==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 1-32532
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 20-0865835
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check One):
Large Accelerated Filer |X| Accelerated Filer |_| Non-Accelerated Filer |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
At April 30, 2006, there were 71,063,910 shares of Registrant's Common
Stock outstanding. One Right to purchase one-thousandth of a share of
Series A Participating Cumulative Preferred Stock accompanies each
outstanding share of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Six months ended
March 31 March 31
------------------------ -----------------------
(In millions except per share data) 2006 2005 2006 2005
------------------------------------------------------------------------------------------- -----------------------
REVENUES
Sales and operating revenues $ 2,275 $ 2,062 $ 4,687 $ 4,239
Equity income 2 69 4 215
Other income 22 18 37 35
---------- ---------- ---------- ----------
2,299 2,149 4,728 4,489
COSTS AND EXPENSES
Cost of sales and operating expenses 1,936 1,754 3,965 3,603
Selling, general and administrative expenses 314 309 619 620
---------- ---------- ---------- ----------
2,250 2,063 4,584 4,223
---------- ---------- ---------- ----------
OPERATING INCOME 49 86 144 266
Gain (loss) on the MAP Transaction (a) (3) - (2) -
Loss on early retirement of debt - - - (2)
Net interest and other financing income (costs) 9 (29) 20 (59)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 55 57 162 205
Income taxes (6) (24) (47) (79)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 49 33 115 126
Results from discontinued operations (net of income taxes) - - (1) -
---------- ---------- ---------- ----------
NET INCOME $ 49 $ 33 $ 114 $ 126
========== ========== ========== ==========
BASIC EARNINGS PER SHARE - Note F
Income from continuing operations $ .68 $ .45 $ 1.61 $ 1.75
Results from discontinued operations - - (.01) -
---------- ---------- ---------- ----------
Net income $ .68 $ .45 $ 1.60 $ 1.75
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE - Note F
Income from continuing operations $ .67 $ .44 $ 1.59 $ 1.72
Results from discontinued operations - - (.02) -
---------- ---------- ---------- ----------
Net income $ .67 $ .44 $ 1.57 $ 1.72
========== ========== ========== ==========
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .55 $ .55
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(a) "MAP Transaction" refers to the June 30, 2005 transfer of Ashland's
38% interest in Marathon Ashland Petroleum LLC (MAP), Ashland's maleic
anhydride business and 60 Valvoline Instant Oil Change centers in
Michigan and northwest Ohio to Marathon Oil Corporation in a
transaction valued at approximately $3.7 billion.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31 September 30 March 31
(In millions) 2006 2005 2005
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ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 476 $ 985 $ 74
Available-for-sale securities 621 403 -
Accounts receivable 1,611 1,642 1,352
Allowance for doubtful accounts (45) (43) (42)
Inventories - Note D 595 527 546
Deferred income taxes 88 122 95
Refundable income taxes 50 - 125
Other current assets 73 121 83
-------------- -------------- --------------
3,469 3,757 2,233
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) - - 2,926
Goodwill and other intangibles 641 650 622
Asbestos insurance receivable (noncurrent portion) 345 370 381
Deferred income taxes 169 175 -
Other noncurrent assets 491 441 351
-------------- -------------- --------------
1,646 1,636 4,280
PROPERTY, PLANT AND EQUIPMENT
Cost 3,349 3,274 3,196
Accumulated depreciation, depletion and amortization (1,912) (1,852) (1,894)
-------------- -------------- --------------
1,437 1,422 1,302
-------------- -------------- --------------
$ 6,552 $ 6,815 $ 7,815
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 12 $ 12 $ 726
Trade and other payables 1,294 1,520 1,254
Income taxes 6 13 30
-------------- -------------- --------------
1,312 1,545 2,010
NONCURRENT LIABILITIES
Long-term debt (less current portion) 77 82 1,086
Employee benefit obligations 404 358 436
Deferred income taxes - - 264
Reserves of captive insurance companies 179 182 201
Asbestos litigation reserve (noncurrent portion) 500 521 545
Other long-term liabilities and deferred credits 386 388 374
-------------- -------------- --------------
1,546 1,531 2,906
STOCKHOLDERS' EQUITY 3,694 3,739 2,899
-------------- -------------- --------------
$ 6,552 $ 6,815 $ 7,815
============== ============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
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Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss (a) Total
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BALANCE AT SEPTEMBER 30, 2004 $ 72 $ 478 $ 2,262 $ (106) $ 2,706
Total comprehensive income (b) 126 40 166
Cash dividends (40) (40)
Issued 1,291,096 common shares under
stock incentive and other plans 1 66 67
-------------- -------------- -------------- -------------- --------------
BALANCE AT MARCH 31, 2005 $ 73 $ 544 $ 2,348 $ (66) $ 2,899
============== ============== ============== ============== ==============
BALANCE AT SEPTEMBER 30, 2005 $ 1 $ 605 $ 3,251 $ (118) $ 3,739
Total comprehensive income (b) 114 (5) 109
Cash dividends (40) (40)
Issued 506,569 common shares under
stock incentive and other plans 24 24
Repurchase of 2,402,030 common shares (138) (138)
-------------- -------------- -------------- -------------- --------------
BALANCE AT MARCH 31, 2006 $ 1 $ 491 $ 3,325 $ (123) $ 3,694
============== ============== ============== ============== ==============
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(a) At March 31, 2006, the accumulated other comprehensive loss of $123
million (after tax) was comprised of net unrealized translation gains
of $38 million, a minimum pension liability of $160 million and net
unrealized losses on cash flow hedges of $1 million.
(b) Reconciliations of net income to total comprehensive income follow.
Three months ended Six months ended
March 31 March 31
------------------------------- -------------------------------
(In millions) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------------------
Net income $ 49 $ 33 $ 114 $ 126
Unrealized translation gains (losses) 6 2 (5) 37
Related tax benefit - - - 2
Net unrealized gains (losses) on cash flow hedges 1 (1) - 1
Net unrealized gains (losses) on available-for-sale
securities (1) - - -
-------------- -------------- -------------- --------------
Total comprehensive income $ 55 $ 34 $ 109 $ 166
============== ============== ============== ==============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Six months ended
March 31
------------------------
(In millions) 2006 2005
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CASH FLOWS FROM OPERATIONS
Income from continuing operations $ 115 $ 126
Adjustments to reconcile to cash flows from operations
Depreciation, depletion and amortization 103 93
Deferred income taxes 39 (11)
Equity income from affiliates (4) (215)
Distributions from equity affiliates 3 4
Change in operating assets and liabilities (a) (279) (242)
Other items (1) 1
---------- -----------
(24) (244)
CASH FLOWS FROM FINANCING
Proceeds from issuance of common stock 14 51
Excess tax benefits related to share-based payments 4 6
Repayment of long-term debt (5) (174)
Repurchase of common stock (138) -
Increase in short-term debt - 438
Cash dividends paid (40) (40)
---------- -----------
(165) 281
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (126) (127)
Purchase of operations - net of cash acquired (3) (101)
Proceeds from sale of operations 12 16
Purchases of available-for-sale securities (549) -
Proceeds from sales and maturities of available-for-sale securities 337 -
Other - net 5 6
---------- -----------
(324) (206)
---------- -----------
CASH USED BY CONTINUING OPERATIONS (513) (169)
Cash used by discontinued operations (revised - see Note A)
Operating cash flows 4 -
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (509) (169)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 985 243
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 476 $ 74
========== ===========
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(a) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Although such
statements are subject to any year-end audit adjustments which may
be necessary, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form
10-K, as amended, for the fiscal year ended September 30, 2005.
Results of operations for the periods ended March 31, 2006, are
not necessarily indicative of results to be expected for the year
ending September 30, 2006. Certain prior period data has been
reclassified in the consolidated financial statements and
accompanying footnotes to conform to current period presentation.
The company has separately disclosed the operating portion of the
cash flows attributable to its discontinued operations, which in
prior periods were reported on a combined basis as a single
amount. There were no financing or investing cash flows related to
discontinued operations for the reported periods.
The preparation of Ashland's condensed consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosures of contingent assets and
liabilities. Significant items that are subject to such estimates
and assumptions include long-lived assets, employee benefit
obligations, income taxes, reserves and associated receivables for
asbestos litigation, environmental remediation, and income
recognized under construction contracts. Although management bases
its estimates on historical experience and various other
assumptions that are believed to be reasonable under the
circumstances, actual results could differ significantly from the
estimates under different assumptions or conditions.
NOTE B - NEW ACCOUNTING STANDARD
In December 2004, the Financial Accounting Standards Board issued
Statement No. 123R (FAS 123R), which revised FAS 123, "Accounting
for Stock-Based Compensation," by requiring the expensing of
share-based compensation based on the grant-date fair value of the
award. FAS 123 had provided companies the option of expensing such
awards or merely disclosing the pro forma effects of such
expensing in the notes to financial statements. As of October 1,
2002, Ashland began expensing employee stock options in accordance
with FAS 123 and its related amendments. Ashland elected the
modified prospective method of adoption, under which compensation
costs recorded in the year ended September 30, 2003 were the same
as that which would have been recorded had the recognition
provisions of FAS 123 been applied from its original effective
date. Results for prior periods were not restated. FAS 123R also
required an additional caption in the financing section of the
Statements of Consolidated Cash Flows to present separately the
excess tax benefits related to share based-payments. The adoption
of FAS 123R during the December 2005 quarter did not have a
material effect on Ashland's financial position, results of
operations or cash flows.
NOTE C - DEBT DEFEASANCE
During the December 2005 quarter Ashland entered into an
in-substance defeasance of approximately $49 million to repay
current and long-term debt that had a carrying value of $44
million on the balance sheet as of December 31, 2005. Because the
transaction was not a legal defeasance the investment has been
placed into a trust and will be exclusively restricted to future
obligations and repayments related to these debt instruments. The
investments have been classified on the balance sheet as other
current assets or other noncurrent assets based on the contractual
debt repayment schedule. At March 31, 2006, the carrying value of
the investments to defease debt, including other defeasements
accomplished in fiscal 2005, was $57 million and the carrying
value of the debt was $49 million.
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE D - INVENTORIES
Inventories are carried at the lower of cost or market. Certain
chemicals, plastics and lubricants are valued at cost using the
last-in, first-out (LIFO) method. The remaining inventories are
stated at cost using the first-in, first-out (FIFO) method or
average cost method (which approximates FIFO). The following table
summarizes Ashland's inventories as of the reported balance sheet
dates.
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March 31 September 30 March 31
(In millions) 2006 2005 2005
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Chemicals and plastics $ 486 $ 429 $ 442
Construction materials 93 80 84
Lubricants 88 68 72
Other products 58 67 59
Supplies 10 9 8
Excess of replacement costs over LIFO carrying values (140) (126) (119)
-------------- -------------- --------------
$ 595 $ 527 $ 546
============== ============== ==============
NOTE E - UNCONSOLIDATED AFFILIATES
On June 30, 2005, Ashland completed the transfer of its 38%
interest in MAP as well as its maleic anhydride business and 60
Valvoline Instant Oil Change centers in Michigan and northwest
Ohio to Marathon in a transaction valued at approximately $3.7
billion (the "MAP Transaction"). For further detailed information
on this transaction see Note D of Notes to Consolidated Financial
Statements in Ashland's Annual Report on Form 10-K, as amended,
for the fiscal year ended September 30, 2005. Separate audited
financial statements for MAP required by Rule 3-09 of Regulation
S-X were filed on a Form 10-K/A on March 30, 2006. Unaudited
income statement information for MAP during the period of
ownership is shown below.
MAP was organized as a limited liability company that had elected
to be taxed as a partnership. Therefore, the parents were
responsible for income taxes applicable to their share of MAP's
taxable income. The net income reflected below for MAP did not
include any provision for income taxes that would have been
incurred by its parents.
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Three months ended Six months ended
March 31 March 31
------------------------- ------------------------
(In millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ - $ 11,397 $ - $ 23,913
Income from operations - 204 - 584
Net income - 188 - 573
Ashland's equity income - 66 - 208
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE F - EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (EPS) from continuing operations.
--------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ ------------------------
(In millions except per share data) 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------------
NUMERATOR
Numerator for basic and diluted EPS - Income
from continuing operations $ 49 $ 33 $ 115 $ 126
=========== ========== ========== ===========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 71 73 72 72
Common shares issuable upon exercise of stock options 1 1 1 1
----------- ---------- ---------- -----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 72 74 73 73
=========== ========== ========== ===========
EPS FROM CONTINUING OPERATIONS
Basic $ .68 $ .45 $ 1.61 $ 1.75
Diluted $ .67 $ .44 $ 1.59 $ 1.72
NOTE G - EMPLOYEE BENEFIT PLANS
Presently, Ashland anticipates contributing $126 million to its
U.S. pension plans and $6 million to its non-U.S. pension plans
during fiscal 2006. As of March 31, 2006, contributions of $75
million have been made to the U.S. plans and $4 million to the
non-U.S. plans. The following table details the components of
pension and other postretirement benefit costs.
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Other postretirement
Pension benefits benefits
------------------------- -------------------------
(In millions) 2006 2005 2006 2005
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THREE MONTHS ENDED MARCH 31
Service cost $ 15 $ 13 $ 2 $ 2
Interest cost 20 19 4 4
Expected return on plan assets (24) (19) - -
Amortization of prior service credit - - (2) (2)
Amortization of net actuarial loss 10 8 - 2
----------- ----------- ----------- -----------
$ 21 $ 21 $ 4 $ 6
=========== =========== =========== ===========
SIX MONTHS ENDED MARCH 31
Service cost $ 30 $ 26 $ 4 $ 4
Interest cost 41 39 7 9
Expected return on plan assets (50) (38) - -
Amortization of prior service credit - - (5) (4)
Amortization of net actuarial loss 21 16 1 3
----------- ----------- ----------- -----------
$ 42 $ 43 $ 7 $ 12
=========== =========== =========== ===========
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NOTE H - LITIGATION, CLAIMS AND CONTINGENCIES
ASBESTOS-RELATED LITIGATION
Ashland is subject to liabilities from claims alleging personal
injury caused by exposure to asbestos. Such claims result
primarily from indemnification obligations undertaken in 1990 in
connection with the sale of Riley Stoker Corporation (Riley), a
former subsidiary. Although Riley was neither a producer nor a
manufacturer of asbestos, its industrial boilers contained some
asbestos-containing components provided by other companies.
A summary of asbestos claims activity follows. Because claims are
frequently filed and settled in large groups, the amount and
timing of settlements and number of open claims can fluctuate
significantly from period to period.
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Six months ended
March 31 Years ended September 30
--------------------------- ------------------------------------------
(In thousands) 2006 2005 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------
Open claims - beginning of period 184 196 196 198 160
New claims filed 3 6 12 29 66
Claims settled (2) (3) (6) (7) (7)
Claims dismissed (11) (10) (18) (24) (21)
------------ ----------- ----------- ----------- -----------
Open claims - end of period 174 189 184 196 198
============ =========== =========== =========== ===========
Since October 1, 2002, Riley has been dismissed as a defendant in
77% of the resolved claims. Amounts spent on litigation defense
and claim settlements averaged $1,594 per claim resolved in the
six months ended March 31, 2006, compared to $1,812 in the six
months ended March 31, 2005, and annual averages of $1,985 in
2005, $1,655 in 2004 and $1,610 in 2003. A progression of activity
in the asbestos reserve is presented in the following table.
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Six months ended
March 31 Years ended September 30
--------------------------- ------------------------------------------
(In millions) 2006 2005 2005 2004 2003
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Asbestos reserve - beginning of period $ 571 $ 618 $ 618 $ 610 $ 202
Expense incurred - - - 59 453
Amounts paid (21) (23) (47) (51) (45)
------------ ----------- ----------- ----------- -----------
Asbestos reserve - end of period $ 550 $ 595 $ 571 $ 618 $ 610
============ =========== =========== =========== ===========
During the December 2002 quarter, Ashland increased its reserve
for asbestos claims by $390 million to cover the litigation
defense and claim settlement costs for probable and reasonably
estimable future payments related to existing open claims, as well
as an estimate of those that may be filed in the future. Prior to
December 31, 2002, the asbestos reserve was based on the estimated
costs that would be incurred to settle existing open claims. A
range of estimates of future asbestos claims and related costs
using various assumptions was developed with the assistance of
Hamilton, Rabinovitz & Alschuler, Inc. (HR&A). The methodology
used by HR&A to project future asbestos costs was based largely on
Ashland's recent experience, including claim-filing and settlement
rates, disease mix, open claims, and litigation defense and claim
settlement costs. Ashland's claim experience was compared to the
results of previously conducted epidemiological studies estimating
the number of people likely to develop asbestos-related diseases.
Those studies were undertaken in connection with national analyses
of the population expected to have been exposed to asbestos. Using
that information, HR&A estimated a range of the number of future
claims that may be filed, as well as the related costs that may be
incurred in resolving those claims.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NOTE H - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
From the range of estimates, Ashland recorded the amount it
believed to be the best estimate, which represented the expected
payments for litigation defense and claim settlement costs during
the next ten years. Subsequent updates to this estimate have been
made, with the assistance of HR&A, based on a combination of a
number of factors including the actual volume of new claims, recent
settlement costs, changes in the mix of alleged disease, enacted
legislative changes and other developments impacting Ashland's
estimate of future payments. Ashland's reserve for asbestos claims
on an undiscounted basis amounted to $550 million at March 31,
2006, compared to $571 million at September 30, 2005 and $595
million at March 31, 2005.
Projecting future asbestos costs is subject to numerous variables
that are extremely difficult to predict. In addition to the
significant uncertainties surrounding the number of claims that
might be received, other variables include the type and severity of
the disease alleged by each claimant, the long latency period
associated with asbestos exposure, dismissal rates, costs of
medical treatment, the impact of bankruptcies of other companies
that are co-defendants in claims, uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case
to case, and the impact of potential changes in legislative or
judicial standards. Furthermore, any predictions with respect to
these variables are subject to even greater uncertainty as the
projection period lengthens. In light of these inherent
uncertainties, Ashland believes its asbestos reserve represents the
best estimate within a range of possible outcomes. As a part of the
process to develop Ashland's estimates of future asbestos costs, a
range of long-term cost models is developed that assumes a run-out
of claims through 2056. These models are based on national studies
that predict the number of people likely to develop
asbestos-related diseases and are heavily influenced by assumptions
regarding long-term inflation rates for indemnity payments and
legal defense costs, as well as other variables mentioned
previously. The total future litigation defense and claim
settlement costs on an undiscounted basis has been estimated within
a reasonably possible range of $400 million to $1.9 billion,
depending on the number of years those costs extend and other
combinations of assumptions selected. If actual experience is worse
than projected relative to the number of claims filed, the severity
of alleged disease associated with those claims or costs incurred
to resolve those claims, Ashland may need to increase further the
estimates of the costs associated with asbestos claims and these
increases could potentially be material over time.
Ashland has insurance coverage for most of the litigation defense
and claim settlement costs incurred in connection with its asbestos
claims, and coverage-in-place agreements exist with the insurance
companies that provide substantially all of the coverage currently
being accessed. As a result, increases in the asbestos reserve have
been largely offset by probable insurance recoveries. The amounts
not recoverable generally are due from insurers that are insolvent,
rather than as a result of uninsured claims or the exhaustion of
Ashland's insurance coverage.
Ashland's management has estimated the value of reasonably
possible insurance recoveries associated with Ashland's estimate
of its asbestos liabilities. Such recoveries are based on
management's assumptions and estimates surrounding the available
or applicable insurance coverage. One such assumption is that all
solvent insurance carriers remain solvent. Although coverage
limits are resolved in the coverage-in-place agreement with
Equitas Limited (Equitas) and other London companies, which
collectively provide a significant portion of Ashland's insurance
coverage for asbestos claims, there is a disagreement with these
companies over the timing of recoveries. The resolution of this
disagreement could have a material effect on the value of
insurance recoveries from those companies. In estimating the value
of future recoveries, Ashland has used the least favorable
interpretation of this agreement under which the ultimate
recoveries are extended for many years, resulting in a significant
discount being applied to value those recoveries. Ashland will
continue to apply this methodology until such time as the
disagreement is resolved. The parties are currently in arbitration
proceedings to resolve the dispute concerning the interpretation
of this agreement.
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
NOTE H - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
At March 31, 2006, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers
amounted to $375 million, of which $53 million relates to costs
previously paid. Receivables from insurance companies amounted to
$400 million at September 30, 2005 and $411 million at March 31,
2005. About 40% of the estimated receivables from insurance
companies at March 31, 2006 are expected to be due from Equitas
and other London companies. Of the remainder, approximately 90% is
expected to come from companies or groups that are rated A or
higher by A. M. Best.
ENVIRONMENTAL REMEDIATION
Ashland is subject to various federal, state and local
environmental laws and regulations that require environmental
assessment or remediation efforts (collectively environmental
remediation) at multiple locations. At March 31, 2006, 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, 101 current and former
operating facilities (including certain operating facilities
conveyed to MAP) and about 1,220 service station properties, of
which 214 are being actively remediated. Ashland's reserves for
environmental remediation amounted to $178 million at March 31,
2006, compared to $178 million at September 30, 2005 and $157
million at March 31, 2005, of which $145 million at March 31,
2006, $145 million at September 30, 2005 and $125 million at March
31, 2005 were classified in noncurrent liabilities on the
Condensed Consolidated Balance Sheets. The total reserves for
environmental remediation reflect Ashland's estimates of the most
likely costs that will be incurred over an extended period to
remediate identified conditions for which the costs are reasonably
estimable, without regard to any third-party recoveries.
Engineering studies, probability techniques, historical experience
and other factors are used to identify and evaluate remediation
alternatives and their related costs in determining the estimated
reserves for environmental remediation.
Environmental remediation reserves are subject to numerous
inherent uncertainties that affect Ashland's ability to estimate
its share of the costs. Such uncertainties involve the nature and
extent of contamination at each site, the extent of required
cleanup efforts under existing environmental regulations, widely
varying costs of alternate cleanup methods, changes in
environmental regulations, the potential effect of continuing
improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at
multiparty sites. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation
expense amounted to $14 million for the six months ended March 31,
2006, compared to $13 million for the six months ended March 31,
2005, and annual expense of $47 million in 2005, $2 million in
2004 and $22 million in 2003.
No individual remediation location is material to Ashland, as its
largest reserve for any site is less than 10% of the remediation
reserve. As a result, Ashland's exposure to adverse developments
with respect to any individual site is not expected to be
material, and these sites are in various stages of ongoing
remediation. Although environmental remediation could have a
material effect on results of operations if a series of adverse
developments occurs in a particular quarter or fiscal year,
Ashland believes that the chance of such developments occurring in
the same quarter or fiscal year is remote.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various
claims, lawsuits and administrative proceedings pending or
threatened against Ashland and its current and former
subsidiaries. Such actions are with respect to commercial matters,
product liability, toxic tort liability, and other environmental
matters, which seek remedies or damages, some of which are for
substantial amounts. While these actions are being contested,
their outcome is not predictable.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Six months ended
March 31 March 31
----------------------- ------------------------
(In millions) 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
APAC $ 489 $ 388 $ 1,215 $ 1,000
Ashland Distribution 1,029 956 1,996 1,851
Ashland Specialty Chemical 447 434 895 833
Valvoline 353 323 663 633
Intersegment sales
Ashland Distribution (5) (5) (11) (11)
Ashland Specialty Chemical (37) (33) (70) (66)
Valvoline (1) (1) (1) (1)
---------- ---------- ---------- -----------
2,275 2,062 4,687 4,239
Equity income
APAC - 1 - 3
Ashland Specialty Chemical 3 2 5 4
Valvoline (1) - (1) -
Refining and Marketing - 66 - 208
---------- ---------- ---------- -----------
2 69 4 215
Other income
APAC 15 3 23 5
Ashland Distribution 1 3 2 5
Ashland Specialty Chemical 2 9 3 18
Valvoline 2 2 5 3
Refining and Marketing - - - 2
Unallocated and other 2 1 4 2
---------- ---------- ---------- -----------
22 18 37 35
---------- ---------- ---------- -----------
$ 2,299 $ 2,149 $ 4,728 $ 4,489
========== ========== ========== ===========
OPERATING INCOME (a)
APAC $ (11) $ (51) $ 28 $ (47)
Ashland Distribution 30 29 65 49
Ashland Specialty Chemical 26 31 53 47
Valvoline 2 17 3 30
Refining and Marketing (b) - 61 - 197
Unallocated and other 2 (1) (5) (10)
---------- ---------- ---------- -----------
$ 49 $ 86 $ 144 $ 266
========== ========== ========== ===========
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(a) In October 2005, Ashland refined its segment reporting to allocate
substantially all corporate expenses to Ashland's four operating
divisions, with the exception of certain legacy costs or items clearly
not associated with the operating divisions. Prior periods have been
conformed to the current period presentation.
(b) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP and other activities associated
with refining and marketing through June 30, 2005.
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Six months ended
March 31 March 31
----------------------- ------------------------
(In millions) 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------------------------
OPERATING INFORMATION
APAC
Construction backlog at March 31 (a) $ 2,107 $ 2,135
Net construction job revenues (b) $ 257 $ 198 $ 681 $ 542
Hot-mix asphalt production (tons) 4.2 3.7 11.9 11.5
Aggregate production (tons) 7.0 6.5 15.1 14.3
Ashland Distribution (c)
Sales per shipping day $ 16.1 $ 15.4 $ 16.0 $ 14.9
Gross profit as a percent of sales 9.6% 9.8% 9.9% 9.7%
Ashland Specialty Chemical (c)
Sales per shipping day $ 7.0 $ 7.0 $ 7.2 $ 6.7
Gross profit as a percent of sales 28.4% 26.7% 27.9% 25.5%
Valvoline
Lubricant sales (gallons) 44.2 42.2 82.7 83.3
Premium lubricants (percent of U.S. branded volumes) 24.3% 24.1% 23.7% 23.0%
-------------------------------------------------------------------------------------------------------------------------------
(a) Includes APAC's proportionate share of the backlog of unconsolidated
joint ventures.
(b) Total construction job revenues, less subcontract costs.
(c) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Current Quarter - Ashland reported net income of $49 million for
the quarter ended March 31, 2006, compared to $33 million for the
quarter ended March 31, 2005. The comparison is affected by the
June 2005 transfer of Ashland's former 38-percent interest in
Marathon Ashland Petroleum LLC (MAP) to Marathon Oil Corporation
(Marathon), the retirement of most of Ashland's debt and the
investment of the remaining proceeds. Net income in the 2005
quarter included $37 million of net income from the former
Refining and Marketing segment (which consisted primarily of
Ashland's equity income from MAP), as well as net, after-tax
interest expense of $18 million, for a net benefit of $19 million,
or $.26 per share. The 2006 quarter included $6 million, or $.08
per share of net, after-tax interest income. In addition, the 2006
quarter also included tax benefits of $8 million, or $.11 per
share, from research and development credits and favorable
adjustments to tax contingency reserves.
Three of Ashland's four businesses continued to perform well
during the March 2006 quarter. APAC's performance was encouraging
considering it represented the winter months when many of its
facilities are shut down to perform routine maintenance work,
historically causing APAC to operate at a significant loss during
the quarter. Ashland Specialty Chemical and Ashland Distribution
continued their solid performance and led the Chemical Sector
results through increased pricing, resulting in revenue growth,
and focused cost controls. Valvoline's results remained
disappointing as it faces the most challenging market conditions
seen in over a decade, which have not allowed it to recoup
historical margin levels through price increases due to the
rapidly rising cost of base lube stock. However, despite this
difficult environment, Valvoline was able to grow lubricant
volumes by 5% as it concentrates on defending and expanding market
share.
Year-to-Date - Ashland reported net income of $114 million for the
six months ended March 31, 2006, compared to $126 million for the
six months ended March 31, 2005. The comparison is affected by the
June 2005 transfer of Ashland's former 38-percent interest in MAP
to Marathon, the retirement of most of Ashland's debt and the
investment of the remaining proceeds. Net income for the six
months ended March 31, 2005 included $120 million of net income
from the former Refining and Marketing segment (which consisted
primarily of Ashland's equity income from MAP), as well as net,
after-tax interest expense of $36 million, for a net benefit of
$84 million, or $1.15 per share. The six months ended March 31,
2006 included $12 million, or $.16 per share of net, after-tax
interest income. In addition, the current period also included tax
benefits of $6 million, or $.09 per share, from research and
development credits and favorable adjustments to tax contingency
reserves.
The increase in Ashland's net income in its remaining operating
businesses for the six months ended March 31, 2006 compared to the
2005 period was due to improved operating income from three of the
four businesses. APAC showed the greatest improvement as operating
income increased to $28 million compared to a loss of $47 million
in the 2005 period. Ashland Distribution showed a 33% increase in
operating income and Ashland Specialty Chemical increased 13%,
while Valvoline declined 90% in a difficult market environment. An
analysis of operating income by industry segment follows.
Segment operating results reflect new methodology adopted in
October 2005 for allocating substantially all corporate expenses
to Ashland's four operating businesses, with the exception of
certain legacy costs or items clearly not associated with the
operating divisions. Accordingly, $29 million in additional
corporate expenses for the March 2006 quarter and $50 million
year-to-date were allocated to the divisions. The remaining $2
million in income for the March 2006 quarter and $5 million
expense for the six months ended March 31, 2006 is classified as
"Unallocated and other" in Ashland's segment reporting. Results
for previously reported periods have been reclassified to conform
with the new allocation methodology.
14
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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APAC
Current Quarter - APAC reported an operating loss of $11 million
for the March 2006 quarter, compared to a loss of $51 million for
the March 2005 quarter. Results for the March 2006 quarter
included an $8 million gain from the transfer of property subject
to eminent domain and a $2 million gain from the sale of assets in
construction markets exited by APAC. The 2006 quarter also
included a $3 million gain on commodity hedges. APAC's improved
performance reflects improved markets and enhanced bidding and
estimating processes, resulting in higher pricing and better
margins. Margin improvement reflected successful efforts in
incorporating higher construction material values and energy costs
into APAC's initial bids. In addition, performance was assisted by
a significantly milder winter, which led to increased hot-mix
asphalt and aggregate volumes. Sales and operating revenues were
$489 million in the March 2006 quarter, a 26% increase over the
$388 million recorded in the March 2005 quarter. Net construction
job revenues (total construction job revenues less subcontract
costs) increased 30% from $198 million for the March 2005 quarter
to $257 million for the March 2006 quarter. Hot-mix asphalt
production increased 14% to 4.2 million tons versus 3.7 million
tons in the March 2005 quarter, while aggregate production
increased 8% to 7.0 million tons from 6.5 million tons in the
March 2005 quarter. APAC continued to roll off older, fixed-price
contracts which contained substantially lower energy and raw
material cost estimates. At March 31, 2006, APAC's construction
backlog, which consists of work awarded and funded but not yet
performed, was $2.1 billion, nearly equal to the amount as of the
same period last year.
Year-to-Date - APAC earned operating income of $28 million for the
six months ended March 31, 2006 compared to a loss of $47 million
for the six months ended March 31, 2005. The $75 million increase
was primarily due to the improved markets and enhanced bidding and
pricing processes discussed in the current quarter comparison.
Results for the 2006 period included an $18 million gain from the
transfer of property subject to eminent domain and a $2 million
gain from the sale of assets in construction markets exited by
APAC. Net construction job revenues increased 26% to $681 million
for the six months ended March 31, 2006 versus $542 million for
the six months ended March 31, 2005. Hot-mix asphalt production
increased 3% to 11.9 million tons versus 11.5 million tons in the
2005 period, while aggregate production increased 6% to 15.1
million tons versus 14.3 million tons in the 2005 period. The
volume increases reflect more favorable weather conditions in the
2006 period.
ASHLAND DISTRIBUTION
Current Quarter - Ashland Distribution achieved its ninth
consecutive record quarter with operating income of $30 million in
the March 2006 quarter, up 3% over the $29 million reported for
the March 2005 quarter. Sales and operating revenues increased to
$1,029 million, an 8% increase over the prior year's quarter. The
division's performance for the current quarter reflects more
typical margins as hurricane-related supply disruptions abated.
Margins for the current quarter were stronger toward the end of
the period as higher product costs and a softened pricing
environment led to weaker margins early in the quarter. Gross
profit as a percent of sales decreased 2% from 9.8% in the March
2005 quarter to 9.6% in the March 2006 quarter.
Year-to-Date - Ashland Distribution reported operating income of
$65 million for the six months ended March 31, 2006, a 33%
increase over the $49 million recorded for the six months ended
March 31, 2005. Sales and operating revenues increased 8% from
$1,851 million in the 2005 period to $1,996 million in the 2006
period. Gross profit as a percent of sales increased from 9.7% to
9.9%, reflecting the division's ability to expand margins despite
rising costs of chemicals and plastics, by increasing prices and
managing expenses.
15
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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ASHLAND SPECIALTY CHEMICAL
Current Quarter - Ashland Specialty Chemical reported operating
income of $26 million for the March 2006 quarter, a decrease of
16% compared to $31 million for the March 2005 quarter, which
included a $7 million gain on the sale of an idle plant in
Plaquemine, Louisiana. Excluding that gain, operating income
increased 8% during the quarter. Sales and operating revenues grew
to $447 million during the March 2006 quarter, a 3% increase over
the March 2005 quarter. Gross profit as a percent of sales
increased 6% from 26.7% to 28.4% for the March 2006 quarter.
Margin expansion drove operating income growth while volume during
the quarter was down slightly, when adjusted for the maleic
anhydride business transferred to Marathon in the MAP Transaction.
Performance Materials reported strong second quarter results, led
by Composite Polymers. Water Technologies continued its growth
initiatives, but operating income reflected difficulty in passing
on raw material price increases and higher selling, general and
administrative expenses.
Year-to-Date - Ashland Specialty Chemical reported operating
income of $53 million for the six months ended March 31, 2006, a
13% increase over the $47 million earned for the six months ended
March 31, 2005. The 2005 period included approximately $4 million
in net gains principally related to the termination of a product
supply contract in the December 2004 quarter, in addition to the
$7 million pre-tax gain on the sale of the idle plant in the March
2005 quarter. Excluding these gains, operating income increased
47% over the 2005 period. The improvement reflects the factors
discussed in the current quarter comparison, with sales and
operating revenues increasing 7% and gross profit as a percent of
sales increasing 9%. All units of Performance Materials had a very
strong first half of fiscal 2006 with Composite Polymers leading
the way, almost doubling operating income compared to the 2005
period. Water Technologies continued its growth initiatives, but
operating income declined due to rising raw material costs and
higher selling, general and administrative expenses.
VALVOLINE
Current Quarter - Valvoline reported operating income of $2
million in the March 2006 quarter, compared to $17 million in the
March 2005 quarter, an 88% decrease. Sales and operating revenues
were $353 million for the current quarter, a 9% increase over the
March 2005 quarter, due to a combination of a 5% increase in
lubricant volumes and higher selling prices. Valvoline has not
been able to recoup through price increases the full impact of the
rapidly rising cost of base lube stock. Consequently, branded
lubricant margins declined 20% from the March 2005 quarter. While
Valvoline continues to implement price increases, margins thus far
have not recovered. Earnings from Valvoline Instant Oil Change
decreased 18%, mostly due to a 3% decrease in the number of oil
changes. International results also declined primarily due to
higher raw material costs.
Year-to-Date - Valvoline reported operating income of $3 million
for the six months ended March 31, 2006, a 90% decrease compared
to $30 million for the six months ended March 31, 2005. The
decline reflects the margin compression described in the current
quarter comparison. Sales and operating revenues have increased
$30 million or 5% from $633 million in the 2005 period to $663
million in the 2006 period. Despite increased revenues, volume has
decreased 1% as price increases have met a soft market for
passenger-car lubricants. Earnings from Valvoline Instant Oil
Change decreased due to higher material costs and a decrease in
the number of oil changes. International results also declined
primarily due to higher raw material costs resulting in lower
earnings from operations in Europe and Australia. In the upcoming
quarters Valvoline will continue to aggressively defend its market
position in the United States with the goal of capturing increased
volume levels while continuing to focus on international and
non-lubricant growth initiatives.
16
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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REFINING AND MARKETING
On June 30, 2005, Ashland completed the transfer of its 38%
interest in MAP as well as its maleic anhydride business and 60
Valvoline Instant Oil Change centers in Michigan and northwest
Ohio to Marathon in a transaction valued at approximately $3.7
billion (the "MAP Transaction"). For further detailed information
on this transaction see Note D of Notes to Consolidated Financial
Statements in Ashland's Annual Report on Form 10-K, as amended,
for the fiscal year ended September 30, 2005. Operating income
from Refining and Marketing, which consisted primarily of equity
income from MAP, amounted to $61 million for the March 31, 2005
quarter and $197 million for the six months ended March 31, 2005.
UNALLOCATED AND OTHER
Unallocated and other costs, consisting of certain legacy costs or
items clearly not associated with the operating divisions,
amounted to $2 million in income for the March 2006 quarter,
compared to a $1 million expense in the March 2005 quarter. The
March 2006 quarter had a $5 million favorable adjustment to the
previously estimated withdrawal premium due Oil Insurance Limited
(OIL), the energy-industry mutual insurance consortium in which
Ashland participated and since has terminated participation
effective December 31, 2005. The March 2006 quarter also included
a $3 million increase in environmental remediation reserves (net
of estimated insurance recoveries) related to a formerly-owned
business. Unallocated and other costs for the six months ended
March 31, 2006 were $5 million compared to $10 million for the six
months ended March 31, 2005. The 2006 period included a $6 million
increase in environmental reserves, partially offset by the $5
million OIL premium adjustment, while the 2005 period included a
$7 million charge for estimated future insurance premiums due OIL.
GAIN (LOSS) ON THE MAP TRANSACTION
Ashland recorded a loss on the MAP Transaction of $3 million in
the March 2006 quarter and a $2 million loss for the six months
ended March 31, 2006 as a result of a decrease in the discounted
receivable from Marathon for the estimated present value of future
tax deductions. The March 2006 quarter included a $4 million
reclassification of certain tax benefits related to previously
owned businesses of Ashland. The offsetting benefit was recorded
in income taxes as deferred tax benefits. This decrease in the
receivable was partially offset by increases due to tax benefits
recognized on increased environmental reserves in both periods.
See Note D in Ashland's Annual Report on Form 10-K, as amended,
for the fiscal year ended September 30, 2005, for further
explanation of this transaction and the related receivable.
LOSS ON EARLY RETIREMENT OF DEBT
In the December 2004 quarter, Ashland recorded a loss of $2
million on the early retirement of a capitalized lease obligation.
NET INTEREST AND OTHER FINANCING INCOME (COSTS)
Ashland recognized net interest and other financing income of $9
million in the March 2006 quarter and $20 million for the six
months ended March 31, 2006, compared to an expense of $29 million
in the March 2005 quarter and $59 million for the six months ended
March 31, 2005. The comparison reflects the retirement of most of
Ashland's debt from the proceeds of the MAP Transaction in June
2005 and the temporary investment of the remaining proceeds in
short-term, available-for-sale securities.
17
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
INCOME TAXES
Ashland's effective income tax rate for the March 2006 quarter was
11.6% compared to 42.1% in the March 2005 quarter. The March 2006
quarter tax rate included tax benefits of $8 million from
prior-year research and development credits and favorable
adjustments to tax contingency reserves and a $4 million
reclassification of certain deferred tax benefits related to
previously owned businesses of Ashland. Excluding these
adjustments, the effective tax rate for the quarter was 33.5%.
Ashland's effective income tax rate for the six months ended March
31, 2006 was 28.8%. This six-month period included tax benefits of
$6 million from prior-year research and development credits and
favorable adjustments to tax contingency reserves and a $4 million
reclassification of certain deferred tax benefits related to
previously owned businesses of Ashland. Excluding these
adjustments, the effective tax rate was 35.3% compared to the
38.5% effective tax rate for the six months ended March 31, 2005.
The effective income tax rate for the second half of fiscal year
2006 is expected to be 35%.
DISCONTINUED OPERATIONS
Results of discontinued operations for the six months ended March
31, 2006 included minor expenses of $1 million (net of income
taxes) associated with asbestos liabilities.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity,
amounted to a deficit of $24 million for the six months ended
March 31, 2006, compared to a deficit of $244 million for the six
months ended March 31, 2005. The deficit in the current period
reflects a $279 million cash outflow resulting from a net increase
in operating assets and liabilities. The largest component of this
change was a $226 million decrease in trade and other payables,
which reflects a $75 million contribution to Ashland's U.S.
pension plan and a seasonal decline in accounts payable.
Otherwise, the increase in cash flows from operations reflects
increased cash flows from Ashland's remaining businesses, net
interest income versus expense, and reduced income tax payments.
Ashland's financial position has enabled it to obtain capital for
its financing needs. Following shareholder approval of the MAP
Transaction in June 2005, Moody's lowered Ashland's senior debt
rating from Baa2 to Ba1, their highest non-investment grade
rating, and also lowered Ashland's commercial paper rating from
P-3 to N-P (Not-Prime), citing the annual cash flow lost from the
operations sold. In September 2005, Standard & Poor's lowered
Ashland's senior debt rating from BBB to BBB-, its lowest
investment grade rating, and lowered Ashland's commercial paper
rating from A-2 to A-3. Ratings downgrades below investment grade
can significantly increase a company's borrowing costs. Ashland
has a revolving credit agreement that expires on March 21, 2010,
which provides for up to $350 million in borrowings. The borrowing
capacity under this facility was reduced by $103 million of
letters of credit outstanding at March 31, 2006. While the
revolving credit agreement contains a covenant limiting new
borrowings based on Ashland's stockholders' equity, the agreement
would have permitted an additional $5.5 billion of borrowings at
March 31, 2006. Additional permissible borrowings are increased
(decreased) by 150% of any increase (decrease) in stockholders'
equity.
At March 31, 2006, working capital (excluding debt due within one
year) amounted to $2,169 million, compared to $2,224 million at
September 30, 2005 and $949 million at March 31, 2005. Ashland's
working capital is affected by its use of the LIFO method of
inventory valuation. That method valued inventories below their
replacement costs by $140 million at March 31, 2006, compared to
$126 million at September 30, 2005 and $119 million at March 31,
2005. Liquid assets (cash, cash equivalents, available-for-sale
securities and accounts receivable) amounted to 203% of current
liabilities at March 31, 2006, compared to 193% at September 30,
2005 and 69% at March 31, 2005. The increases in liquidity since
March 2005 reflect the cash proceeds from the MAP Transaction net
of debt retirements.
18
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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CAPITAL RESOURCES
On July 21, 2005, Ashland's Board of Directors authorized the
purchase of $270 million of Ashland common stock in the open
market. Through December 31, 2005, Ashland had repurchased 3.5
million shares at a cost of $196 million. On January 25, 2006,
Ashland's Board of Directors increased the remaining authorization
to $250 million, an increase of $176 million. During the six
months ended March 31, 2006, Ashland repurchased 2.4 million
shares for $138 million. Through March 31, 2006, Ashland had
repurchased a total of 4.2 million shares at a cost of $237
million with a remaining authorization of $209 million.
For the six months ended March 31, 2006, property additions
amounted to $126 million, compared to $127 million for the same
period last year. Ashland anticipates meeting its remaining 2006
capital requirements for property additions and dividends from
internally generated funds.
Ashland's debt level amounted to $89 million at March 31, 2006,
compared to $94 million at September 30, 2005, and $1.81 billion
at March 31, 2005. Debt as a percent of capital employed amounted
to 2.4% at March 31, 2006, compared to 2.5% at September 30, 2005,
and 38.5% at March 31, 2005. The decline from March 31, 2005
reflects the retirement of most of Ashland's debt with the
proceeds from the MAP Transaction.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
There have been no material changes in the critical accounting
policies described in Management's Discussion and Analysis (MD&A)
in Ashland's Annual Report on Form 10-K, as amended, for the
fiscal year ended September 30, 2005. For a discussion of
Ashland's asbestos-related litigation and environmental
remediation matters, see Note H to the Condensed Consolidated
Financial Statements.
OUTLOOK
APAC continues to implement its successful five-part improvement
program as it strives to be a consistent low-cost competitor in
its markets. The March 2006 quarter reflects the progress being
made on an improved bidding and estimating process as well as
capturing increased margins on materials, whether through
third-party sales or through intra-company sales to its own
construction services. In addition, as older, less profitable jobs
roll off, they are being replaced by contracts with better
margins. Approximately 79% of the current backlog has been awarded
since October 2004. In January, APAC sold its Richmond, Virginia,
and Shawnee, Oklahoma, market areas and reported a $2 million gain
in the March 2006 quarter. Both of these businesses were
unprofitable in 2005. APAC's so-called "fix or exit" team's
analysis of 75 markets has been completed and while no additional
exits of markets are planned, APAC will continue to evaluate and
closely monitor each market's profitability. APAC has positioned
itself for operating income growth in the second half of fiscal
2006, but remains exposed to adverse weather and commodity
pricing.
In the Chemical Sector, Ashland continues to make good progress on
its GlobalOne enterprise resource planning (ERP) system. Ashland's
Canadian operations are running under this system, and key
learnings from the "go live" in Canada are being applied to the
implementation in the United States and Mexico now planned for the
December 2006 quarter. The scope of GlobalOne is being expanded to
include new, additional functionalities in customer management and
pricing management. Because of this additional functionality, the
total cost of the project is expected to increase by approximately
$25 million, bringing the total planned expenditures for GlobalOne
to $115 million. Additional increases in the cost of GlobalOne are
quite possible as the implementation continues. Through the March
2006 quarter, Ashland has spent approximately $75 million on this
project, with $11 million of that amount being expensed, and
anticipates spending the additional $40 million in planned
expenditures over the next 18 to 24 months.
19
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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OUTLOOK (CONTINUED)
Both Ashland Distribution and Ashland Specialty Chemical's
profitability is a function of economic growth and their ability
to manage material cost increases. Ashland Distribution continues
to perform well and a strong economy bodes well for this business.
As global supplies of commodities improve, there will be downward
pressure on pricing and margins. Ashland Distribution is expected
to perform in the second half of the year in a manner similar to
the first half of the year, even in the face of these pressures.
Ashland Specialty Chemical continues to manage gross margin.
Investment in the Water Technologies business continues, as
demonstrated by two acquisitions announced in the March quarter.
Nanjing Clear Environment Protection Co., Ltd. is a small
acquisition that supports Ashland's increasing presence in China.
Ashland has signed a definitive agreement to purchase the water
treatment business of Degussa AG which will expand Ashland's
global presence with plants in the U.S., Europe, Russia, Brazil
and China. This $144 million definitive agreement is expected to
close in May and will increase Ashland's presence in the waste
water treatment market, which is growing quickly. Looking forward
to the second half of fiscal 2006, Ashland Specialty Chemical is
expected to perform in a manner similar to the first half of the
year.
The market environment that has led to Valvoline's poor
performance during the first six months of fiscal year 2006
continues to exist. The focus for the second half of fiscal 2006
is on increasing volume through improved marketing effectiveness
while strengthening VIOC operations. Valvoline continues to pass
through price increases; however, in the face of increasing crude
oil prices, capturing margin on a timely basis remains a
challenge. Valvoline is taking the right steps to manage these
market conditions, but earnings in the second half of fiscal 2006
are likely to be well below earnings in the second half of fiscal
2005.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis (MD&A) contains
forward-looking statements, within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include those that refer to
Ashland's operating performance, earnings, and benefits expected
to be obtained through the GlobalOne ERP implementation. These
estimates are based upon a number of assumptions, including those
mentioned within MD&A. Such estimates are also based upon internal
forecasts and analyses of current and future market conditions and
trends, management plans and strategies, weather, operating
efficiencies and economic conditions, such as prices, supply and
demand, cost of raw materials, and legal proceedings and claims
(including environmental and asbestos matters). Although Ashland
believes its expectations are based on reasonable assumptions, it
cannot assure the expectations reflected herein will be achieved.
This forward-looking information may prove to be inaccurate and
actual results may differ significantly from those anticipated if
one or more of the underlying assumptions or expectations proves
to be inaccurate or is unrealized or if other unexpected
conditions or events occur. Other factors and risks affecting
Ashland are contained in its Annual Report on Form 10-K, as
amended, for the fiscal year ended September 30, 2005. Ashland
undertakes no obligation to subsequently update or revise these
forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland's market risk exposure at March 31, 2006 is generally
consistent with the types and amounts of market risk exposures
presented in Ashland's Annual Report on Form 10-K, as amended, for
the fiscal year ended September 30, 2005.
20
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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ITEM 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly
report, Ashland, under the supervision and with the
participation of its management, including Ashland's
Chief Executive Officer and its Chief Financial Officer,
evaluated the effectiveness of Ashland's disclosure
controls and procedures pursuant to Rule 13a-15(b) and
15d-15(b) promulgated under the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures
were effective.
(b) There were no significant changes in Ashland's internal
control over financial reporting, or in other factors,
that occurred during the period covered by this quarterly
report that have materially affected, or are reasonably
likely to materially affect, Ashland's internal control
over financial reporting.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos-Related Litigation - Ashland is subject to liabilities from
claims alleging personal injury caused by exposure to asbestos. Such claims
result primarily from indemnification obligations undertaken in 1990 in
connection with the sale of Riley Stoker Corporation ("Riley"), a former
subsidiary. Although Riley was neither a producer nor a manufacturer of
asbestos, its industrial boilers contained some asbestos-containing
components provided by other companies.
The majority of lawsuits filed involve multiple plaintiffs and
multiple defendants, with the number of defendants in many cases exceeding
100. The monetary damages sought in the asbestos-related complaints that
have been filed in state or federal courts vary as a result of
jurisdictional requirements and practices, though the vast majority of
these complaints either do not specify monetary damages sought or merely
recite that the monetary damages sought meet or exceed the required
jurisdictional minimum in which the complaint was filed. Plaintiffs have
asserted specific dollar claims for damages in approximately 5% of the
50,200 active lawsuits pending as of March 31, 2006. In these active
lawsuits, approximately 0.3% of the active lawsuits involve claims between
$0 and $100,000; approximately 1.6% of the active lawsuits involve claims
between $100,000 and $1 million; less than 1% of the active lawsuits
involve claims between $1 million and $5 million; less than 0.2% of the
active lawsuits involve claims between $5 million and $10 million; less
than 2% of the active lawsuits involve claims between $10 million and $15
million; and less than .02% of the active lawsuits involve claims between
$15 million and $100 million. The variability of requested damages, coupled
with the actual experience of resolving claims over an extended period,
demonstrates that damages requested in any particular lawsuit or complaint
bear little or no relevance to the merits or disposition value of a
particular case. Rather, the amount potentially recoverable by a specific
plaintiff or group of plaintiffs is determined by other factors such as
product identification or lack thereof, the type and severity of the
disease alleged, the number and culpability of other defendants, the impact
of bankruptcies of other companies that are co-defendants in claims,
specific defenses available to certain defendants, other potential
causative factors and the specific jurisdiction in which the claim is made.
For additional information regarding liabilities arising from
asbestos-related litigation, see Note H of "Notes to Condensed Consolidated
Financial Statements" in this quarterly report on Form 10-Q.
U.S. Department of Justice ("USDOJ") Antitrust Division Investigation
- In November 2003, Ashland received a subpoena from the USDOJ relating to
a foundry resins grand jury investigation. In January 2006, Ashland was
advised by the USDOJ that this investigation has now been closed. As is
frequently the case when such investigations have been initiated, a number
of civil actions have been filed in multiple jurisdictions, most of which
are seeking class action status for classes of customers of foundry resins.
These cases have been consolidated for pretrial purposes in the United
States District Court, Southern District of Ohio. Ashland will vigorously
defend these civil actions.
Environmental Proceedings - (1) Under the federal Comprehensive
Environmental Response Compensation and Liability Act (as amended) and
similar state laws, Ashland may be subject to joint and several liability
for clean-up costs in connection with alleged releases of hazardous
substances at sites where it has been identified as a "potentially
responsible party" ("PRP"). As of March 31, 2006, 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
United States Environmental Protection Agency ("USEPA") or a state agency,
in which Ashland is typically participating as a member of a PRP group.
Generally, the type of relief sought includes remediation of contaminated
soil and/or groundwater, reimbursement for past costs of site clean-up and
administrative oversight and/or long-term monitoring of environmental
conditions at the sites. The ultimate costs are not predictable with
assurance.
For additional information regarding environmental matters and
reserves, see Note H of "Notes to Condensed Consolidated Financial
Statements" in this quarterly report on Form 10-Q.
(2) On May 13, 2002, Ashland entered into a plea agreement with the
U.S. Attorney's Office for the District of Minnesota and the USDOJ
regarding a May 16, 1997, sewer fire at the St. Paul Park, Minnesota
refinery, which is now owned and operated by Marathon Petroleum Company
LLC. As part of the plea agreement, Ashland entered guilty pleas to two
misdemeanors, paid a $3.5 million fine related to violations of the Clean
Air Act ("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,
22
junction boxes and drains to meet standards established by Subpart QQQ of
the New Source Performance Standards of the CAA (the "Refinery Upgrades").
The Refinery Upgrades, completed in 2004, have been acknowledged and
accepted by the appropriate agencies. As part of the plea agreement,
Ashland entered into and satisfied the terms and conditions of a deferred
prosecution agreement, and as a result the deferred prosecution was
dismissed by the Court on February 22, 2005.
As part of its sentence, Ashland was placed on probation for five
years. The primary condition of probation is an obligation not to commit
future federal, state, or local crimes. If Ashland were to commit such a
crime, not only would it be subject to prosecution for that new violation,
but the government could also seek to revoke Ashland's probation. The
probation office has retained an independent environmental consultant to
review and monitor Ashland's compliance with applicable environmental
requirements and the terms and conditions of probation. The court also
included other customary terms and restrictions of probation in its
probation order.
On December 15, 2005, Ashland filed a motion for Order for Early
Release from probation. On December 30, 2005, the Judge stated that he
would sign the order releasing Ashland from probation on June 30, 2006,
assuming Ashland remains in compliance with the terms of probation.
(3) In 1990, contamination of groundwater at Ashland's former Canton,
Ohio refinery (now owned and operated by Marathon Petroleum Company LLC)
was first identified and reported to Ohio's Environmental Protection Agency
("OEPA"). Since that time, Ashland has voluntarily conducted investigation
and remediation activities and regularly communicated with OEPA regarding
this matter. Ashland and the State of Ohio exchanged Consent Order drafts
and met to negotiate the terms of such an order. The state filed a
complaint in February 2004, but simultaneously expressed an interest in
continuing Consent Order settlement discussions. Following the filing of
the complaint, Ashland, OEPA and Ohio's Office of the Attorney General
finalized a draft Consent Order. Upon expiration of the public notice and
comment period, the Consent Order was entered by the court and became
effective on April 18, 2006. The settlement requires payment of a civil
penalty of $80,000 and funding for two environmentally beneficial community
projects expected to total $295,000.
(4) In March 2006, USEPA issued a proposed Consent Agreement and Final
Order recommending a penalty of $117,345 and requiring the performance of
an unspecified Supplemental Environmental Project in connection with
alleged violations of record keeping requirements under the CAA at
Ashland's Calumet City, Illinois specialty chemical facility. Ashland has
requested further information from the USEPA on the penalty calculation.
Securities and Exchange Commission ("Commission") Notification - On
April 25, 2006, Ashland was notified by the staff of the Commission of the
staff's intent to seek authorization from the Commission to pursue a civil
action against Ashland relating to adjustments which reduced its
environmental remediation reserves for certain sites for the fiscal years
1999 and 2000. These adjustments to environmental reserves totaled $12.2
million in 1999 and $12.6 million in 2000. The staff advised that it
intends to seek injunctive and/or administrative relief against Ashland and
that it will not recommend any fines, penalties or restatements from
Ashland nor allege any intentional misconduct by Ashland. Ashland intends
to file a Wells submission and will vigorously oppose the staff's request
that the Commission authorize a civil action against Ashland.
Ashland anticipates that the staff will also seek authorization from
the Commission to pursue similar, perhaps more extensive, relief against a
current employee who was responsible for establishing Ashland's
environmental reserves during 1999 and 2000.
Lake Belt Third-Party Litigation - APAC-Southeast, Inc.
("APAC-Southeast"), an indirect wholly-owned subsidiary of Ashland, holds
one of several U. S. Army Corps of Engineers (the "Corps") permits granted
in 2002 allowing mining of construction aggregates in the Lake Belt area in
Miami-Dade County, Florida (the "Permit"). Mining under the Permit is
actually performed by a third party, which in turn pays royalties to
APAC-Southeast. The Sierra Club and others filed suit to challenge the
Corps' issuance of the permits alleging that the Corps and other federal
agencies acted capriciously, abused their discretion and failed to comply
with statutory and administrative requirements when issuing the permits.
Although not named as a defendant, APAC-Southeast and other permittees
intervened in the proceedings to protect their interests.
On March 22, 2006, the United States District Court for the Southern
District of Florida ruled that permits at issue, including
APAC-Southeast's, had been improperly issued. The Court remanded the matter
to the Corps for further development consistent with the Court's specific
findings. The Court retained jurisdiction to determine the effect, if any,
upon the existing permits and ongoing mining operations. APAC-Southeast
and the other intervenors are actively defending their interests in the
litigation.
23
If ongoing mining operations are adversely affected, APAC-Southeast
could be impacted both through the negative effect upon royalties paid for
mining under its Permit, and through a general reduction or cessation of
supply of aggregates from the Lake Belt area, which would negatively impact
construction operations in Florida that are highly dependent upon the
availability of the material, including APAC-Southeast's. The proceedings
are continuing and it is not possible to determine at this time the likely
eventual outcome or what impact it will have on APAC-Southeast's
operations.
Other Legal Proceedings - In addition to the matters described above,
there are various claims, lawsuits and administrative proceedings pending
or threatened against Ashland and its current and former subsidiaries. Such
actions are with respect to commercial matters, product liability, toxic
tort liability and other environmental matters, which seek remedies or
damages, some of which are for substantial amounts. While these actions are
being contested, their outcome is not predictable.
ITEM 1A. RISK FACTORS
During the period covered by this report, there were no material
changes from the risk factors previously disclosed in Ashland's Form 10-K,
as amended, for the year ended September 30, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information regarding purchases of
Ashland Common Stock by Ashland during the second quarter of fiscal 2006.
Issuer Purchases of Equity Securities (1)
Maximum number (or
approximate dollar
value) of shares
Average price Total number of shares that may yet be
paid per share, purchased as part of purchased under
Total number of including publicly announced the plans or
Period shares purchased commission plans or programs programs
------- ---------------- --------------- ---------------------- ------------------
(a) (b) (c) (d)
January 1 - January 31 15,300 $63.25 15,300 $ 249,344,120
February 1 - February 28 367,900 $64.40 367,900 $ 225,650,548
March 1 - March 31 254,100 $65.26 254,100 $ 209,068,589
--------- -------- -------- ----------------
Total 637,300 $64.72 637,300 $ 209,068,589
(1) Ashland's stock repurchase program was originally announced on July
21, 2005. The amount of repurchases authorized at that time was
$270 million. After repurchasing $196 million in Ashland Common
Stock under the original authorization, on January 25, 2006,
Ashland announced that the authorization has been increased by an
additional $176 million bringing the total authorization at that
time to $250 million.
ITEM 6. EXHIBITS
(a) Exhibits
--------
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer
of Ashland pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer
of Ashland, and J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Ashland Inc.
----------------------------------------------
(Registrant)
Date: May 9, 2006 /s/ J. Marvin Quin
----------------------------------------------
J. Marvin Quin
Senior Vice President and Chief Financial Officer
(on behalf of the Registrant and as principal
financial officer)
25
EXHIBIT INDEX
Exhibit
No. Description
-------- --------------------------------------------------------------
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland, and J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
26