================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (859) 815-3333
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [x] No
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [x] No
At April 30, 2003, there were 68,242,617 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.
================================================================================
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
----------------------- -----------------------
(In millions except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues $ 1,692 $ 1,598 $ 3,479 $ 3,410
Equity income 29 9 64 61
Other income 15 18 38 37
---------- ---------- ----------- ----------
1,736 1,625 3,581 3,508
COSTS AND EXPENSES
Cost of sales and operating expenses 1,402 1,290 2,852 2,755
Selling, general and administrative expenses 300 282 604 550
Depreciation, depletion and amortization 55 54 109 106
---------- ---------- ----------- ----------
1,757 1,626 3,565 3,411
---------- ---------- ----------- ----------
OPERATING INCOME (LOSS) (21) (1) 16 97
Net interest and other financial costs (32) (34) (65) (70)
---------- ---------- ----------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (53) (35) (49) 27
Income taxes 19 14 17 (10)
---------- ---------- ----------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (34) (21) (32) 17
Results from discontinued operations (net of income taxes) - Note C (5) - (99) -
---------- ---------- ----------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (39) (21) (131) 17
Cumulative effect of accounting change (net of income taxes) - Note B - - - (12)
---------- ---------- ----------- ----------
NET INCOME (LOSS) $ (39) $ (21) $ (131) $ 5
========== ========== =========== ==========
BASIC EARNINGS (LOSS) PER SHARE - Note A
Income (loss) from continuing operations $ (.50) $ (.31) $ (.46) $ .24
Results from discontinued operations (.07) - (1.45) -
Cumulative effect of accounting change - - - (.16)
---------- ---------- ----------- ----------
Net income (loss) $ (.57) $ (.31) $ (1.91) $ .08
========== ========== =========== ==========
DILUTED EARNINGS (LOSS) PER SHARE - Note A
Income (loss) from continuing operations $ (.50) $ (.31) $ (.46) $ .24
Results from discontinued operations (.07) - (1.45) -
Cumulative effect of accounting change - - - (.16)
---------- ---------- ----------- ----------
Net income (loss) $ (.57) $ (.31) $ (1.91) $ .08
========== ========== =========== ==========
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .55 $ .55
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
March 31 September 30 March 31
(In millions) 2003 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 106 $ 90 $ 156
Accounts receivable 1,101 1,124 1,030
Allowance for doubtful accounts (40) (35) (38)
Inventories - Note A 509 485 475
Deferred income taxes 89 122 121
Other current assets 146 139 91
------------- ------------- --------------
1,911 1,925 1,835
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,315 2,350 2,328
Goodwill 525 521 515
Asbestos insurance receivable (noncurrent portion) 394 171 170
Other noncurrent assets 358 341 388
------------- -------------- --------------
3,592 3,383 3,401
PROPERTY, PLANT AND EQUIPMENT
Cost 3,128 3,118 3,063
Accumulated depreciation, depletion and amortization (1,758) (1,701) (1,639)
------------- -------------- --------------
1,370 1,417 1,424
------------- -------------- --------------
$ 6,873 $ 6,725 $ 6,660
============= ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 243 $ 201 $ 241
Trade and other payables 1,260 1,285 1,104
Income taxes 16 25 96
------------- -------------- --------------
1,519 1,511 1,441
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,568 1,606 1,625
Employee benefit obligations 480 509 448
Deferred income taxes 181 256 226
Reserves of captive insurance companies 186 166 183
Asbestos litigation reserve (noncurrent portion) 530 152 157
Other long-term liabilities and deferred credits 353 352 377
Commitments and contingencies - Notes E and F
------------- -------------- --------------
3,298 3,041 3,016
COMMON STOCKHOLDERS' EQUITY 2,056 2,173 2,203
------------- -------------- --------------
$ 6,873 $ 6,725 $ 6,660
============= ============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 2001 $ 69 $ 363 $ 1,920 $ (126) $ 2,226
Total comprehensive loss (1) 5 (7) (2)
Cash dividends (38) (38)
Issued common stock under
stock incentive plans 1 16 17
-------------- -------------- -------------- -------------- --------------
BALANCE AT MARCH 31, 2002 $ 70 $ 379 $ 1,887 $ (133) $ 2,203
============== ============== ============== ============== ==============
BALANCE AT OCTOBER 1, 2002 $ 68 $ 338 $ 1,961 $ (194) $ 2,173
Total comprehensive loss (1) (131) 44 (87)
Cash dividends (37) (37)
Issued common stock under
stock incentive plans 7 7
-------------- -------------- -------------- -------------- --------------
BALANCE AT MARCH 31, 2003 $ 68 $ 345 $ 1,793 $ (150) $ 2,056
============== ============== ============== ============== ==============
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Reconciliations of net income (loss) to total comprehensive loss follow.
Three months ended Six months ended
March 31 March 31
-------------------------------- ---------------------------------
(In millions) 2003 2002 2003 2002
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (39) $ (21) $ (131) $ 5
Minimum pension liability adjustment 19 - 19 -
Related tax expense (7) - (7) -
Unrealized translation gains (losses) 24 (5) 32 (10)
Related tax benefits - - - 3
-------------- -------------- -------------- --------------
Total comprehensive loss $ (3) $ (26) $ (87) $ (2)
============== ============== ============== ==============
- ------------------------------------------------------------------------------------------------------------------------------------
At March 31, 2003, the accumulated other comprehensive loss of $150 million
(after tax) was comprised of net unrealized translation losses of $31
million and a minimum pension liability of $119 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended
March 31
------------------------
(In millions) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
Income (loss) from continuing operations $ (32) $ 17
Expense (income) not affecting cash
Depreciation, depletion and amortization 109 106
Deferred income taxes 22 (79)
Equity income from affiliates (64) (61)
Distributions from equity affiliates 98 119
Change in operating assets and liabilities (1) (21) (92)
----------- ----------
112 10
CASH FLOWS FROM FINANCING
Proceeds from issuance of common stock 1 11
Repayment of long-term debt (161) (55)
Increase in short-term debt 165 50
Dividends paid (37) (38)
----------- ----------
(32) (32)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (55) (92)
Purchase of operations - net of cash acquired (5) (8)
Proceeds from sale of operations 6 -
Other - net (6) 20
----------- ----------
(60) (80)
----------- ----------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS 20 (102)
Cash provided (used) by discontinued operations (4) 22
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16 (80)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 90 236
----------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 106 $ 156
=========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL REPORTING
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial reporting and Securities and Exchange Commission
regulations. Although such statements are subject to any year-end audit
adjustments which may be necessary, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form 10-K for
the fiscal year ended September 30, 2002. Results of operations for the
periods ended March 31, 2003, are not necessarily indicative of results to
be expected for the year ending September 30, 2003.
INVENTORIES
- ----------------------------------------------------------------------------------------------------------------------
March 31 September 30 March 31
(In millions) 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------------------
Chemicals and plastics $ 387 $ 367 $ 339
Construction materials 78 68 84
Petroleum products 64 58 59
Other products 47 51 51
Supplies 7 6 5
Excess of replacement costs over LIFO carrying values (74) (65) (63)
------------- -------------- --------------
$ 509 $ 485 $ 475
============= ============== ==============
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (EPS) from continuing operations.
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ -----------------------
(In millions except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
NUMERATOR
Numerator for basic and diluted EPS - Income (loss)
from continuing operations $ (34) $ (21) $ (32) $ 17
========== =========== ========== ==========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 68 69 68 69
Common shares issuable upon exercise of stock options - - - 1
---------- ----------- ---------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 68 69 68 70
========== =========== ========== ==========
BASIC EPS $ (.50) $ (.31) $ (.46) $ .24
DILUTED EPS $ (.50) $ (.31) $ (.46) $ .24
PRODUCT WARRANTIES
Ashland's products are not generally sold with any extended warranties;
therefore, liabilities for product warranties are insignificant. Costs of
product warranties are generally recorded as incurred.
6
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK INCENTIVE PLANS
As of October 1, 2002, Ashland began expensing employee stock options in
accordance with Financial Accounting Standards Board (FASB) Statement No.
123 (FAS 123), "Accounting for Stock-Based Compensation," and its related
amendments. Ashland elected the modified prospective method of adoption,
under which compensation costs recorded in the periods ended March 31, 2003
are the same as that which would have been recorded had the recognition
provisions of FAS 123 been applied from its original effective date.
Results for prior periods have not been restated. Prior to October 1, 2002,
Ashland accounted for stock options under Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and
related Interpretations, and no expense was recorded. In addition to stock
options, Ashland grants nonvested stock awards to key employees and
directors, which are expensed over their vesting period under either APB 25
or FAS 123. The following table illustrates the effect on net income and
earnings per share if FAS 123 had been applied to all outstanding and
unvested awards in each period.
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ -----------------------
(In millions except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $ (39) $ (21) $ (131) $ 5
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 1 - 2 -
Deduct: Total stock-based employee compensation expense
determined under FAS 123 for all awards, net of related
tax effects (1) (1) (2) (2)
---------- ----------- ---------- ----------
Pro forma net income (loss) $ (39) $ (22) $ (131) $ 3
========== =========== ========== ==========
Earnings (loss) per share:
Basic - as reported $ (.57) $ (.31) $ (1.91) $ .08
Basic - pro forma $ (.57) $ (.32) $ (1.91) $ .05
Diluted - as reported $ (.57) $ (.31) $ (1.91) $ .08
Diluted - pro forma $ (.57) $ (.32) $ (1.91) $ .04
NOTE B - ACCOUNTING CHANGE - GOODWILL
As of October 1, 2001, Ashland adopted FASB Statement No. 142 (FAS 142),
"Goodwill and Other Intangible Assets." Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
subject to annual impairment tests. As a result of the adoption of FAS 142,
it was determined that the goodwill of Ashland Distribution was impaired.
Accordingly, an impairment loss of $14 million ($12 million net of income
taxes) was recorded as a cumulative effect of accounting change as of
October 1, 2001.
7
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE C - DISCONTINUED OPERATIONS
Ashland is subject to liabilities from claims alleging personal injury
caused by exposure to asbestos. During the quarter ended December 31, 2002,
Ashland increased its reserve for asbestos claims by $390 million to cover
litigation defense and claim settlement costs expected to be paid during
the next ten years. The reserve was further increased by $14 million during
the quarter ended March 31, 2003, to maintain the reserve at a level
adequate to cover future payments over a rolling 10-year period. Because
insurance provides reimbursements for most of these costs and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed, these
increases in the asbestos reserve are expected to be offset in part by
probable insurance recoveries valued at $242 million. The resulting $162
million pretax charge to income (net of deferred income tax benefits of $63
million) was reflected as an after-tax loss from discontinued operations of
$99 million in the Statements of Consolidated Income. See Note F for
further discussion of Ashland's asbestos-related litigation.
NOTE D - UNCONSOLIDATED AFFILIATES
Under Rule 3-09 of Regulation S-X, Ashland filed audited financial
statements for Marathon Ashland Petroleum LLC (MAP) for the year ended
December 31, 2002, on a Form 10-K/A on March 20, 2003. Unaudited income
statement information for MAP is shown below.
MAP is organized as a limited liability company that has elected to be
taxed as a partnership. Therefore, the parents are responsible for income
taxes applicable to their share of MAP's taxable income. The net income
reflected below for MAP does not include any provision for income taxes
that will be incurred by its parents.
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 the earnings of MAP and Ashland. A pretax
charge of $77 million was recognized by MAP in the December 2001 quarter
and reversed in the March 2002 quarter. As a result of these adjustments,
MAP's income from operations and net income for the three months ended
March 31, 2002, reflected in the table below, were increased by $77 million
and Ashland's equity income was increased by $29 million.
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ -------------------------
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 8,254 $ 5,306 $ 15,333 $ 11,048
Income from operations 82 34 176 181
Net income 77 32 169 176
Ashland's equity income 25 8 56 58
8
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE E - LEASES AND OTHER COMMITMENTS
LEASES
Under various operating leases, Ashland has guaranteed the residual value
of the underlying property that had an unamortized cost totaling $144
million at March 31, 2003. If Ashland had cancelled those leases at that
date, its maximum obligations under the residual value guarantees would
have amounted to $125 million. Ashland does not expect to incur any
significant charge to earnings under these guarantees, $76 million of which
relates to real estate. These lease agreements are with unrelated third
party lessors and Ashland has no additional contractual or other
commitments to any party relative to these leases.
FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities," was issued in January 2003. Under FIN 46 certain of the lessor
entities as currently structured would have to be consolidated in Ashland's
financial statements, beginning July 1, 2003. Ashland may restructure or
refinance those leases, purchase the assets from the lessor, or ultimately
consolidate the lessor entities. However, the impact of any of these
actions is not expected to be material to Ashland's consolidated financial
statements.
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 March 31, 2003, the recorded value of such
obligations is not significant, because new leasing activity has been
minimal. Ashland cannot currently estimate the ultimate value of the
obligations that will be recorded upon restructuring or refinancing current
leases or entering other new leases. However, the liability is generally
expected to be offset with an asset (prepaid rent), and both the asset and
liability will be amortized over the life of the lease, with no impact on
results of operations.
OTHER COMMITMENTS
Ashland has guaranteed 38% of MAP's payments for certain crude oil
purchases, up to a maximum guarantee of $95 million. At March 31, 2003,
Ashland's contingent liability under this guarantee amounted to the full
$95 million. Although Ashland has not made and does not expect to make any
payments under this guarantee, it has recorded the fair value of this
guarantee obligation, which is not significant.
NOTE F - LITIGATION, CLAIMS AND CONTINGENCIES
ASBESTOS-RELATED LITIGATION
Ashland is subject to liabilities from claims alleging personal injury
caused by exposure to asbestos. Virtually all of those liabilities result
from indemnification obligations undertaken in 1990 in connection with the
sale of Riley Stoker Corporation (Riley), a former subsidiary. Although
Riley was neither a producer nor a manufacturer of asbestos, its industrial
boilers contained some asbestos-containing components provided by other
companies.
A summary of asbestos claims activity follows. Because claims are
frequently filed and settled in large groups, the amount and timing of
settlements, as well as the number of open claims, can fluctuate
significantly from period to period.
9
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE F - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
Six months ended
March 31 Years ended September 30
----------------------- ------------------------------------------------
(In thousands) 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Open claims - beginning of period 160 167 118 93
New claims filed 35 45 52 37
Claims settled (4) (15) (2) (9)
Claims dismissed (13) (37) (1) (3)
----------------------- ------------- ------------- -------------
Open claims - end of period 178 160 167 118
======================= ============= ============= =============
Since October 1, 1999, Riley has been dismissed as a defendant in 64% of
the resolved claims. Amounts spent on litigation defense and claim
settlements totaled $26 million for the six months ended March 31, 2003,
compared to annual costs of $38 million in 2002, $15 million in 2001 and
$11 million in 2000.
During the December 2002 quarter, Ashland increased its reserve for
asbestos claims by $390 million to cover the litigation defense and claim
settlement costs expected to be paid during the next ten years. The reserve
was further increased by $14 million during the quarter ended March 31,
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 $580 million at March 31, 2003, compared to
$201 million at March 31, 2002.
The methodology used by HR&A to project future asbestos costs was based
largely on Ashland's recent experience, including claim-filing and
settlement rates, disease mix, open claims, and litigation defense and
claim settlement costs. Ashland's claim experience was compared to the
results of previously conducted epidemiological studies estimating the
number of people likely to develop asbestos-related diseases. Those studies
were undertaken in connection with national analyses of the population
expected to have been exposed to asbestos. Using that information, HR&A
estimated the number of future claims that would be filed, as well as the
related costs that would be incurred in resolving those claims.
However, projecting future asbestos costs is subject to numerous variables
that are extremely difficult to predict. In addition to the significant
uncertainties surrounding the number of claims that might be received,
other variables include the type and severity of the disease alleged by
each claimant, the long latency period associated with asbestos exposure,
dismissal rates, costs of medical treatment, the impact of bankruptcies of
other companies that are co-defendants in claims, uncertainties surrounding
the litigation process from jurisdiction to jurisdiction and from case to
case, and the impact of potential changes in legislative or judicial
standards. Furthermore, any predictions with respect to these variables are
subject to even greater uncertainty as the projection period lengthens. In
light of these inherent uncertainties, Ashland believes that ten years is
the most reasonable period for recognizing a reserve for future costs, and
that costs that might be incurred after that period are not reasonably
estimable.
Because insurance provides reimbursements for most of these costs and
coverage-in-place agreements exist with the insurance companies that
provide substantially all of the coverage currently being accessed, the
current year increases in the asbestos reserve are expected to be offset in
part by probable insurance recoveries valued at $242 million. At March 31,
2003, Ashland's receivable for recoveries of such costs from its insurers
amounted to $419 million, of which $28 million relates to costs previously
paid. Receivables from insurance companies amounted to $190 million at
March 31, 2002.
10
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE F - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
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 March 31, 2003, are expected to be due from Equitas Limited
(Equitas) and other London companies. Of the remainder, over 90% is
expected to come from companies or groups that are rated A or higher by A.
M. Best.
Although coverage limits are resolved in the coverage-in-place agreement
with Equitas and other London companies, there is a disagreement with these
companies over the timing of recoveries. The resolution of this
disagreement could have a material effect on the value of insurance
recoveries from those companies. In estimating the value of future
recoveries at March 31, 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
March 31, 2003, such locations included 98 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, approximately 130 current and former
operating facilities (including certain facilities conveyed to MAP) and
about 1,220 service station properties. Ashland's reserves for
environmental remediation amounted to $174 million at March 31, 2003, and
reflect its estimates of the most likely costs that will be incurred over
an extended period to remediate identified conditions for which the costs
are reasonably estimable, without regard to any third-party recoveries.
Engineering studies, probability techniques, historical experience and
other factors are used to identify and evaluate remediation alternatives
and their related costs in determining the estimated reserves for
environmental remediation.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods, changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as remediation continues.
None of the remediation locations is individually material to Ashland as
its largest reserve for any site is less than $10 million. As a result,
Ashland's exposure to adverse developments with respect to any individual
site is not expected to be material, and these sites are in various stages
of ongoing remediation. Although environmental remediation could have a
material effect on results of operations if a series of adverse
developments 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 with assurance.
11
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ ------------------------
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
APAC $ 374 $ 424 $ 932 $ 1,105
Ashland Distribution 712 621 1,348 1,205
Ashland Specialty Chemical 326 300 659 612
Valvoline 301 273 582 528
Intersegment sales
Ashland Distribution (5) (5) (10) (9)
Ashland Specialty Chemical (16) (15) (32) (30)
Valvoline - - - (1)
---------- ---------- ---------- ----------
1,692 1,598 3,479 3,410
Equity income
APAC 2 - 4 -
Ashland Specialty Chemical 2 1 4 2
Valvoline - - - 1
Refining and Marketing 25 8 56 58
---------- ---------- ---------- ----------
29 9 64 61
Other income
APAC (1) 6 2 6
Ashland Distribution 4 3 14 12
Ashland Specialty Chemical 8 7 15 12
Valvoline 1 1 3 2
Refining and Marketing 1 - 1 2
Corporate 2 1 3 3
---------- ---------- ---------- ----------
15 18 38 37
---------- ---------- ---------- ----------
$ 1,736 $ 1,625 $ 3,581 $ 3,508
========== ========== ========== ==========
OPERATING INCOME (LOSS)
APAC $ (57) $ (14) $ (56) $ 22
Ashland Distribution 7 (4) 15 5
Ashland Specialty Chemical 8 18 26 34
Valvoline 18 17 32 28
Refining and Marketing (1) 21 - 45 45
Corporate (18) (18) (46) (37)
---------- ---------- ---------- ----------
$ (21) $ (1) $ 16 $ 97
========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP, and other activities
associated with refining and marketing.
12
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
OPERATING INFORMATION BY INDUSTRY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ ------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
APAC
Construction backlog at March 31 (millions) (1) $ 1,800 $ 1,658
Hot-mix asphalt production (million tons) 4.1 4.6 11.2 13.9
Aggregate production (million tons) 5.3 5.9 12.4 13.8
Ready-mix concrete production (million cubic yards) 0.4 0.4 0.9 1.0
ASHLAND DISTRIBUTION (2)
Sales per shipping day (millions) $ 11.3 $ 10.0 $ 10.8 $ 9.7
Gross profit as a percent of sales 15.6% 15.9% 15.8% 16.2%
ASHLAND SPECIALTY CHEMICAL (2)
Sales per shipping day (millions) $ 5.2 $ 4.8 $ 5.3 $ 4.9
Gross profit as a percent of sales 33.3% 36.2% 33.9% 35.3%
VALVOLINE
Lubricant sales (million gallons) 48.6 48.6 92.9 91.8
Premium lubricants (percent of U.S. branded volumes) 18.7% 15.6% 17.8% 14.8%
REFINING AND MARKETING (3)
Refinery runs (thousand barrels per day)
Crude oil refined 853 891 842 908
Other charge and blend stocks 96 160 130 168
Refined product yields (thousand barrels per day)
Gasoline 483 591 525 604
Distillates 257 278 268 293
Asphalt 66 65 65 68
Other 143 123 115 117
----------- ---------- ---------- -----------
Total 949 1,057 973 1,082
Refined product sales (thousand barrels per day) (4) 1,280 1,228 1,293 1,273
Refining and wholesale marketing margin (per barrel) (5) $ 1.71 $ 0.68 $ 1.82 $ 1.74
Speedway SuperAmerica (SSA)
Retail outlets at March 31 2,005 2,097
Gasoline and distillate sales (million gallons) 829 852 1,726 1,768
Gross margin - gasoline and distillates (per gallon) $ .1166 $ .0827 $ .1085 $ .0989
Merchandise sales (millions) (6) $ 522 $ 540 $ 1,105 $ 1,124
Merchandise margin (as a percent of sales) 25.5% 24.0% 24.8% 24.0%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes APAC's proportionate share of the backlog of
unconsolidated joint ventures.
(2) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses, and depreciation and amortization relative to
manufacturing assets.
(3) Amounts represent 100% of MAP's operations, in which Ashland owns
a 38% interest.
(4) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(5) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(6) Effective January 1, 2003, SSA adopted EITF 02-16, "Accounting by
a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," which requires rebates from vendors to be
recorded as reductions to cost of sales. Rebates from vendors
recorded in SSA merchandise sales for periods prior to January 1,
2003 have not been restated and included $44 million in the three
months ended March 31, 2002; $46 million in the six months ended
March 31, 2003; and $91 million in the six months ended March 31,
2002.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Ashland reported a loss from continuing operations of $34 million for the
quarter ended March 31, 2003, compared to a loss of $21 million for the
quarter ended March 31, 2002. The March 2003 quarter also included a $5
million after-tax charge reflected in discontinued operations for future
asbestos liabilities less probable insurance recoveries. For the six months
ended March 31, 2003, Ashland reported a loss from continuing operations of
$32 million, compared to income of $17 million for the six months ended
March 31, 2002. An after-tax charge of $99 million associated with
estimated future asbestos liabilities less probable insurance recoveries is
reflected in discontinued operations for the 2003 period. The 2002 period
included a $12 million after-tax charge for the cumulative effect of an
accounting change for goodwill. An analysis of operating income by industry
segment follows.
APAC
CURRENT QUARTER - APAC reported an operating loss of $57 million for the
March 2003 quarter, compared to a loss of $14 million for the March 2002
quarter. APAC continues to suffer from adverse construction weather and
high hydrocarbon costs. While APAC typically experiences a slowdown in the
March quarter, this year has been markedly slower. Heavier than normal
precipitation in the December quarter continued through most of the March
quarter, while temperatures were colder than usual in about half of APAC's
operating area. These factors severely limited paving operations and the
sale of construction materials. Net construction job revenue (total revenue
less subcontract costs) decreased 11% from the prior year period, while
production of hot-mix asphalt declined 11%, and aggregate production
dropped 10%. Operating expenses included a 24% increase in the cost of
liquid asphalt and higher costs for fuels used to operate plants and
equipment. APAC also incurred a $3 million increase in implementation costs
associated with its business process redesign initiative, Project PASS.
YEAR-TO-DATE - APAC reported an operating loss of $56 million for the six
months ended March 31, 2003, compared to operating income of $22 million
for the six months ended March 31, 2002. The decline reflects the same
factors described in the current quarter comparison. Net construction job
revenue declined 17%, while production of hot-mix asphalt declined 19%, and
production of both aggregate and ready-mix concrete dropped 10%. Liquid
asphalt costs were 15% higher and Project PASS costs were up $5 million.
Looking forward, APAC's ability to achieve its previously announced target
of a 10% return on investment in fiscal 2004 is subject to a number of
factors, including successfully achieving internally generated cost savings
(which are on track), adequate governmental funding of highway construction
programs, normal weather conditions and reasonable energy costs.
ASHLAND DISTRIBUTION
CURRENT QUARTER - Ashland Distribution reported operating income of $7
million for the March 2003 quarter compared to an operating loss of $4
million for the March 2002 quarter, which included the impact of internal
execution problems related to the implementation of an enterprise resource
planning system. Margins have been under some pressure as a result of
hydrocarbon-driven cost increases for chemicals and plastics. However,
sales per shipping day increased 13%.
14
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASHLAND DISTRIBUTION (CONTINUED)
YEAR-TO-DATE - Ashland Distribution reported operating income of $15
million for the six months ended March 31, 2003, compared to $5 million for
the same period of 2002. The increase reflects the same factors described
in the current quarter comparison, as sales per shipping day increased 11%.
A significant portion of the profits for both periods ($6 million in 2003
and $7 million in 2002) came from litigation settlements and asset sales.
ASHLAND SPECIALTY CHEMICAL
CURRENT QUARTER - Ashland Specialty Chemical reported operating income of
$8 million for the March 2003 quarter, compared to $18 million for the
March 2002 quarter. Sales per shipping day increased 8%, despite weak
industrial output. However, rising raw material prices were the primary
factor contributing to the decline in profits. The composite polymers,
maleic anhydride, and specialty polymers & adhesives businesses were
hardest hit by the rising costs, necessitating price increases that went
into effect April 1, 2003. Casting solutions and electronic chemicals
reported higher results, reflecting increased sales volumes due to market
improvements.
YEAR-TO-DATE - Ashland Specialty Chemical reported operating income of $26
million for the six months ended March 31, 2003, compared to $34 million
for the same period of 2002. Although sales per shipping day increased 8%,
margin compression, especially in composite polymers, led to the decline in
operating income. Results from electronic chemicals, casting solutions and
water treatment improved reflecting increased sales volumes due to market
improvements.
VALVOLINE
CURRENT QUARTER - Valvoline reported operating income of $18 million for
the March 2003 quarter compared to $17 million for the March 2002 quarter.
Overall sales revenues increased 10% over last year's quarter. The
improvement reflects higher branded lubricant sales volumes and improved
international sales. An increase in the average ticket price contributed to
record March quarter earnings for Valvoline Instant Oil Change. The most
significant contributor to Valvoline's profits is continued success in the
premium products category. While Valvoline's total U.S. branded lubricant
volumes were up 6% this quarter, premium product volumes were up 25%.
YEAR-TO-DATE - Valvoline reported operating income of $32 million for the
six months ended March 31, 2003, compared to $28 million for the same
period of 2002. Higher volumes from the core lubricants business and the
success of Valvoline's ongoing premium products strategy contributed to the
improvement. Valvoline Instant Oil Change reported record six months
results and earnings from international operations improved. The sale of
nearly all of Valvoline's remaining R-12 refrigerant inventory added
modestly to operating profit.
15
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
REFINING AND MARKETING
CURRENT QUARTER - Operating income from Refining and Marketing, which
consists primarily of equity income from Ashland's 38% ownership interest
in MAP, amounted to $21 million for the quarter ended March 31, 2003. This
compares to near breakeven results for the March 2002 quarter, which
benefited from a $29 million pretax, non-cash gain to adjust the carrying
value of MAP's inventories to the lower of cost or market value. Equity
income from MAP's refining and wholesale marketing operations (which
excludes the impact of the inventory adjustment) was up $41 million,
reflecting an increase of $1.03 per barrel in MAP's refining and wholesale
marketing margin. The positive effects of improved refining crack spreads
and wider differentials between sweet and sour crude oil prices were
partially offset by higher maintenance, natural gas and purchased product
costs. As a result of planned and unplanned maintenance at MAP's
refineries, refinery throughputs were down 10% and were supplemented with
increased volumes of higher-cost purchased refined products. Equity income
from MAP's retail operations (Speedway SuperAmerica and a 50% interest in
the Pilot Travel Centers joint venture) increased $8 million, reflecting an
increase in product margins.
YEAR-TO-DATE - Operating income from Refining and Marketing amounted to $45
million for both the six months ended March 31, 2003 and 2002. Equity
income from MAP's refining and wholesale marketing operations declined $4
million. MAP's refining and wholesale marketing margin improved 8 cents per
barrel reflecting the same factors described in the current quarter
comparison. However, this improvement was more than offset by increased
operating and administrative expenses. Equity income from MAP's retail
operations increased $5 million, reflecting an increase in product margins.
CORPORATE
Corporate expenses amounted to $18 million in both the quarter ended March
31, 2003 and 2002. Corporate expenses on a year-to-date basis amounted to
$46 million in the 2003 period, compared to $37 million in the 2002 period.
The increase reflects an $8 million charge in the December 2002 quarter for
severance and other transition costs related to Ashland's program to reduce
general and administrative costs by $25 million per year, as well as the
expensing of employee stock options which began October 1, 2002.
NET INTEREST AND OTHER FINANCIAL COSTS
For the quarter ended March 31, 2003, net interest and other financial
costs totaled $32 million, compared to $34 million for the March 2002
quarter. For the year-to-date, net interest and other financial costs
amounted to $65 million in the 2003 period, compared to $70 million in the
2002 period. The decline reflects the repayment of currently maturing
long-term debt with lower rate short-term debt, as well as reduced interest
rates.
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGE
As described in Notes C and F to the Condensed Consolidated Financial
Statements, Ashland's results include losses from discontinued operations
associated with estimated future asbestos liabilities less probable
insurance recoveries.
As described in Note B to the Condensed Consolidated Financial Statements,
Ashland recognized an impairment loss of $12 million after income taxes
related to the goodwill of Ashland Distribution, as a result of the
adoption of FAS 142 as of October 1, 2001.
16
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity, amounted
to $112 million for the six months ended March 31, 2003, compared to $10
million for the six months ended March 31, 2002. Although cash flows from
APAC were down as a result of its lower earnings, most of the other
segments reported improvements. Cash distributions from MAP amounted to $93
million in the 2003 period and $119 million in the 2002 period. However,
income taxes paid by Ashland related to MAP's earnings were $112 million
lower in the 2003 period than in the 2002 period. Ashland pays income taxes
on most of its share of the taxable earnings reported by MAP in the
following year, creating timing issues in Ashland's cash flows from year to
year. Ashland's cash flows from operations exceeded its capital
requirements for net property additions and dividends by $19 million for
the six months ended March 31, 2003.
Ashland's financial position has enabled it to obtain capital for its
financing needs and to maintain investment grade ratings on its senior debt
of Baa2 from Moody's and BBB from Standard & Poor's. Ashland has two
revolving credit agreements providing for up to $425 million in borrowings,
neither of which has been used. Under a shelf registration, Ashland can
also issue an additional $545 million in debt and equity securities should
future opportunities or needs arise. Furthermore, Ashland has access to the
commercial paper markets and various uncommitted lines of credit. While the
revolving credit agreements contain a covenant limiting new borrowings
based on Ashland's stockholders' equity, these agreements would have
permitted an additional $1.2 billion of borrowings at March 31, 2003.
Additional permissible borrowings are increased (decreased) by 150% of any
increase (decrease) in stockholders' equity.
At March 31, 2003, working capital (excluding debt due within one year)
amounted to $635 million, compared to $615 million at September 30, 2002,
and $635 million at March 31, 2002. Ashland's working capital is affected
by its use of the LIFO method of inventory valuation. That method valued
inventories below their replacement costs by $74 million at March 31, 2003,
$65 million at September 30, 2002, and $63 million at March 31, 2002.
Liquid assets (cash, cash equivalents and accounts receivable) amounted to
77% of current liabilities at March 31, 2003, compared to 78% at September
30, 2002, and 80% at March 31, 2002.
CAPITAL RESOURCES
For the six months ended March 31, 2003, property additions amounted to $55
million, compared to $92 million for the same period last year. Ashland
anticipates meeting its remaining 2003 capital requirements for property
additions, dividends and scheduled debt repayments of $30 million from
internally generated funds.
Ashland's debt level amounted to $1.8 billion at March 31, 2003, and
September 30, 2002, compared to $1.9 billion at March 31, 2002. Debt as a
percent of capital employed amounted to 46.8% at March 31, 2003, compared
to 45.4% at September 30, 2002, and 45.9% at March 31, 2002. At March 31,
2003, Ashland's debt included $214 million of floating-rate obligations,
including $175 million of short-term commercial paper and $39 million of
long-term debt, and the interest rates on an additional $153 million of
fixed-rate, medium-term notes were effectively converted to floating rates
through interest rate swap agreements. In addition, Ashland's costs under
its sale of receivables program and various operating leases are based on
the floating-rate interest costs on $246 million of third-party debt
underlying those transactions. As a result, Ashland was exposed to
fluctuations in short-term interest rates on $613 million of debt
obligations at March 31, 2003.
17
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASBESTOS-RELATED LITIGATION AND ENVIRONMENTAL REMEDIATION
For a discussion of Ashland's asbestos-related litigation and environmental
remediation matters, see Note F to the Condensed Consolidated Financial
Statements.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis (MD&A) contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, with respect to
various information in the Results of Operations, Capital Resources,
Asbestos-Related Litigation and Environmental Remediation sections of this
MD&A. Estimates as to operating performance, earnings, and scope and effect
of asbestos and environmental liabilities are based upon a number of
assumptions, including those mentioned in MD&A. Such estimates are also
based upon internal forecasts and analyses of current and future market
conditions and trends, management plans and strategies, weather, operating
efficiencies and economic conditions, such as prices, supply and demand,
cost of raw materials, and legal proceedings and claims (including asbestos
and environmental matters). Although Ashland believes its expectations are
based on reasonable assumptions, it cannot assure the expectations
reflected in MD&A will be achieved. This forward-looking information may
prove to be inaccurate and actual results may differ significantly from
those anticipated if one or more of the underlying assumptions or
expectations proves to be inaccurate or is unrealized, or if other
unexpected conditions or events occur. Other factors and risks affecting
Ashland are contained in Risks and Uncertainties in Note A to the
Consolidated Financial Statements in Ashland's 2002 Annual Report and in
Ashland's Form 10-K for the fiscal year ended September 30, 2002, as
amended. Ashland undertakes no obligation to subsequently update or revise
these forward-looking statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland's market risk exposure at March 31, 2003 is consistent with, and
not greater than, the types and amounts of market risk exposures presented
in Ashland's Form 10-K for the fiscal year ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Ashland's Chief Executive Officer and its Chief Financial Officer,
after evaluating the effectiveness of Ashland's disclosure
controls and procedures as of a date within 90 days of the filing
date of this Form 10-Q, have concluded that the disclosure
controls and procedures were effective to ensure that material
information relating to Ashland and its consolidated subsidiaries
was made known to them by others within those entities.
(b) There were no significant changes in Ashland's internal controls
or in other factors that could significantly affect these controls
or procedures subsequent to the date of Ashland's evaluation, nor
were there any significant deficiencies or material weaknesses in
Ashland's internal controls requiring corrective action.
19
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - As of March 31, 2003, Ashland has been
identified as a "potentially responsible party" ("PRP") under Superfund or
similar state laws for potential joint and several liability for clean-up
costs in connection with alleged releases of hazardous substances
associated with 98 waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the United States Environmental Protection Agency or a state
agency, in which Ashland is typically participating as a member of a PRP
group. Generally, the type of relief sought includes remediation of
contaminated soil and/or groundwater, reimbursement for past costs of site
clean-up and administrative oversight, and/or long-term monitoring of
environmental conditions at the sites. The ultimate costs are not
predictable with assurance. For additional information regarding
environmental matters and reserves, see Note F to the Condensed
Consolidated Financial Statements.
ASBESTOS-RELATED LITIGATION - Ashland is subject to liabilities from
claims alleging personal injury caused by exposure to asbestos. For
additional information regarding liabilities arising from asbestos-related
litigation, see Note F to the Condensed Consolidated Financial Statements.
SHAREHOLDER DERIVATIVE LITIGATION - On August 16, 2002, Central
Laborers' Pension Fund, derivatively as a shareholder of Ashland,
instituted an action in the Circuit Court of Kentucky in Kenton County
against Ashland's then-serving Board of Directors. On motion of Ashland and
the other defendants, the case was removed to the United States District
Court, Eastern District of Kentucky, Covington Division. Plaintiff has
moved to remand the case to the state court. The action is purportedly
filed on behalf of Ashland, and asserts the following causes of action
against the Directors: breach of fiduciary duty, abuse of control, gross
mismanagement, and waste of corporate assets. The suit also names Paul W.
Chellgren, the then-serving Chief Executive Officer and Chairman of the
Board, and James R. Boyd, former Senior Vice President and Group Operating
Officer, as individual defendants, and it seeks to recover an unstated sum
from them individually alleging unjust enrichment from various transactions
completed during their tenure with Ashland. The suit further seeks an
unspecified sum from Mr. Chellgren individually based upon alleged
usurpation of corporate opportunities. The suit also names Mr. J. Marvin
Quin, Ashland's Chief Financial Officer, as well as three former employees
of Ashland's wholly-owned subsidiary, APAC, as individual defendants and
alleges that they participated in the preparation and filing of false
financial statements during fiscal years 1999 - 2001. The suit further
names Ernst & Young LLP ("E&Y"), as a defendant, alleging professional
accounting malpractice and negligence in the conduct of its audit of
Ashland's 1999 and 2000 financial statements, respectively, as well as
alleging that E&Y aided and abetted the individual defendants in their
alleged breach of duties. The complaint seeks to recover, jointly and
severally, from defendants an unstated sum of compensatory and punitive
damages. The complaint seeks equitable and/or injunctive relief to avoid
continuing harm from alleged ongoing illegal acts, and seeks a disgorgement
of defendants' alleged insider-trading gains, in addition to the reasonable
cost and expenses incurred in bringing the complaint, including attorneys'
and experts' fees.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
12 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.
99.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C.
Section 1350.
(b) Reports on Form 8-K
-------------------
During the quarter ended March 31, 2003, and between such date and the
filing of this Form 10-Q, Ashland filed or furnished the following reports
on Form 8-K:
(1) Form 8-K dated January 23, 2003 reporting Ashland's first quarter
results.
(2) Form 8-K dated April 22, 2003 reporting Ashland's second quarter
results.
(3) Form 8-K dated May 2, 2003 containing a Regulation FD disclosure.
21
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 13, 2003 /s/ J. Marvin Quin
-------------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer (on behalf of the
Registrant and as principal financial
officer)
CERTIFICATION
Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by
Chief Executive Officer Regarding Facts and Circumstances Relating to
Exchange Act Filings.
I, James J. O'Brien, Chief Executive Officer of Ashland Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ashland
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant, and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
22
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ James J. O'Brien
--------------------------------
Chief Executive Officer
CERTIFICATION
StatementPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings.
I, J. Marvin Quin, Chief Financial Officer of Ashland Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ashland
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant, and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
23
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ J. Marvin Quin
--------------------------------
Chief Financial Officer
24
EXHIBIT INDEX
Exhibit
No. Description
- ------ ----------------------------------------------------------
12 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.
99.2 Certificate of J. Marvin Quin, Chief Financial Officer of Ashland
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350.
25
EXHIBIT 12
ASHLAND INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
Six months ended
Years ended September 30 March 31
------------------------------------------------------- ----------------------
1998 1999 2000 2001 2002 2002 2003
--------- --------- --------- --------- ---------- ---------- ----------
EARNINGS
- --------
Income (loss) from continuing operations $ 178 $ 291 $ 288 $ 403 $ 129 $ 17 $ (32)
Income taxes 114 194 189 273 71 10 (17)
Interest expense 133 141 189 160 133 68 62
Interest portion of rental expense 40 35 39 41 36 18 16
Amortization of deferred debt expense 1 1 2 2 2 1 1
Distributions in excess of (less than) earnings
of unconsolidated affiliates (62) (12) (112) (90) 20 58 34
--------- --------- --------- --------- ---------- ---------- ----------
$ 404 $ 650 $ 595 $ 789 $ 391 $ 172 $ 64
========= ========= ========= ========= ========== ========== ==========
FIXED CHARGES
- -------------
Interest expense $ 133 $ 141 $ 189 $ 160 $ 133 $ 68 $ 62
Interest portion of rental expense 40 35 39 41 36 18 16
Amortization of deferred debt expense 1 1 2 2 2 1 1
--------- --------- --------- --------- ---------- ---------- ----------
$ 174 $ 177 $ 230 $ 203 $ 171 $ 87 $ 79
========= ========= ========= ========= ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 2.32 3.67 2.59 3.89 2.29 1.98 0.81
Exhibit 99.1
ASHLAND INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ashland Inc. (the "Company") on
Form 10-Q for the period ended March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, James J.
O'Brien, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ James J. O'Brien
- --------------------------------
James J. O'Brien
Chief Executive Officer
May 13, 2003
Exhibit 99.2
ASHLAND INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ashland Inc. (the "Company") on
Form 10-Q for the period ended March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, J. Marvin
Quin, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ J. Marvin Quin
- ----------------------------------
J. Marvin Quin
Chief Financial Officer
May 13, 2003