAP's earnings and the use
of tax loss carryforwards in various jurisdictions that had not been
recognized in prior years due to uncertainties as to their ultimate
realization.
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGES
Results of Ashland's discontinued operations are summarized below. See
Note N of Notes to Consolidated Financial Statements for additional
information.
(In millions) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NET OF TAX)
Reserves for asbestos-related litigation (net of insurance recoveries) $ (109) $ - $ (14)
Electronic Chemicals
Results of operations 14 13 13
Gain on sale of operations 81 - -
Gain on sale of investment in Arch Coal - - 33
---------- ---------- -----------
$ (14) $ 13 $ 32
========== ========== ===========
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 connection with the sale of
Riley Stoker Corporation, a former subsidiary. During 2003, Ashland
increased its reserve for asbestos claims to cover litigation defense and
claim settlement costs expected to be paid during the next ten years.
Because insurance provides reimbursements for most of the costs and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed, the
increase in the asbestos reserve was offset in part by probable insurance
recoveries. A reserve associated with asbestos-related liabilities was also
recognized in 2001.
During 2003, Ashland sold the net assets of its Electronic Chemicals
business and certain related subsidiaries for $300 million. Due to the
sale, the results of operations of those businesses, as well as the gain on
the sale, were shown in discontinued operations.
Ashland spun-off the majority of its shares of Arch Coal common stock
to Ashland's shareholders in 2000. Ashland subsequently sold its remaining
Arch Coal shares in a public offering in February 2001.
As discussed in Note A to the Consolidated Financial Statements,
Ashland adopted certain pronouncements of the FASB during the last three
years. As of July 1, 2003, Ashland consolidated a lessor entity in its
financial statements under FIN 46, and doing so resulted in an after-tax
charge of $5 million to adjust the depreciation included in the cumulative
lease payments to conform to Ashland's depreciation methods. Ashland also
adopted FAS 142 in 2002 and recognized an impairment loss of $11 million
after income taxes to write off the goodwill of Ashland Distribution. In
addition, the cumulative effect of the change in the method of accounting
for derivatives by MAP under FAS 133 resulted in an after-tax charge to
Ashland of $5 million in 2001.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity,
amounted to $242 million in 2003, $163 million in 2002 and $814 million in
2001. Such amounts include cash distributions from MAP of $197 million in
2003, $196 million in 2002 and $658 million in 2001. MAP operates on a
calendar year basis and is organized as a limited liability company that
has elected to be taxed as a partnership. As a result, Ashland pays income
taxes on most of its share of the taxable earnings reported by MAP in the
following year, creating additional variability in Ashland's cash flows
from year to year. Income taxes paid by Ashland related to MAP's earnings
amounted to $4 million in 2003, $239 million in 2002 and $157 million in
2001. Over the last three years, cash flows from operations have exceeded
Ashland's capital requirements for net property additions and dividends by
about $550 million, providing additional funds for debt reductions, stock
purchases and acquisitions.
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 (S&P). In August 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 materially
restricts, and could at times eliminate, the availability of the commercial
paper market to Ashland. Ashland has two revolving credit agreements
providing for up to $350 million in borrowings. Although Ashland borrowed
$175 million under these agreements to repay commercial paper shortly after
the S&P downgrade, the revolving credit agreements were not in use at
September 30, 2003. While the revolving credit
M-5
agreements contain covenants limiting new borrowings based on Ashland's
stockholders' equity, these agreements would have permitted an additional
$1.7 billion of borrowings at September 30, 2003. Additional permissible
borrowings are increased (decreased) by 150% of any increase (decrease) in
stockholders' equity.
At September 30, 2003, working capital (excluding debt due within one
year) amounted to $703 million. Although the comparable amount at the end
of 2002 was $752 million, that amount included net assets of $172 million
of the discontinued Electronic Chemical operations held for sale. 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
$78 million at September 30, 2003, and $61 million at September 30, 2002.
Liquid assets (cash, cash equivalents and accounts receivable) amounted to
92% of current liabilities at September 30, 2003, compared to 75% at the
end of 2002. Most of the improvement resulted from the combination of an
increase of $112 million in cash equivalents and a reduction of $99 million
in debt due within one year.
CAPITAL RESOURCES
Property additions amounted to $470 million during the last three
years and are summarized in the Information by Industry Segment on page
F-25. For that period, APAC accounted for 52% of Ashland's capital
expenditures, while Ashland Specialty Chemical accounted for an additional
21%. Capital used for acquisitions (including assumed debt) amounted to
$113 million during the last three years, of which $46 million was invested
in APAC, $64 million in Ashland Specialty Chemical and $3 million in
Valvoline. A summary of the capital employed in Ashland's operations
follows. The reduction in capital employed in Ashland Specialty Chemical in
2003 resulted principally from the sale of the Electronic Chemicals
business.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL EMPLOYED
APAC $ 1,014 $ 1,039 $ 1,047
Ashland Distribution 418 459 470
Ashland Specialty Chemical 438 610 612
Valvoline 399 343 389
Refining and Marketing 1,866 1,818 1,654
Long-term borrowings provided cash flows of $107 million during the
last three years, the proceeds from which were used in part to retire $525
million of long-term debt. Debt retirements included scheduled maturities,
as well as prepayments or refundings to reduce interest costs. Cash flows
were supplemented as necessary by the issuance of short-term notes,
commercial paper and borrowings under the revolving credit agreements.
During 2003, Ashland reduced its total debt by $193 million to $1.6
billion principally by using the proceeds from the sale of the Electronic
Chemicals business to retire debt. Stockholders' equity increased by $80
million during 2003 to $2.3 billion. Although Ashland's net income of $75
million for 2003 was equivalent to its cash dividends, translation gains
associated with foreign operations and a reduction in the minimum pension
liability resulted in an increase in reported stockholders' equity. Debt as
a percent of capital employed was reduced from 45.4% at the end of 2002 to
41.7% at September 30, 2003.
At September 30, 2003, Ashland's long-term debt included $69 million
of floating-rate obligations, 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 $203 million of
third-party debt underlying those transactions. As a result, Ashland was
exposed to short-term interest rate fluctuations on $425 million of debt
obligations at September 30, 2003.
During 2004, Ashland expects capital expenditures of approximately
$175 million, compared to $110 million in 2003, with most of the increase
committed to APAC and Ashland Specialty Chemical. Improvements in APAC's
equipment management process allowed for a temporary reduction in capital
expenditures in 2003, while Ashland Specialty Chemical plans additional
investments in international capacity and environmental projects in 2004.
Ashland anticipates meeting its capital requirements during 2004 for
property additions, dividends and scheduled debt repayments of $102 million
from internally generated funds. However, external financing may be
necessary to provide funds for acquisitions or other corporate purposes.
M-6
OFF-BALANCE SHEET ARRANGEMENTS
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation and off-road construction equipment, warehouses and
storage facilities, and other equipment, facilities and properties under
leasing agreements that expire at various dates. At September 30, 2003,
minimum rental payments under these operating leases amount to $258 million
in the aggregate, including $47 million in 2004, $39 million in 2005, $33
million in 2006, $26 million in 2007, $22 million in 2008 and $91 million
thereafter.
Under various operating leases, Ashland has guaranteed the residual
value of the underlying property. If Ashland had canceled those leases at
September 30, 2003, its maximum obligations under the residual value
guarantees would have amounted to $102 million. Ashland does not expect to
incur any significant charge to earnings under these guarantees, $46
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 parties to the leases.
Ashland has also guaranteed 38% of MAP's payments for certain crude
oil purchases, up to a maximum guarantee of $95 million. At September 30,
2003, Ashland's contingent liability under this guarantee amounted to $60
million. Ashland has not made and does not expect to make any payments
under this guarantee.
During 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 are added to the pool and collections reduce
the pool. Since inception, interests totaling $150 million have been sold
on a continuous basis, except for a period between April 29 and September
7, 2003, when the full $200 million capacity was utilized. Ashland retains
a credit interest in these receivables and addresses its risk of loss on
this retained interest in its allowance for doubtful accounts. Receivables
sold exclude defaulted accounts or concentrations over certain limits with
any one customer.
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, reserves and associated receivables for
asbestos litigation and environmental remediation, and income recognized
under construction contracts. Although management bases its estimates on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, actual results could differ
significantly from the estimates under other 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 is generally determined from estimated discounted future net cash
flows (assets held for use) or net realizable value (assets held for sale).
During 2003, Ashland recognized an impairment charge of $10 million for a
maleic anhydride production facility that is shutdown and not likely to
reopen based on internal analyses. 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, 2003.
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 are generally
synonymous with its industry segments. However, the individual operating
divisions of Ashland Specialty Chemical are also considered reporting units
under FAS 142. Since market prices of Ashland's reporting units are not
readily available, management makes various estimates and assumptions in
determining the estimated fair values of those units. Fair values are based
principally on EBITDA (earnings before interest, taxes, depreciation and
amortizaton) multiples of peer group companies for each of these reporting
units. During 2003, Ashland recognized an impairment charge of $9 million
for goodwill associated with non-strategic businesses of APAC identified
for sale. The most recent annual impairment tests indicated that the fair
values of each of Ashland's reporting units with significant goodwill were
in
M-7
excess of their carrying values by at least 20%. 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 noncontributory pension plans
that cover substantially all employees, as well as healthcare and life
insurance plans for eligible employees who retire or are disabled.
Ashland's retiree life insurance plans are noncontributory, while Ashland
shares the costs of providing healthcare coverage with its retired
employees through premiums, deductibles and coinsurance provisions.
The principal assumptions used to determine Ashland's pension and
other postretirement benefit costs are the discount rate, the salary
adjustment rate and the expected return on plan assets. Nearly all of
Ashland's retiree healthcare plans contain a cap that limits Ashland's
contributions to base year (1992) per capita costs, plus annual increases
of up to 4.5% per year (1.5% a year effective January 1, 2004). Since
medical inflation is expected to continue at a rate in excess of these caps
for the immediate future, no explicit assumption was required as to the
expected rate of future medical inflation.
The discount rates used to determine the present value of future
pension payments, healthcare costs and life insurance benefits are based on
the yields on high-quality, fixed-income investments (such as Moody's
Aa-rated corporate bonds), as adjusted for the longer duration of Ashland's
pension and other postretirement benefit obligations. The present values of
Ashland's future pension and other postretirement obligations were
determined using discount rates of 6.25% at September 30, 2003, and 6.75%
at September 30, 2002. Ashland's costs under these plans are determined
using the discount rate as of the beginning of the fiscal year, which
amounted to 6.75% for 2003, 7.25% for 2002, 7.75% for 2001, and will be
6.25% for 2004.
The salary adjustment rate and the expected return on plan assets were
assumed to be 5% and 9% in determining Ashland's costs for each of the last
three years, and those factors will be reduced slightly to 4.5% and 8.5% in
determining Ashland's costs for 2004. The salary assumption has been
indicative of actual results for the last few years, but the compounded
return of 1.1% on plan assets for the last three years has been subject to
wide year to year variances. For 2003, the pension plan assets generated
income of 19.1%, compared to losses of 6.7% in 2002 and 7.1% in 2001.
However, the expected return on plan assets is designed to be a long-term
assumption that will be subject to considerable year-to-year variances from
actual returns. Ashland has generated compounded annual investment returns
of 4.8% and 7.8% on its pension plan assets over the last five-year and
ten-year periods. Although those returns are both below the long-term
assumption, they were measured with the ending point amidst a partial
recovery from a two-year period of declining stock prices that accompanied
depressed economic conditions. For the five-year and ten-year periods that
ended in September 2000 prior to this adverse investment climate, the
compounded annual investment returns on Ashland's pension plan assets were
11.4% and 12.4%.
Shown below are the estimated increases in pension and other
postretirement costs that would have resulted from a 1% change in the
principal assumptions for each of the last three years.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
INCREASE IN PENSIONS COSTS FROM
Decrease in the discount rate $ 20 $ 21 $ 15
Increase in the salary adjustment rate 9 10 6
Decrease in the expected return on plan assets 6 5 5
INCREASE IN OTHER POSTRETIREMENT COSTS FROM
Decrease in the discount rate 2 4 3
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. Ashland's
reserve for asbestos claims covers the litigation defense and claim
settlement costs expected to be paid during the next ten years on an
undiscounted basis and amounted to $610 million at September 30, 2003.
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
M-8
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.
Insurance provides reimbursements for most of the litigation defense and
claim settlement costs incurred, 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
are expected to be offset in part by probable insurance recoveries. The
amounts not recoverable are generally due from insurers that are insolvent,
rather than as a result of uninsured claims or the exhaustion of Ashland's
insurance coverage. At September 30, 2003, Ashland's receivable for
recoveries of such costs from its insurers amounted to $429 million, of
which $26 million relates to costs previously paid. About 35% of the
estimated receivables from insurance companies 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 the 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 September 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.
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, 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 135 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 $174 million at September 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 environmental remediation
continues.
No individual remediation location is material to Ashland as its
largest reserve for any site is less than 10% of the remediation reserve.
As a result, Ashland's exposure to adverse developments with respect to any
individual site is not expected to be material, and these sites are in
various stages of ongoing remediation. Although environmental remediation
could have a material effect on results of operations if a series of
adverse developments occurs in a particular quarter or fiscal year, Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.
CONSTRUCTION CONTRACTS
Income related to construction contracts is generally recognized by
the units-of-production method, which is a variation of the
percentage-of-completion method. Construction jobs by their very nature are
subject to numerous risks that could create variances from expectations.
Such risks include changes in raw material and other costs, adverse weather
conditions and the performance of subcontractors and other entities. Income
is only certain after a job is completed, and the extent of completion can
be difficult to assess in certain circumstances.
The extent of completion for each production phase is determined by
reference to material quantities, labor hours, subcontract costs or other
factors that are believed to be most indicative of the progress made under
each phase of a project. Revenues earned are computed by reference to the
contract or detailed analyses of revenues and expenses by production phase
that supported the related construction contract or bid proposal. These
detailed analyses also serve as early indicators as to whether a
construction contract may ultimately be completed at a loss. Any
anticipated losses on such contracts are charged against operations as soon
as such losses are determined to be probable and estimable. During 2003,
reserves of $14 million were established for job losses related to a large
highway construction project in Virginia, reflecting weather-related cost
increases and construction delays. Losses
M-9
of this magnitude are unusual, and this reserve reflects the fact that
rainfall in Virginia during 2003 was among the highest levels on record in
the last 109 years.
Assumptions concerning the extent of completion can have a significant
effect on the income recognized on an individual construction project in
any period. However, the effects of individual assumptions on APAC's
reported results are mitigated to some extent by the significant number of
jobs in various stages of completion at any point in time.
OUTLOOK
The major cornerstones of Ashland's strategy for 2004 will be driving
efficiency, managing capital effectively and expanding through organic
means in existing or adjacent markets. The Top-Quartile Cost Structure
(TQCS) program that is currently underway is the initial focus in driving
efficiency. That program is designed to reduce Ashland's annual selling,
general and administrative (SG&A) costs by at least $75 million, and is in
addition to the actions that were taken in 2003 to produce annual G&A
savings of $25 million. Opportunities to produce additional savings through
process changes that cut horizontally across Ashland are also being
examined.
Improving the efficiency of Ashland's operations will be another
focus. During 2003, APAC consolidated its operations from 39 into 24 field
business units, implemented new employee benefit plans that will reduce its
costs and consolidated its purchasing function, and also plans to continue
reducing costs through the TQCS program and the Project PASS redesign
initiative. Costs of $20 million were incurred during 2003 under this
redesign initiative, and such costs are expected to decline by about 40% in
2004 when this initiative will be completed. Ashland Distribution continues
to focus on service level improvements, with a goal of reducing rework in
the order to cash process. Ashland Specialty Chemical has recently adopted
the Six Sigma quality process that focuses on reducing manufacturing
expenses and improving quality. Valvoline continues to focus on process
improvements, and recently implemented a new system that will result in a
much more concise and streamlined invoicing process.
Managing capital effectively assures that Ashland's assets are
performing at desired or expected levels. Assets whose performance cannot
be improved will be redeployed, with the proceeds used to reduce debt or
reinvest in more profitable growth opportunities. Reducing debt remains a
key objective, with an ultimate target of having debt no greater than 35%
of capital employed. MAP has been an important source of both operating
income and cash, and Ashland will continue to capture value from that
investment, which is subject to the put/call agreement discussed in Note D
to the Consolidated Financial Statements. MAP is also working on improving
its cost structure to strengthen profitability and competitive position.
Ashland is also pursuing sales and profit growth by developing new
products, expanding into adjacent geographic or product markets, and
improving marketing techniques to existing customers. In addition to
restoring normal sales and profits through increased efficiency, APAC is
pursuing growth by emphasizing large jobs and extending current
capabilities in concrete paving, milling and bridge work across their
markets. Ashland Distribution will continue to focus on perfecting on-time,
accurate and complete service to ultimately restore sales to their pre-2001
levels, which were in excess of $3 billion. Ashland Specialty Chemical has
two new processes designed to support organic sales growth. A growth
initiatives process will support the delivery of customer-focused solutions
that do not require extensive research and development or commercialization
support, while a solutions process is being developed to identify and
deliver emerging, technology-based solutions within a 36-month time frame.
Valvoline will pursue growth by continuing to build its premium brands and
services in both the "do-it-yourself" and "do-it-for-me" markets, including
an emphasis on product innovation and growth in selected international
markets.
At September 30, 2003, APAC's construction backlog amounted to $1.7
billion, up slightly from the level at the end of 2002. However, an
increasingly competitive bidding process led to a decrease of about .5% in
the estimated margin on about $1.3 billion of new business awarded in 2003.
About $400 million of the backlog was bid at lower energy prices, and no
income will be recognized on the completion of the work on which job loss
reserves were recognized in 2003. Public sector work in the backlog
increased slightly during the year, and the public funding outlook remains
positive. Private contract work increased from $136 million at the end of
2002 to $169 million this year, reflecting the strengthening economy.
Ashland's sales and operating revenues are normally subject to
seasonal variations. Although APAC normally enjoys a relatively long
construction season, most of its operating income is generated during the
construction period of May to October. In addition, MAP experiences demand
increases for gasoline during the summer driving season, for propane and
distillate during the winter heating season and for asphalt during the
construction season. The following table compares operating income by
quarter for the three years ended September 30, 2003 (amounts for each
quarter do not necessarily total to results for the year due to rounding).
M-10
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING INCOME (LOSS)
December 31 $ 32 $ 96 $ 136
March 31 (24) (3) 79
June 30 138 132 366
September 30 119 96 251
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 and MAP operate are
capital-intensive, and replacement costs for their plant and equipment
would generally exceed their historical costs. Accordingly, depreciation,
depletion and amortization expense would be greater if it were based on
current replacement costs. However, since replacement facilities would
reflect technological improvements and changes in business strategies, such
facilities would be expected to be more productive than existing
facilities, mitigating part of the increased expense.
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 liabilities exceed its monetary assets, which results in
net purchasing power gains and provides a hedge against the effects of
future inflation.
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. Estimates as to
operating performance and earnings are based on 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, and cost of raw
materials. 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
and in Item 1 of this annual report on Form 10-K. Ashland undertakes no
obligation to subsequently update or revise these forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland selectively uses unleveraged interest rate swap agreements to
obtain greater access to the lower borrowing costs normally available on
floating-rate debt, while minimizing refunding risk through the issuance of
long-term, fixed-rate debt. Ashland's intent is to maintain its
floating-rate exposure between 25% and 45% of total interest-bearing
obligations. At September 30, 2003, Ashland held interest rate swaps that
effectively converted the interest rates on $153 million of fixed-rate,
medium-term notes to floating rates based upon three-month LIBOR. The swaps
have been designated as fair value hedges, and since the critical terms of
the debt instruments and the swaps match, the hedges are assumed to be
perfectly effective, with the changes in fair value of the debt and swaps
offsetting.
Ashland regularly uses commodity-based and foreign currency derivative
instruments to manage its exposure to price fluctuations associated with
the purchase of natural gas, diesel fuel and gasoline, as well as certain
transactions denominated in foreign currencies. In addition, Ashland
opportunistically enters into petroleum crackspread futures to economically
hedge or enhance its equity earnings and cash distributions from MAP.
Although certain of these instruments could be designated as qualifying for
hedge accounting treatment, Ashland has not elected to do so. Futures
contracts for natural gas are generally accounted for as normal purchases
and sales, and the fair values of other derivatives are recorded on the
balance sheet, with the resulting gains or losses recognized in earnings.
The
M-11
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, 2003, would not
significantly affect Ashland's consolidated financial position, results of
operations, cash flows or liquidity.
MAP uses commodity-based derivative instruments to manage its exposure
to commodity price risk. MAP's management has authorized the use of
futures, forwards, swaps and combinations of options related to the
purchase or sale of crude oil, refined products and natural gas. Changes in
the fair value of all derivatives are recognized immediately in income
unless the derivative qualifies as a hedge of future cash flows or certain
foreign currency exposures. MAP has not designated any derivatives as
qualifying for hedge accounting treatment.
M-12
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE
PAGE
----
Report of management.................................................... F-2
Report of independent auditors.......................................... F-2
Consolidated financial statements:
Statements of consolidated income.............................. F-3
Consolidated balance sheets.................................... F-4
Statements of consolidated stockholders' equity................ F-5
Statements of consolidated cash flows.......................... F-6
Notes to consolidated financial statements..................... F-7
Information by industry segment......................................... F-24
Five-year selected financial information................................ F-26
Consolidated financial schedule:
Schedule II - Valuation and qualifying accounts................ F-27
Schedules other than that listed above have been omitted because of
the absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements or
the notes thereto. Separate financial statements for MAP required by Rule
3-09 of Regulation S-X will be filed as an amendment to this annual report
on Form 10-K within 90 days after the end of MAP's fiscal year ending
December 31, 2003. Separate financial statements of other unconsolidated
affiliates are omitted because each company does not constitute a
significant subsidiary using the 20% tests when considered individually.
Summarized financial information for such affiliates is disclosed in Note D
of Notes to Consolidated Financial Statements.
F-1
REPORT OF MANAGEMENT
Management is responsible for 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 accounting
principles generally accepted in the United States. 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 Code of Business Conduct summarizes our guiding values 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.
The Board, subject to stockholder ratification, selects and engages
the independent auditors based on the recommendation of the Audit
Committee. The Audit Committee, composed of directors who are not members
of management, reviews the adequacy of Ashland's policies, procedures and
controls, the scope of auditing and other services performed by the
independent auditors, and the scope of the internal audit function. The
Committee holds meetings with Ashland's internal auditor and independent
auditors, with and without management present, to discuss the findings of
their audits, the overall quality of Ashland's financial reporting and
their evaluation of Ashland's internal controls.
Ernst & Young, independent auditors, are engaged to audit Ashland's
consolidated financial statements. Their audit includes a review of
Ashland's internal controls to the extent they consider necessary in the
circumstances, and their report follows.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of
Ashland Inc. and consolidated subsidiaries as of September 30, 2003 and
2002, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of Ashland Inc.'s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the 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-3 to F-25 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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2003, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
As discussed in Note A to the financial statements, in 2003 Ashland
Inc. changed its methods of accounting for employee stock options and
variable interest entities and in 2002 Ashland Inc. changed its method of
accounting for goodwill and other intangible assets. Additionally, as
discussed in Note A to the financial statements, in 2001 Ashland Inc. and
its unconsolidated affiliate, Marathon Ashland Petroleum LLC, changed their
method of accounting for derivatives.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 5, 2003
F-2
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended September 30
(In millions except per share data) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues $ 7,518 $ 7,348 $ 7,528
Equity income - Note D 301 181 755
Other income 46 47 53
----------- ---------- ----------
7,865 7,576 8,336
COSTS AND EXPENSES
Cost of sales and operating expenses 6,005 5,736 6,016
Selling, general and administrative expenses 1,390 1,311 1,249
Depreciation, depletion and amortization 204 208 240
----------- ---------- ----------
7,599 7,255 7,505
----------- ---------- ----------
OPERATING INCOME 266 321 831
Net interest and other financial costs - Note E (128) (138) (175)
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 138 183 656
Income taxes - Note J (44) (68) (266)
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 94 115 390
Results from discontinued operations (net of income taxes) - Note N (14) 13 32
----------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 80 128 422
Cumulative effect of accounting changes (net of income taxes) - Note A (5) (11) (5)
----------- ---------- ----------
NET INCOME $ 75 $ 117 $ 417
=========== ========== ==========
EARNINGS PER SHARE - NOTE A
Basic
Income from continuing operations $ 1.37 $ 1.67 $ 5.60
Results from discontinued operations (.19) .19 .46
Cumulative effect of accounting changes (.08) (.17) (.07)
----------- ---------- ----------
Net income $ 1.10 $ 1.69 $ 5.99
=========== ========== ==========
Diluted
Income from continuing operations $ 1.37 $ 1.64 $ 5.54
Results from discontinued operations (.19) .19 .45
Cumulative effect of accounting changes (.08) (.16) (.06)
----------- ---------- ----------
Net income $ 1.10 $ 1.67 $ 5.93
=========== ========== ==========
See Notes to Consolidated Financial Statements.
F-3
Ashland Inc. and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 223 $ 90
Accounts receivable (less allowances for doubtful accounts of
$35 million in 2003 and $34 million in 2002) 1,135 1,056
Inventories - Note A 441 456
Deferred income taxes - Note J 142 119
Assets of discontinued operations held for sale - Note N - 211
Other current assets 144 139
---------- ----------
2,085 2,071
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) - Note D 2,448 2,350
Goodwill - Note A 523 510
Asbestos insurance receivable (noncurrent portion) - Note M 399 171
Other noncurrent assets 340 329
---------- ----------
3,710 3,360
PROPERTY, PLANT AND EQUIPMENT
Cost
APAC 1,322 1,358
Ashland Distribution 333 360
Ashland Specialty Chemical 722 708
Valvoline 424 379
Corporate 158 115
---------- ----------
2,959 2,920
Accumulated depreciation, depletion and amortization (1,748) (1,629)
---------- ----------
1,211 1,291
---------- ----------
$ 7,006 $ 6,722
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Debt due within one year
Commercial paper $ - $ 10
Current portion of long-term debt 102 191
Trade and other payables 1,371 1,256
Liabilities of discontinued operations held for sale - Note N - 39
Income taxes 11 24
---------- ----------
1,484 1,520
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Note E 1,512 1,606
Employee benefit obligations - Note O 385 509
Deferred income taxes - Note J 291 246
Reserves of captive insurance companies 168 166
Asbestos litigation reserve (noncurrent portion) - Note M 560 152
Other long-term liabilities and deferred credits 353 350
Commitments and contingencies - Notes F and M
---------- ----------
3,269 3,029
STOCKHOLDERS' EQUITY - Notes E, K and L
Preferred stock, no par value, 30 million shares authorized - -
Common stock, par value $1.00 per share, 300 million shares authorized
Issued - 68 million shares in 2003 and 2002 68 68
Paid-in capital 350 338
Retained earnings 1,961 1,961
Accumulated other comprehensive loss (126) (194)
---------- ----------
2,253 2,173
---------- ----------
$ 7,006 $ 6,722
========== ==========
See Notes to Consolidated Financial Statements.
F-4
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 2000 $ 70 $ 388 $ 1,579 $ (72) $ 1,965
Total comprehensive income (1) 417 (54) 363
Cash dividends, $1.10 per common share (76) (76)
Issued common stock under
stock incentive plans 1 22 23
Repurchase of common stock (2) (47) (49)
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2001 69 363 1,920 (126) 2,226
Total comprehensive income (1) 117 (68) 49
Cash dividends, $1.10 per common share (76) (76)
Issued common stock under
stock incentive plans 16 16
Repurchase of common stock (1) (41) (42)
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2002 68 338 1,961 (194) 2,173
Total comprehensive income (1) 75 68 143
Cash dividends, $1.10 per common share (75) (75)
Issued common stock under
stock incentive plans 12 12
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2003 $ 68 $ 350 $ 1,961 $ (126) $ 2,253
========== ========== ========== ========== ==========
(1) Reconciliations of net income to total comprehensive income
follow.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------
Net income $ 75 $ 117 $ 417
Minimum pension liability adjustment 24 (144) (57)
Related tax benefit (expense) (9) 56 22
Unrealized translation gains (losses) 53 19 (21)
Related tax benefit - 1 2
---------- ---------- ----------
Total comprehensive income $ 143 $ 49 $ 363
========== ========== ==========
At September 30, 2003, the accumulated other comprehensive loss of $126
million (after tax) was comprised of net unrealized translation losses of
$10 million and a minimum pension liability of $116 million.
See Notes to Consolidated Financial Statements.
F-5
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended September 30
(In millions) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
Income from continuing operations $ 94 $ 115 $ 390
Expense (income) not affecting cash
Depreciation, depletion and amortization 204 208 240
Deferred income taxes 49 (121) 151
Equity income from affiliates (301) (181) (755)
Distributions from equity affiliates 203 201 664
Other items 1 - 5
Change in operating assets and liabilities (1) (8) (59) 119
----------- ---------- ----------
242 163 814
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt - 55 52
Proceeds from issuance of common stock 2 11 15
Repayment of long-term debt (216) (140) (169)
Repurchase of common stock - (42) (49)
Increase (decrease) in short-term debt (10) 10 (245)
Dividends paid (75) (76) (76)
----------- ---------- ----------
(299) (182) (472)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (110) (174) (186)
Purchase of operations - net of cash acquired (5) (15) (91)
Proceeds from sale of operations 7 - 9
Other - net 11 27 9
----------- ---------- ----------
(97) (162) (259)
----------- ---------- ----------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS (154) (181) 83
Cash provided by discontinued operations 287 35 86
----------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 133 (146) 169
Cash and cash equivalents - beginning of year 90 236 67
----------- ---------- ----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 223 $ 90 $ 236
=========== ========== ==========
DECREASE (INCREASE) IN OPERATING ASSETS (1)
Accounts receivable $ (79) $ 110 $ 70
Inventories 15 12 5
Deferred income taxes 22 17 -
Other current assets (5) 30 31
Investments and other assets 7 36 (168)
INCREASE (DECREASE) IN OPERATING LIABILITIES (1)
Trade and other payables 115 (132) 71
Income taxes (50) (18) 4
Noncurrent liabilities (33) (114) 106
----------- ---------- ----------
CHANGE IN OPERATING ASSETS AND LIABILITIES $ (8) $ (59) $ 119
=========== ========== ==========
(1) Excludes changes resulting from operations acquired or sold.
See Notes to Consolidated Financial Statements.
F-6
Ashland Inc. and Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ashland
and its majority owned subsidiaries. Investments in joint ventures and 20%
to 50% owned affiliates are accounted for on the equity method. In January
2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." Beginning July 1, 2003, the lessor entity in one of Ashland's
lease programs was consolidated in Ashland's financial statements under FIN
46, resulting in a pre-tax charge of $8 million ($5 million net of income
taxes) for the cumulative effect of this accounting change. Property, plant
and equipment increased by $27 million and long-term debt increased by $35
million as a result of the consolidation of the lessor entity. Ashland
canceled the lease and purchased the assets from the lessor in October
2003.
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, reserves and associated receivables for
asbestos litigation and environmental remediation, and income recognized
under construction contracts. Although management bases its estimates on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, actual results could differ
significantly from the estimates under different assumptions or conditions.
Ashland's results, including those of Marathon Ashland Petroleum LLC
(MAP), are affected by domestic and international economic, political,
legislative, regulatory and legal actions, as well as weather conditions.
Economic conditions, such as recessionary trends, inflation, interest and
monetary exchange rates, and changes in the prices of crude oil, petroleum
products and petrochemicals, can have a significant effect on operations.
Political actions may include changes in the policies of the Organization
of Petroleum Exporting Countries or other developments involving or
affecting oil-producing countries, including military conflict, embargoes,
internal instability or actions or reactions of the U.S. government in
anticipation of, or in response to, such actions. While Ashland maintains
reserves for anticipated liabilities and carries various levels of
insurance, Ashland could be affected by civil, criminal, regulatory or
administrative actions, claims or proceedings relating to asbestos,
environmental remediation or other matters. In addition, climate and
weather can significantly affect Ashland's results from several of its
operations, such as APAC's construction activities and MAP's refined
product sales.
INVENTORIES
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Chemicals and plastics $ 333 $ 335
Construction materials 67 68
Petroleum products 66 58
Other products 48 51
Supplies 5 5
Excess of replacement costs over LIFO carrying values (78) (61)
----------- -----------
$ 441 $ 456
=========== ===========
Chemicals, plastics and petroleum products with a replacement cost of
$279 million at September 30, 2003, and $294 million at September 30, 2002,
are valued using the last-in, first-out (LIFO) method. The remaining
inventories are stated generally at the lower of cost (using the first-in,
first-out [FIFO] or average cost methods) or market.
LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE ASSETS
The cost of plant and equipment is depreciated by the straight-line
method over the estimated useful lives of the assets. 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 is generally determined from estimated discounted
future net cash flows (assets held for use) or net realizable value (assets
held for sale). During
F-7
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2003, Ashland recognized an impairment charge of $10 million for a maleic
anhydride production facility that is shutdown and not likely to reopen
based on internal analyses.
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. Prior to the adoption of FAS 142,
Ashland's goodwill was amortized by the straight-line method over periods
generally ranging from 15 to 40 years. Goodwill amortization amounted to
$41 million in 2001 and included charges of $10 million for write-downs
related to certain operations. Results from those operations consistently
had been well below the levels that were expected when they were acquired,
necessitating the impairment review and resulting write-downs.
When MAP was formed, Ashland's investment exceeded its underlying
equity in the net assets of that company. That excess investment included
$245 million that was accounted for as part of the carrying value of MAP's
plant and equipment, and is being amortized on a straight-line basis over
15 years at a rate of $16 million a year. The remainder was accounted for
as goodwill and was being amortized on a straight-line basis over 20 years
at a rate of $10 million a year prior to the adoption of FAS 142. At
September 30, 2003, Ashland's investment exceeds its equity in the net
assets of MAP by $316 million, of which $151 million represents plant and
equipment that will continue to be amortized, and $165 million represents
goodwill.
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 ($11 million net of income taxes) was recorded as a
cumulative effect of accounting change as of October 1, 2001. During 2003,
Ashland recognized an impairment charge of $9 million for goodwill
associated with non-strategic businesses of APAC identified for sale. Due
to the nonamortization of goodwill, Ashland's reported results for 2003 and
2002 are not comparable to 2001. If Ashland had adopted FAS 142 as of
October 1, 2000, income from continuing operations for 2001 would have
increased to $435 million, and basic and diluted earnings per share would
have increased to $6.24 and $6.18, respectively.
All of Ashland's intangible assets are subject to amortization. These
intangible assets (included in other noncurrent assets) and the related
amortization expense are not material to Ashland's consolidated financial
position or results of operations.
Following is a progression of goodwill by segment for the year ended
September 30, 2003. Not included in the $510 million of goodwill at October
1, 2002, is $11 million of goodwill of the Electronic Chemicals division of
Ashland Specialty Chemical that was classified as assets of discontinued
operations held for sale (see Note N).
Ashland
Specialty
(In millions) APAC Chemical Valvoline Total
- ---------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2002 $ 420 $ 85 $ 5 $ 510
Goodwill acquired - - 1 1
Goodwill assigned to sold businesses (1) - - (1)
Impairment losses (9) - - (9)
Adjustments related to previous acquisitions 16 1 - 17
Currency translation adjustments - 5 - 5
---------- ---------- ----------- -----------
Balance at September 30, 2003 $ 426 $ 91 $ 6 $ 523
========== ========== =========== ===========
ENVIRONMENTAL COSTS
Accruals for environmental costs are recognized when it is probable
that 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. Accruals 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.
F-8
EARNINGS PER SHARE
Following is the computation of basic and diluted earnings per share
(EPS) from continuing operations.
(In millions except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
NUMERATOR
Numerator for basic and diluted EPS -
Income from continuing operations $ 94 $ 115 $ 390
=========== ========== ==========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 68 69 69
Common shares issuable upon exercise of stock options 1 1 1
----------- ---------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 69 70 70
=========== ========== ==========
BASIC EPS FROM CONTINUING OPERATIONS $ 1.37 $ 1.67 $ 5.60
DILUTED EPS FROM CONTINUING OPERATIONS 1.37 1.64 5.54
STOCK INCENTIVE PLANS
As of October 1, 2002, Ashland began expensing employee stock options
in accordance with FASB Statement No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," and its related amendments. Ashland elected the
modified prospective method of adoption, under which compensation costs
recorded in the year ended September 30, 2003 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. See Note L for
the impact of this accounting change on net income and earnings per share.
DERIVATIVE INSTRUMENTS
In June 1998, the FASB issued Statement No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities." FAS 133 was amended by
two other statements and was required to be adopted in years beginning
after June 15, 2000. Because of Ashland's minimal use of derivatives, FAS
133 did not have a significant effect on Ashland's consolidated financial
position or results of operations when it was adopted on October 1, 2000.
MAP's adoption of FAS 133 on January 1, 2001, resulted in a $20 million
pretax loss from the cumulative effect of this accounting change. Ashland's
share of the pretax loss amounted to $8 million which, net of income tax
benefits of $3 million, resulted in a loss of $5 million from the
cumulative effect of this accounting change.
Ashland selectively uses unleveraged interest rate swap agreements to
obtain greater access to the lower borrowing costs normally available on
floating-rate debt, while minimizing refunding risk through the issuance of
long-term, fixed-rate debt. Ashland's intent is to maintain its
floating-rate exposure between 25% and 45% of total interest-bearing
obligations. At September 30, 2003, Ashland held interest rate swaps that
effectively converted the interest rates on $153 million of fixed-rate,
medium-term notes to floating rates based upon three-month LIBOR. The swaps
have been designated as fair value hedges, and since the critical terms of
the debt instruments and the swaps match, the hedges are assumed to be
perfectly effective, with the changes in fair value of the debt and swaps
offsetting. Settlements of terminated swaps are amortized to interest
expense over the remaining term of the debt.
Ashland regularly uses commodity-based and foreign currency derivative
instruments to manage its exposure to price fluctuations associated with
the purchase of natural gas, diesel fuel and gasoline, as well as certain
transactions denominated in foreign currencies. In addition, Ashland
opportunistically enters into petroleum crackspread futures to economically
hedge or enhance its equity earnings and cash distributions from MAP.
Although certain of these instruments could be designated as qualifying for
hedge accounting treatment, Ashland has not elected to do so. Futures
contracts for natural gas are generally accounted for as normal purchases
and sales, and the fair values of other derivatives are recorded on the
balance sheet, with the resulting gains or losses recognized in earnings.
MAP uses commodity-based derivative instruments to manage its exposure
to commodity price risk. MAP's management has authorized the use of
futures, forwards, swaps and combinations of options related to the
purchase or sale of crude oil, refined products and natural gas. Changes in
the fair value of all derivatives are recognized immediately in income
unless the derivative qualifies as a hedge of future cash flows or certain
foreign currency exposures. MAP has not designated any derivatives as
qualifying for hedge accounting treatment.
F-9
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
Cash equivalents include highly liquid investments maturing within
three months after purchase.
Income related to construction contracts is generally recognized by
the units-of-production method, which is a variation of the
percentage-of-completion method. Any anticipated losses on such contracts
are charged against operations as soon as such losses are determined to be
probable and estimable.
Advertising costs ($77 million in 2003, $78 million in 2002 and $67
million in 2001) and research and development costs ($36 million in 2003,
$34 million in 2002 and $33 million in 2001) are expensed as incurred.
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.
Certain prior year amounts have been reclassified in the consolidated
financial statements and accompanying notes to conform to 2003
classifications.
NOTE B - INFORMATION BY INDUSTRY SEGMENT
Ashland's operations are managed along industry segments, which
include APAC, Ashland Distribution, Ashland Specialty Chemical, Valvoline,
and Refining and Marketing. Information by industry segment is shown on
pages F-24 and F-25.
The APAC group of companies performs contract construction work, such
as paving, repairing and resurfacing highways, streets, airports,
residential and commercial developments, sidewalks, and driveways; grading
and base work; and excavation and related activities in the construction of
bridges and structures, drainage facilities and underground utilities in 14
southern and midwestern states. APAC also produces and sells construction
materials, such as hot-mix asphalt, crushed stone and other aggregate and
ready-mix concrete.
Ashland Distribution distributes chemicals, plastics, composites and
fine ingredients in North America and plastics in Europe, and provides
environmental services throughout North America.
Ashland Specialty Chemical manufactures composites, adhesives, and
casting binder chemicals for use in the transportation and construction
industries. Ashland Specialty Chemical also manufactures water treatment
chemicals for use in the general industrial and merchant marine markets.
Valvoline is a marketer of premium-branded automotive and commercial
oils, automotive chemicals, appearance products and automotive services,
with sales in more than 120 countries. Valvoline is engaged in the "fast
oil change" business through owned and franchised service centers operating
under the Valvoline Instant Oil Change name.
The Refining and Marketing segment includes Ashland's 38% ownership
interest in Marathon Ashland Petroleum LLC (MAP) and other activities
associated with refining and marketing. MAP was formed January 1, 1998,
combining the major elements of the refining, marketing and transportation
operations of Ashland and Marathon Oil Company. MAP has seven refineries
with a combined crude oil refining capacity of 935,000 barrels per calendar
day, 87 light products and asphalt terminals in the Midwest and Southeast
United States, about 5,650 retail marketing outlets in 17 states and
significant pipeline holdings. Ashland accounts for its investment in MAP
using the equity method.
Information about Ashland's domestic and foreign operations follows.
Ashland has no material operations in any individual foreign country.
Revenues from Property, plant
external customers and equipment
-------------------------------------- ------------------------
(In millions) 2003 2002 2001 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
United States $ 6,740 $ 6,621 $ 7,380 $ 1,079 $ 1,168
Foreign 1,125 955 956 132 123
---------- ----------- ----------- ----------- ----------
$ 7,865 $ 7,576 $ 8,336 $ 1,211 $ 1,291
========== =========== =========== =========== ==========
F-10
NOTE C - RELATED PARTY TRANSACTIONS
Ashland sells chemicals and lubricants to Marathon Ashland Petroleum
LLC (MAP) and purchases petroleum products from MAP. Such transactions are
in the ordinary course of business at negotiated prices comparable to those
of transactions with other customers and suppliers. In addition, Ashland
leases certain facilities to MAP, and provides certain information
technology and administrative services to MAP. The following table
indicates the amounts of these transactions for each of the last three
years ended September 30. Ashland's transactions with other affiliates and
related parties were not significant.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Ashland's sales to MAP $ 23 $ 24 $ 22
Ashland's purchases from MAP 247 217 258
Ashland's costs charged to MAP 3 6 6
Ashland has entered into revolving credit agreements providing for
short-term loans, at Ashland's discretion, to and from MAP at competitive
rates. Under MAP's borrowing agreement, Ashland may loan up to $190 million
to MAP. Under Ashland's borrowing agreement, MAP could invest up to 38% of
its surplus cash balances with Ashland. No loans were outstanding under
either agreement at September 30, 2003 and 2002. Under these agreements,
Ashland paid interest expense to MAP of $4 million in 2001. Interest
expense paid to MAP in 2003 and 2002 and interest income received from MAP
in all three years was not significant.
Ashland has guaranteed 38% of MAP's payments for certain crude oil
purchases, up to a maximum guarantee of $95 million. At September 30, 2003,
Ashland's contingent liability under this guarantee amounted to $60
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 D - UNCONSOLIDATED AFFILIATES
As discussed in Note B, Ashland accounts for its investment in MAP on
the equity method. Under the agreements related to its formation, MAP was
organized by Ashland and Marathon Oil Company (Marathon) as a limited
liability company for an initial term expiring on December 31, 2022,
subject to automatic ten-year extensions unless a termination notice is
given by either parent. The parents also entered into a put/call agreement
that could be exercised by either parent at any time after December 31,
2004. Under that agreement, Ashland will have the right to sell all of its
ownership interest in MAP to Marathon for an amount equal to 85% (90% if
equity securities are used) of the fair market value of that ownership
interest, payable in cash or Marathon debt or equity securities. Similarly,
Marathon will have the right to purchase all of Ashland's ownership
interest in MAP for an amount equal to 115% of the fair market value of
that ownership interest, payable in cash.
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. Since MAP is organized as a limited liability company
that has elected to be taxed as a partnership, 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. At September 30, 2003,
Ashland's retained earnings included $212 million of undistributed earnings
from unconsolidated affiliates accounted for on the equity method.
F-11
NOTE D - UNCONSOLIDATED AFFILIATES (CONTINUED)
Other
(In millions) MAP affiliates Total
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003
Financial position
Current assets $ 3,889 $ 149
Current liabilities (2,640) (82)
----------- -----------
Working capital 1,249 67
Noncurrent assets 4,946 99
Noncurrent liabilities (586) (59)
----------- -----------
Stockholders' equity $ 5,609 $ 107
=========== ===========
Results of operations
Sales and operating revenues $ 32,034 $ 336
Income from operations 810 41
Net income 795 34
Amounts recorded by Ashland
Investments and advances 2,448 (1) 47 $ 2,495
Equity income 285 16 301
Distributions received 197 6 203
SEPTEMBER 30, 2002
Financial position
Current assets $ 3,425 $ 151
Current liabilities (2,200) (71)
----------- -----------
Working capital 1,225 80
Noncurrent assets 4,572 105
Noncurrent liabilities (461) (106)
----------- -----------
Stockholders' equity $ 5,336 $ 79
=========== ===========
Results of operations
Sales and operating revenues $ 25,063 $ 237
Income from operations 511 24
Net income 502 16
Amounts recorded by Ashland
Investments and advances 2,350 37 $ 2,387
Equity income 176 5 181
Distributions received 196 5 201
SEPTEMBER 30, 2001
Results of operations
Sales and operating revenues $ 28,865 $ 204
Income from operations 2,042 22
Net income 2,022 14
Amounts recorded by Ashland
Equity income 749 6 $ 755
Distributions received 658 6 664
(1) At September 30, 2003, Ashland's investment exceeds its equity in
the net assets of MAP by $316 million, of which $151 million
represents plant and equipment that will continue to be amortized,
and $165 million represents goodwill. Straight-line amortization
of the excess investment that was charged against equity income
amounted to $16 million in 2003 and 2002 and $26 million in 2001
(see Note A).
F-12
NOTE E - DEBT
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Medium-term notes, due 2004-2025, interest at a weighted
average rate of 8% at September 30, 2003 (6.9% to 10.4%) $ 578 $ 765
8.80% debentures, due 2012 250 250
7.83% medium-term notes, Series J, due 2005 229 229
Pollution control and industrial revenue bonds, due
2004-2022, interest at a weighted average rate of 5.5%
at September 30, 2003 (1.0% to 7.1%) 176 201
6.86% medium-term notes, Series H, due 2009 150 150
6.625% senior notes, due 2008 150 150
Other 81 52
----------- -----------
Total long-term debt 1,614 1,797
Current portion of long-term debt (102) (191)
----------- -----------
Long-term debt (less current portion) $ 1,512 $ 1,606
=========== ===========
Aggregate maturities of long-term debt are $102 million in 2004, $399
million in 2005, $62 million in 2006, $125 million in 2007 and $168 million
in 2008. Interest payments on all indebtedness amounted to $125 million in
2003, $138 million in 2002 and $167 million in 2001. No short-term
borrowings were outstanding at September 30, 2003. The weighted average
interest rate on short-term borrowings outstanding was 1.9% at September
30, 2002.
Ashland has two revolving credit agreements providing for up to $350
million in borrowings, neither of which was in use at September 30, 2003.
The agreement providing for $250 million in borrowings expires on June 2,
2004. The agreement providing for $100 million in borrowings expires on
June 4, 2004. Both agreements contain a covenant limiting new borrowings
based on Ashland's stockholders' equity. However, these agreements would
have permitted an additional $1.7 billion of borrowings at September 30,
2003. Additional permissible borrowings are increased (decreased) by 150%
of any increase (decrease) in stockholders' equity.
NET INTEREST AND OTHER FINANCIAL COSTS
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Interest expense $ 123 $ 135 $ 162
Expenses on sales of accounts receivable (see Note G) 3 4 8
Loss on early retirement of debt - - 5
Other financial costs 3 3 2
Interest income (1) (4) (2)
---------- ----------- -----------
$ 128 $ 138 $ 175
========== =========== ===========
NOTE F - LEASES
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation and off-road construction equipment, warehouses and
storage facilities, and other equipment, facilities and properties under
leasing agreements that expire at various dates. Under various operating
leases, Ashland has guaranteed the residual value of the underlying
property that had an unamortized cost totaling $117 million at September
30, 2003. If Ashland had canceled those leases at that date, its maximum
obligations under the residual value guarantees would have amounted to $102
million. Ashland does not expect to incur any significant charge to
earnings under these guarantees, $46 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 parties
to the leases. Capitalized lease obligations are not significant and are
included in long-term debt. Future minimum rental payments at September 30,
2003, and rental expense under operating leases follow.
F-13
NOTE F - LEASES (CONTINUED)
(In millions)
Future minimum rental payments Rental expense 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
2004 $ 47 Minimum rentals
2005 39 (including rentals under
2006 33 short-term leases) $ 98 $ 103 $ 116
2007 26 Contingent rentals 3 3 5
2008 22 Sublease rental income (2) (2) (2)
Later years 91 ---------- ----------- -----------
---------- $ 99 $ 104 $ 119
$ 258 ========== =========== ===========
==========
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 September 30, 2003, the
recorded value of such obligations was not significant.
NOTE G - 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 are added to the pool and collections reduce
the pool. Since inception, interests totaling $150 million have been sold
on a continuous basis, except for a period between April 29 and September
7, 2003, when the full $200 million capacity was utilized. Ashland retains
a credit interest in these receivables and addresses its risk of loss on
this retained interest in its allowance for doubtful accounts. Receivables
sold exclude defaulted accounts or concentrations over certain limits with
any one customer. The costs of these sales are based on the buyer's
short-term borrowing rates and approximated 1.5% at September 30, 2003, and
2.2% at September 30, 2002.
NOTE H - FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
Ashland uses interest rate swaps and commodity-based and foreign
currency derivative instruments as described in Note A. Open contracts
other than interest rate swaps were not significant at September 30, 2003
and 2002.
FAIR VALUES
The carrying amounts and fair values of Ashland's significant
financial instruments at September 30, 2003 and 2002 are shown below. The
fair values of cash and cash equivalents, investments of captive insurance
companies and commercial paper approximate their carrying amounts. The fair
values of long-term debt are based on quoted market prices or, if market
prices are not available, the present values of the underlying cash flows
discounted at Ashland's incremental borrowing rates. The fair values of
interest rate swaps are based on quoted market prices.
2003 2002
------------------------ ------------------------
Carrying Fair Carrying Fair
(In millions) amount value amount value
- ----------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 223 $ 223 $ 90 $ 90
Interest rate swaps 1 1 11 11
Investments of captive insurance companies (1) 13 13 3 3
Liabilities
Commercial paper - - 10 10
Long-term debt (including current portion) 1,614 1,809 1,797 1,958
(1) Included in other noncurrent assets in the Consolidated Balance
Sheets.
F-14
NOTE I - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
During 2001, Ashland Specialty Chemical acquired Neste Polyester's
unsaturated polyester resins and gelcoats business and assets from Dynea
Oy. In addition, several smaller acquisitions were completed by APAC,
Ashland Specialty Chemical and Valvoline during the three years ended
September 30, 2003. These acquisitions were accounted for as purchases and
did not have a significant effect on Ashland's consolidated financial
statements.
DIVESTITURES
During 2003, APAC sold the assets of its Nashville division and
certain ready-mix operations in Missouri. During 2001, APAC sold certain
grading and utilities construction operations. None of these divestitures
had a significant effect on Ashland's consolidated financial statements.
See Note N for a discussion of the sale of the Electronic Chemicals
division of Ashland Specialty Chemical in 2003.
NOTE J - INCOME TAXES
A summary of the provision for income taxes related to continuing
operations follows.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Current (1)
Federal $ (17) $ 151 $ 85
State (3) 22 13
Foreign 15 16 17
---------- ----------- -----------
(5) 189 115
Deferred 49 (121) 151
---------- ----------- -----------
$ 44 $ 68 $ 266
========== =========== ===========
(1) Income tax payments amounted to $24 million in 2003, $158 million
in 2002 and $103 million in 2001.
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 50% owned foreign corporate
joint ventures. Management intends to indefinitely reinvest such earnings,
which amounted to $105 million at September 30, 2003. Because of
significant foreign tax credits, it is not practicable to determine the
U.S. federal income tax liability, if any, that might be incurred if those
earnings were distributed. Temporary differences that give rise to
significant deferred tax assets and liabilities follow.
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Employee benefit obligations $ 219 $ 204
Environmental, self-insurance and litigation reserves (net of receivables) 196 134
Compensation accruals 59 53
Uncollectible accounts receivable 18 18
Other items 61 51
----------- -----------
Total deferred tax assets 553 460
----------- -----------
Property, plant and equipment 189 175
Investment in unconsolidated affiliates 513 412
----------- -----------
Total deferred tax liabilities 702 587
----------- -----------
Net deferred tax liability $ 149 $ 127
=========== ===========
F-15
NOTE J - INCOME TAXES (CONTINUED)
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) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
United States $ 60 $ 114 $ 594
Foreign 78 69 62
---------- ----------- -----------
$ 138 $ 183 $ 656
========== =========== ===========
Income taxes computed at U.S. statutory rate (35%) $ 48 $ 64 $ 230
Increase (decrease) in amount computed resulting from
State income taxes 3 1 21
Net impact of foreign results (2) 3 4
Nondeductible goodwill amortization - - 11
Business meals and entertainment 3 3 3
Deductible dividends under employee stock ownership plan (2) (3) (3)
Life insurance expense (income) (2) 4 5
Other items (4) (4) (5)
---------- ----------- -----------
Income taxes $ 44 $ 68 $ 266
========== =========== ===========
NOTE K - CAPITAL STOCK
Under Ashland's Shareholder Rights Plan, each common share is
accompanied by one right to purchase one-thousandth share of preferred
stock for $140. Each one-thousandth share of preferred stock will be
entitled to dividends and to vote on an equivalent basis with one common
share. The rights are neither exercisable nor separately transferable from
the common shares unless a party acquires or tenders for more than 15% of
Ashland's common stock. If any party acquires more than 15% of Ashland's
common stock or acquires Ashland in a business combination, each right
(other than those held by the acquiring party) will entitle the holder to
purchase preferred stock of Ashland or the acquiring company at a
substantial discount. The rights expire on May 16, 2006, and Ashland's
Board of Directors can amend certain provisions of the Plan or redeem the
rights at any time prior to their becoming exercisable.
At September 30, 2003, 500,000 shares of cumulative preferred stock
are reserved for potential issuance under the Shareholder Rights Plan and
10.5 million common shares are reserved for issuance under stock incentive
and deferred compensation plans.
NOTE L - STOCK INCENTIVE PLANS
Ashland has stock incentive plans under which key employees or
directors can purchase shares of common stock under stock options or
nonvested stock awards. Stock options 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 four years. Unexercised options lapse 10
years after the date of grant. Nonvested stock awards entitle employees or
directors to purchase shares at a nominal cost, to vote such shares and to
receive any dividends thereon. However, such shares are subject to
forfeiture upon termination of service before the vesting period ends.
As discussed in Note A, Ashland began expensing employee stock options
in accordance with FAS 123 in 2003. The following table illustrates the
effect on net income and earnings per share if FAS 123 had been applied in
2002 and 2001 to all outstanding and unvested awards. The fair value per
share of options granted was determined using the Black-Scholes option
pricing model with the indicated assumptions.
F-16
(In millions except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Net income as reported $ 75 $ 117 $ 417
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 5 - -
Deduct: Total stock-based employee compensation expense
determined under FAS 123 for all awards, net of related tax effects (5) (4) (3)
---------- ---------- -----------
Pro forma net income $ 75 $ 113 $ 414
========== ========== ===========
Earnings per share:
Basic - as reported $ 1.10 $ 1.69 $ 5.99
Basic - pro forma 1.10 1.63 5.94
Diluted - as reported 1.10 1.67 5.93
Diluted - pro forma 1.10 1.61 5.88
Weighted average fair value per share of options granted 6.71 5.35 7.38
Assumptions (weighted average)
Risk-free interest rate 3.1% 2.9% 4.1%
Expected dividend yield 3.3% 3.8% 3.0%
Expected volatility 27.3% 26.7% 24.4%
Expected life (in years) 5.0 5.0 5.0
A progression of activity and various other information relative to
stock options is presented in the following table.
2003 2002 2001
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
average average average
(In thousands except Common option price Common option price Common option price
per share data) shares per share shares per share shares per share
- ---------------------------------------------------------------------------------------------------------------------
Outstanding-beginning of year (1) 7,482 $ 37.28 6,735 $ 38.41 6,380 $ 38.01
Granted 537 33.42 1,210 29.05 1,001 36.38
Exercised (103) 27.96 (413) 31.34 (572) 30.06
Canceled (109) 35.27 (50) 38.54 (74) 41.04
----------- ---------- -----------
Outstanding-end of year (1) 7,807 37.17 7,482 37.28 6,735 38.41
=========== ========== ===========
Exercisable-end of year 6,491 38.25 5,537 39.34 4,803 39.36
(1) Shares of common stock available for future grants of options or
awards amounted to 1,860,000 at September 30, 2003 and 2,853,000
at September 30, 2002. Exercise prices per share for options
outstanding at September 30, 2003 ranged from $25.00 to $34.00 for
2,982,000 shares, from $35.88 to $43.13 for 3,500,000 shares, and
from $44.20 to $53.38 for 1,325,000 shares. The weighted average
remaining contractual life of the options was 5.6 years.
NOTE M - 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.
F-17
NOTE M - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
A summary of asbestos claims activity follows. Because claims are
frequently filed and settled in large groups, the amount and timing of
settlements, as well as the number of open claims, can fluctuate
significantly from period to period.
(In thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Open claims - beginning of year 160 167 118
New claims filed 66 45 52
Claims settled (7) (15) (2)
Claims dismissed (21) (37) (1)
---------- ----------- -----------
Open claims - end of year 198 160 167
========== =========== ===========
Since October 1, 2000, Riley has been dismissed as a defendant in 71%
of the resolved claims. Amounts spent on litigation defense and claim
settlements totaled $45 million in 2003, $38 million in 2002 and $15
million in 2001.
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. Additional
reserves were provided during the nine months ended September 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 $610 million at September 30, 2003, compared
to $202 million at September 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.
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.
Insurance provides reimbursements for most of the litigation defense
and claim settlement costs incurred, and coverage-in-place agreements exist
with the insurance companies that provide substantially all of the coverage
currently being accessed. As a result, the current year increases in the
asbestos reserve were largely offset by probable insurance recoveries
valued at $257 million. The amounts not recoverable are generally due from
insurers that are insolvent, rather than as a result of uninsured claims or
the exhaustion of Ashland's insurance coverage. At September 30, 2003,
Ashland's receivable for recoveries of such costs from its insurers
amounted to $429 million, of which $26 million relates to costs previously
paid. Receivables from insurance companies amounted to $196 million at
September 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 September 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
F-18
the value of future recoveries at September 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.
ENVIRONMENTAL PROCEEDINGS
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, 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 135 current and former
operating facilities (including certain operating facilities conveyed to
MAP) and about 1,220 service station properties. Ashland's reserves for
environmental remediation amounted to $174 million at September 30, 2003,
and $169 million at September 30, 2002. Such amounts reflect Ashland's
estimates of the most likely costs that will be incurred over an extended
period to remediate identified conditions for which the costs are
reasonably estimable, without regard to any third-party recoveries.
Engineering studies, probability techniques, historical experience and
other factors are used to identify and evaluate remediation alternatives
and their related costs in determining the estimated reserves for
environmental remediation.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods, changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as environmental remediation
continues.
No individual remediation location is material to Ashland as its
largest reserve for any site is less than 10% of the remediation reserve.
As a result, Ashland's exposure to adverse developments with respect to any
individual site is not expected to be material, and these sites are in
various stages of ongoing remediation. Although environmental remediation
could have a material effect on results of operations if a series of
adverse developments occurs in a particular quarter or fiscal year, Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various claims,
lawsuits and administrative proceedings pending or threatened against
Ashland and its current and former subsidiaries. Such actions are with
respect to commercial matters, product liability, toxic tort liability, and
other environmental matters, which seek remedies or damages, some of which
are for substantial amounts. While these actions are being contested, their
outcome is not predictable.
NOTE N - DISCONTINUED OPERATIONS
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, a former subsidiary. During the quarter
ended December 31, 2002, Ashland increased its reserve for asbestos claims
by $390 million to cover litigation defense and claim settlement costs
expected to be paid during the next ten years. Additional reserves were
provided during the nine months ended September 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. The resulting $178 million pretax charge to
income, net of deferred income tax benefits of $69 million, was reflected
as an after-tax loss from discontinued operations of $109 million in the
Statements of Consolidated Income. See Note M for further discussion of
Ashland's asbestos-related litigation.
On August 29, 2003, Ashland sold the net assets of its Electronic
Chemicals business and certain related subsidiaries in a transaction valued
at approximately $300 million before tax. Electronic Chemicals was a part
of Ashland Specialty Chemical, providing ultra pure chemicals and other
products and services to the worldwide semiconductor industry, with
revenues of $215 million in 2003, $217 million in 2002 and $212 million in
2001. The sale reflects Ashland's strategy to optimize its business mix and
focus greater attention on the remaining specialty chemical businesses and
other transportation and construction-related operations where it can
achieve strategic advantage. Ashland's after-tax proceeds were used
primarily to reduce debt. All assets and liabilities of Electronic
Chemicals are classified as current in the September 30, 2002 balance
sheet. Assets of $211 million were composed of current assets of $62
million, investments and other assets of $23 million, and property, plant
and equipment of
F-19
NOTE N - DISCONTINUED OPERATIONS (CONTINUED)
$126 million. Liabilities of $39 million were composed of current
liabilities of $27 million and noncurrent liabilities of $12 million.
In 2001, Ashland sold its remaining 4.7 million Arch Coal shares in a
public offering for $86 million and recorded reserves for asbestos-related
litigation. Components of amounts reflected in the income statements
related to discontinued operations are presented in the following table.
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS
Reserves for asbestos-related litigation $ (178) $ - $ (23)
Electronic Chemicals 17 17 20
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
Electronic Chemicals 101 - -
Arch Coal - - 49
---------- ----------- -----------
INCOME BEFORE INCOME TAXES (60) 17 46
INCOME TAXES
Income from discontinued operations
Reserves for asbestos-related litigation 69 - 9
Electronic Chemicals (3) (4) (7)
Gain on disposal of discontinued operations (20) - (16)
---------- ----------- -----------
RESULTS FROM DISCONTINUED OPERATIONS $ (14) $ 13 $ 32
========== =========== ===========
NOTE O - EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
Ashland and its subsidiaries sponsor noncontributory pension plans
that cover substantially all employees. For certain plans, half of the
balances in employees' accounts under an employee stock ownership plan are
coordinated with their pension benefits. Ashland's objective is to fully
fund the accumulated benefit obligations of its qualified plans, and the
level of its contributions is determined annually to achieve that objective
over time. During 2003, Ashland contributed $61 million to its qualified
pension plans, and an additional $50 million was contributed on October 1,
2003. Ashland funds the costs of its nonqualified pension plans as the
benefits are paid.
Prior to July 1, 2003, benefits under Ashland's pension plans were
generally 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 most other 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.
Although individual plans have varying provisions, employees with cash
balance accounts generally receive either fixed pay credits or variable pay
credits ranging from 3% to 16% of pay based on their age plus vested
service. Their accounts are also credited with interest based on the
one-year U. S. Treasury rate plus 1%, subject to a minimum annual crediting
rate of 4% and a maximum of 7%. Pension benefits for these employees will
be based on the balances in their accounts upon retirement.
Ashland and its subsidiaries also sponsor healthcare and life
insurance plans for eligible employees who retire or are disabled.
Ashland's retiree life insurance plans are noncontributory, while Ashland
shares the costs of providing healthcare coverage with its retired
employees through premiums, deductibles and coinsurance provisions. Ashland
funds its share of the costs of the postretirement benefit plans as the
benefits are paid.
As of July 1, 2003, Ashland implemented changes in the way it will
share the cost of healthcare coverage with future retirees. Those changes
did not affect the previous cost-sharing program for retirees or for
employees meeting certain qualifications (based on age and years of
service) 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. Premiums for retiree healthcare coverage are
equivalent to the excess of the estimated per capita costs over the amounts
borne by Ashland.
F-20
Employees not meeting the required qualifications were allocated
notional accounts based on their age and years of service that can only be
used to pay all or part of the premiums for retiree healthcare coverage.
Such premiums represent the full costs of providing that coverage, without
any subsidy from Ashland. The notional accounts are credited with interest
based on the one-year U. S. Treasury rate plus 1%, subject to a minimum
annual crediting rate of 4% and a maximum of 7%. 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.
Summaries of the changes in the benefit obligations and plan assets
(primarily listed stocks and debt securities) and of the funded status of
the plans follow. Pension benefit obligations under the qualified plans at
September 30, 2003 were reduced by approximately $82 million, which
represents the amount expected to be funded by the balances in the
employees' accounts under an employee stock ownership plan.
Pension benefits
--------------------------------------------------
2003 2002
------------------------ ----------------------- Other
postretirement
Non- Non- benefits
Qualified qualified Qualified qualified --------------------
(In millions) plans plans plans plans 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at October 1 $ 874 $ 109 $ 715 $ 103 $ 361 $ 333
Service cost 42 1 42 1 11 12
Interest cost 58 7 52 7 22 23
Retiree contributions - - - - 12 8
Benefits paid (33) (4) (30) (4) (33) (33)
Plan amendments (6) - - - (95) -
Changes in assumptions 58 5 59 7 19 19
Other-net 9 (19) 36 (5) (1) (1)
----------- ----------- ----------- ---------- ---------- ----------
Benefit obligations at September 30 $ 1,002 $ 99 $ 874 $ 109 $ 296 $ 361
=========== =========== =========== ========== ========== ==========
CHANGE IN PLAN ASSETS
Value of plan assets at October 1 $ 551 $ 518
Actual return on plan assets 99 (42)
Employer contributions 61 103
Benefits paid (33) (30)
Other 2 2
----------- -----------
Value of plan assets at September 30 $ 680 $ 551
=========== ===========
FUNDED STATUS OF THE PLANS
Unfunded accumulated obligation $ 139 $ 90 $ 150 $ 98 $ 296 $ 361
Provision for future salary increases 183 9 173 11 - -
----------- ----------- ----------- ---------- ---------- ----------
Excess of obligations over plan assets 322 99 323 109 296 361
Unrecognized actuarial loss (344) (41) (354) (43) (87) (72)
Unrecognized prior service credit (cost) 3 - (2) - 100 15
----------- ----------- ----------- ---------- ---------- ----------
Net liability recognized $ (19) $ 58 $ (33) $ 66 $ 309 $ 304
=========== =========== =========== ========== ========== ==========
BALANCE SHEET LIABILITIES (ASSETS)
Accrued benefit liabilities $ 231 $ 250 $ 309 $ 304
Intangible assets (1) (2) - -
Accumulated other comprehensive loss (191) (215) - -
---------- ---------- ---------- ----------
Net liability recognized $ 39 $ 33 $ 309 $ 304
========== ========== ========== ==========
ASSUMPTIONS AS OF SEPTEMBER 30
Discount rate 6.25% 6.75% 6.25% 6.75%
Salary adjustment rate 4.50 5.00 - -
F-21
NOTE O - EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table details the components of pension and other
postretirement benefit costs.
Other
Pension benefits postretirement benefits
----------------------------------- -----------------------------------
(In millions) 2003 2002 2001 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Service cost $ 43 $ 43 $ 37 $ 11 $ 12 $ 11
Interest cost 65 59 53 22 23 22
Expected return on plan assets (9%) (51) (47) (48) - - -
Other amortization and deferral 30 19 4 (7) (6) (6)
---------- ---------- ---------- ---------- ---------- ----------
$ 87 $ 74 $ 46 $ 26 $ 29 $ 27
========== ========== ========== ========== ========== ==========
The changes previously discussed in the postretirement benefit plans
reduced Ashland's accrued obligations under those plans, and the reductions
are being amortized to income. Such amortization reduced Ashland's costs
for postretirement benefit costs by $10 million in 2003, $8 million in 2002
and $9 million in 2001. At September 30, 2003, the remaining unrecognized
prior service credit resulting from the changes amounted to $100 million,
and will reduce future costs by $15 million in 2004, $9 million in 2005 and
about $8 million annually thereafter through 2014.
OTHER PLANS
Ashland sponsors a qualified savings plan to assist eligible employees
in providing for retirement or other future needs. Under that plan, Ashland
contributes up to 5.5% (increased from 4.2% at July 1, 2003) of a
participating employee's earnings. Company contributions amounted to $19
million in 2003, $17 million in 2002 and $16 million in 2001.
Certain union employees are covered under multiemployer pension plans
administered by unions. Amounts contributed to the plans by Ashland and
charged to expense amounted to $5 million annually in 2003, 2002 and 2001.
F-22
NOTE P - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents quarterly financial information and per
share data relative to Ashland's common stock. Amounts for quarters prior
to June 2003 have been restated to reflect the results of the Electronic
Chemicals division of Ashland Specialty Chemical as a discontinued
operation. See Note N for further explanations.
Quarters ended December 31 March 31 June 30 September 30
------------------- -------------------- ------------------- -------------------
(In millions except per share data) 2002 2001 (1) 2003 2002 (1) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 1,738 $ 1,765 $ 1,644 $ 1,553 $ 2,006 $ 1,997 $ 2,130 $ 2,033
Operating income (loss) 32 96 (24) (3) 138 132 119 96
Income (loss) from
continuing operations (1) 37 (37) (23) 71 61 61 41
Net income (loss) (92) 27 (39) (21) 70 65 137 47
Basic earnings (loss) per share
Continuing operations $ (.02) $ .53 $ (.54) $ (.33) $ 1.04 $ .88 $ .89 $ .59
Net income (loss) (1.35) .38 (.57) (.31) 1.02 .94 2.00 .68
Diluted earnings (loss) per share
Continuing operations $ (.02) $ .52 $ (.54) $ (.33) $ 1.03 $ .87 $ .89 $ .59
Net income (loss) (1.35) .38 (.57) (.31) 1.01 .93 1.99 .68
Common cash dividends per share $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275
Market price per common share
High $ 30.80 $ 46.54 $ 30.37 $ 46.98 $ 33.85 $ 45.61 $ 34.51 $ 41.20
Low 23.60 37.60 25.91 43.04 28.66 37.11 30.27 26.29
(1) MAP maintains an inventory valuation reserve to reduce the LIFO
cost of its inventories to their net realizable values.
Adjustments in that reserve are recognized quarterly based on
changes in petroleum product prices, creating non-cash charges or
credits to Ashland's earnings. A pretax charge of $29 million ($18
million after tax, or $.26 per share) was recognized in the
December 2001 quarter and reversed in the March 2002 quarter as a
result of these adjustments.
F-23
Ashland Inc. and Consolidated Subsidiaries
INFORMATION BY INDUSTRY SEGMENT
Years Ended September 30
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
APAC $ 2,400 $ 2,652 $ 2,624
Ashland Distribution 2,804 2,535 2,849
Ashland Specialty Chemical 1,170 1,094 1,055
Valvoline 1,235 1,152 1,092
Intersegment sales (1)
Ashland Distribution (21) (20) (26)
Ashland Specialty Chemical (69) (63) (64)
Valvoline (1) (2) (2)
---------- ----------- -----------
7,518 7,348 7,528
Equity income
APAC 9 - -
Ashland Specialty Chemical 7 4 5
Valvoline - 1 1
Refining and Marketing 285 176 749
---------- ----------- -----------
301 181 755
Other income
APAC - 12 13
Ashland Distribution 19 17 15
Ashland Specialty Chemical 10 4 6
Valvoline 5 7 6
Refining and Marketing 2 2 7
Corporate 10 5 6
---------- ----------- -----------
46 47 53
---------- ----------- -----------
$ 7,865 $ 7,576 $ 8,336
========== =========== ===========
OPERATING INCOME
APAC $ (42) $ 122 $ 55
Ashland Distribution 32 1 35
Ashland Specialty Chemical 31 70 38
Valvoline 87 77 81
Refining and Marketing (2) 263 143 707
Corporate (105) (92) (85)
---------- ----------- -----------
$ 266 $ 321 $ 831
========== =========== ===========
ASSETS
APAC $ 1,481 $ 1,498 $ 1,574
Ashland Distribution 856 884 961
Ashland Specialty Chemical 749 941 941
Valvoline 667 611 642
Refining and Marketing 2,484 2,409 2,452
Corporate (3) 769 379 558
---------- ----------- -----------
$ 7,006 $ 6,722 $ 7,128
========== =========== ===========
F-24
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT IN EQUITY AFFILIATES
APAC $ 4 $ (2) $ -
Ashland Specialty Chemical 35 30 30
Valvoline 8 9 9
Refining and Marketing 2,448 2,350 2,387
---------- ----------- -----------
$ 2,495 $ 2,387 $ 2,426
========== =========== ===========
EXPENSE (INCOME) NOT AFFECTING CASH
Depreciation, depletion and amortization
APAC $ 108 $ 114 $ 133
Ashland Distribution 19 21 27
Ashland Specialty Chemical 40 38 46
Valvoline 26 24 23
Corporate 11 11 11
---------- ----------- -----------
204 208 240
Other noncash items (4)
APAC (25) 24 14
Ashland Distribution 3 1 (1)
Ashland Specialty Chemical (2) 3 3
Valvoline 4 (2) 4
Refining and Marketing 2 (168) 21
Corporate (30) 41 24
---------- ----------- -----------
(48) (101) 65
---------- ----------- -----------
$ 156 $ 107 $ 305
========== =========== ===========
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
APAC $ 47 $ 107 $ 92
Ashland Distribution 5 12 15
Ashland Specialty Chemical 34 27 38
Valvoline 16 21 29
Corporate 8 7 12
---------- ----------- -----------
$ 110 $ 174 $ 186
========== =========== ===========
(1) Intersegment sales are accounted for at prices that approximate
market value.
(2) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP, and other activities
associated with refining and marketing.
(3) Includes cash, cash equivalents and other unallocated assets.
(4) Includes deferred income taxes, equity income from affiliates net
of distributions, and other items not affecting cash.
F-25
Ashland Inc. and Consolidated Subsidiaries
FIVE-YEAR SELECTED FINANCIAL INFORMATION
Years Ended September 30
(In millions except per share data) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Revenues
Sales and operating revenues $ 7,518 $ 7,348 $ 7,528 $ 7,771 $ 6,623
Equity income 301 181 755 395 350
Other income 46 47 53 63 88
Cost and expenses
Cost of sales and operating expenses (6,005) (5,736) (6,016) (6,157) (5,118)
Selling, general and administrative expenses (1,390) (1,311) (1,249) (1,200) (1,113)
Depreciation, depletion and amortization (204) (208) (240) (227) (219)
---------- ----------- ---------- ---------- ----------
Operating income 266 321 831 645 611
Net interest and other financial costs (128) (138) (175) (194) (140)
---------- ----------- ---------- ---------- ----------
Income from continuing operations
before income taxes 138 183 656 451 471
Income taxes (44) (68) (266) (179) (188)
---------- ----------- ---------- ---------- ----------
Income from continuing operations 94 115 390 272 283
Results from discontinued operations (14) 13 32 (202) 7
---------- ----------- ---------- ---------- ----------
Income before cumulative effect
of accounting changes 80 128 422 70 290
Cumulative effect of accounting changes (5) (11) (5) - -
---------- ----------- ---------- ---------- ----------
Net income $ 75 $ 117 $ 417 $ 70 $ 290
========== =========== ========== ========== ==========
BALANCE SHEET INFORMATION
Current assets $ 2,085 $ 2,071 $ 2,233 $ 2,173 $ 2,060
Current liabilities 1,484 1,520 1,530 1,711 1,398
---------- ----------- ---------- ---------- ----------
Working capital $ 601 $ 551 $ 703 $ 462 $ 662
========== =========== ========== ========== ==========
Total assets $ 7,006 $ 6,722 $ 7,128 $ 6,824 $ 6,475
Short-term debt $ - $ 10 $ - $ 245 $ 182
Long-term debt (including current portion) 1,614 1,797 1,871 1,981 1,664
Stockholders' equity 2,253 2,173 2,226 1,965 2,200
---------- ----------- ---------- ---------- ----------
Capital employed $ 3,867 $ 3,980 $ 4,097 $ 4,191 $ 4,046
========== =========== ========== ========== ==========
CASH FLOW INFORMATION
Cash flows from operations $ 242 $ 163 $ 814 $ 457 $ 373
Additions to property, plant and equipment 110 174 186 214 232
Cash dividends 75 76 76 78 81
COMMON STOCK INFORMATION
Diluted earnings per share
Income from continuing operations $ 1.37 $ 1.64 $ 5.54 $ 3.83 $ 3.80
Net income 1.10 1.67 5.93 .98 3.89
Cash dividends per share 1.10 1.10 1.10 1.10 1.10
F-26
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, 2003
Reserves deducted from asset accounts
Accounts receivable $ 34 $ 18 $ (18) $ 1 $ 35
Inventories 12 2 (5) - 9
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002
Reserves deducted from asset accounts
Accounts receivable $ 33 $ 23 $ (23) $ 1 $ 34
Inventories 12 5 (5) - 12
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2001
Reserves deducted from asset accounts
Accounts receivable $ 25 $ 33 $ (25) $ - $ 33
Inventories 10 4 (2) - 12
- ---------------------------------------------------------------------------------------------------------------------
F-27
Exhibit Index
Exhibit
No. Description
- ------- ------------------------------------------------------------------
10.7 Form of Indemnification Agreement between Ashland Inc. and members
of its Board of Directors.
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of subsidiaries.
23.1 Consent of independent auditors.
24 Power of Attorney, including resolutions of the Board of
Directors.
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.