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 December 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 December 31, 2006, there were 62,637,469 shares of Registrant's Common Stock outstanding.
ITEM 1. FINANCIAL STATEMENTS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended
December 31
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(In millions except per share data - unaudited) 2006 2005
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REVENUES
Sales and operating revenues $ 1,803 $ 1,686
Equity income 4 2
Other income 6 8
----------- -----------
1,813 1,696
COSTS AND EXPENSES
Cost of sales and operating expenses 1,489 1,397
Selling, general and administrative expenses 266 253
----------- -----------
1,755 1,650
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OPERATING INCOME 58 46
Gain on the MAP Transaction (a) - 2
Net interest and other financing income 16 10
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 74 58
Income taxes (21) (23)
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INCOME FROM CONTINUING OPERATIONS 53 35
Income (loss) from discontinued operations (net of income taxes) (b) (4) 31
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NET INCOME $ 49 $ 66
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BASIC EARNINGS PER SHARE - Note H
Income from continuing operations $ .82 $ .49
Income (loss) from discontinued operations (.06) .43
----------- -----------
Net income $ .76 $ .92
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DILUTED EARNINGS PER SHARE - Note H
Income from continuing operations $ .81 $ .48
Income (loss) from discontinued operations (.06) .43
----------- -----------
Net income $ .75 $ .91
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DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
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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.
(b) Ashland sold APAC to Oldcastle Materials, Inc. in August 2006 for
approximately $1.3 billion. After-tax operating results of APAC,
excluding previously allocated corporate costs, are reflected in
discontinued operations, with prior period restated.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31 September 30 December 31
(In millions - unaudited) 2006 2006 2005
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 516 $ 1,820 $ 601
Available-for-sale securities 436 349 479
Accounts receivable 1,385 1,441 1,226
Allowance for doubtful accounts (44) (40) (35)
Inventories - Note F 580 532 499
Deferred income taxes 76 93 66
Other current assets 65 55 80
Current assets of discontinued operations - - 472
------------ ------------- ------------
3,014 4,250 3,388
INVESTMENTS AND OTHER ASSETS
Goodwill and other intangibles 377 310 231
Asbestos insurance receivable (noncurrent portion) 440 444 363
Deferred income taxes 189 186 222
Other noncurrent assets 443 450 478
Noncurrent assets of discontinued operations - - 967
------------ ------------- ------------
1,449 1,390 2,261
PROPERTY, PLANT AND EQUIPMENT
Cost 2,042 2,007 1,848
Accumulated depreciation and amortization (1,079) (1,057) (1,015)
------------ ------------- ------------
963 950 833
------------ ------------- ------------
$ 5,426 $ 6,590 $ 6,482
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 7 $ 12 $ 12
Trade and other payables 1,059 1,302 1,025
Dividends payable - 674 -
Income taxes 10 53 2
Current liabilities of discontinued operations - - 203
------------ ------------- ------------
1,076 2,041 1,242
NONCURRENT LIABILITIES
Long-term debt (less current portion) 70 70 77
Employee benefit obligations 303 313 394
Asbestos litigation reserve (noncurrent portion) 577 585 512
Other long-term liabilities and deferred credits 522 485 483
Noncurrent liabilities of discontinued operations - - 88
------------ ------------- ------------
1,472 1,453 1,554
STOCKHOLDERS' EQUITY 2,878 3,096 3,686
------------ ------------- ------------
$ 5,426 $ 6,590 $ 6,482
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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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 - unaudited) stock capital earnings loss (a) Total
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BALANCE AT SEPTEMBER 30, 2005 $ 1 $ 605 $ 3,251 $ (118) $ 3,739
Total comprehensive income (b) 66 (12) 54
Cash dividends (20) (20)
Issued 164,203 common shares under
stock incentive and other plans (c) 9 9
Repurchase of 1,764,730 common shares (96) (96)
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BALANCE AT DECEMBER 31, 2005 $ 1 $ 518 $ 3,297 $ (130) $ 3,686
=========== =========== =========== =========== ===========
BALANCE AT SEPTEMBER 30, 2006 $ 1 $ 240 $ 2,899 $ (44) $ 3,096
Total comprehensive income (b) 49 11 60
Cash dividends (1) (17) (18)
Issued 492,303 common shares under
stock incentive and other plans (c) 28 28
Repurchase of 4,712,000 common shares (267) (21) (288)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2006 $ 1 $ - $ 2,910 $ (33) $ 2,878
=========== =========== =========== =========== ===========
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(a) At December 31, 2006 and 2005, the accumulated other comprehensive
loss (after tax) of $33 million for 2006 and $130 million for 2005 was
comprised of a minimum pension liability of $113 million for 2006 and
$160 million for 2005, net unrealized translation gains of $81 million
for 2006 and $31 million for 2005, and net unrealized losses on cash
flow hedges of $1 million for 2006 and $1 million for 2005.
(b) Reconciliations of net income to total comprehensive income follow.
Three months ended
December 31
------------------------------
(In millions) 2006 2005
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Net income $ 49 $ 66
Unrealized translation adjustments 9 (11)
Related tax benefits 1 -
Net unrealized gains (losses) on cash flow hedges 1 (1)
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Total comprehensive income $ 60 $ 54
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(c) Includes income tax benefits resulting from the exercise of stock options of $8 million in fiscal year 2007 and $2 million in fiscal year 2006.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Three months ended
December 31
------------------------------
(In millions - unaudited) 2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 49 $ 66
Loss (income) from discontinued operations (net of income taxes) 4 (31)
Adjustments to reconcile income from continuing operations to
cash flows from operating activities
Depreciation and amortization 28 25
Deferred income taxes 11 39
Equity income from affiliates (4) (2)
Distributions from equity affiliates 2 1
(Gain) on the MAP Transaction - (2)
Change in operating assets and liabilities (a) (212) (306)
Other items - (1)
----------- -----------
(122) (211)
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of common stock 13 4
Excess tax benefits related to share-based payments 6 1
Repayment of long-term debt (5) (5)
Repurchase of common stock (288) (96)
Cash dividends paid (692) (20)
----------- -----------
(966) (116)
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Additions to property, plant and equipment (35) (25)
Purchase of operations - net of cash acquired (73) -
Purchases of available-for-sale securities (286) (227)
Proceeds from sales and maturities of available-for-sale securities 207 152
Other - net 2 3
----------- -----------
(185) (97)
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CASH USED BY CONTINUING OPERATIONS (1,273) (424)
Cash (used) provided by discontinued operations
Operating cash flows (4) 64
Investing cash flows (27) (24)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,304) (384)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,820 985
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 516 $ 601
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(a) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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. In the opinion of management all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2006. Results of operations for the period ended December 31, 2006, are not necessarily indicative of results to be expected for the year ending September 30, 2007. Certain prior period data has been reclassified in the condensed consolidated financial statements and accompanying footnotes to conform to current period presentation.
On August 28, 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC), to Oldcastle Materials, Inc. (Oldcastle). The operating results and assets and liabilities related to APAC have been reflected as discontinued operations in the condensed consolidated financial statements for all periods presented. Unless otherwise noted, amounts in these Notes to Condensed Consolidated Financial Statements exclude amounts attributable to discontinued operations.
In June 2006, Ashland redefined its reportable business segments as it
continues to evolve into a diversified, global chemical company.
Performance Materials and Water Technologies, formerly combined under
Ashland Specialty Chemical, have now been separately disclosed since
these businesses serve different markets and recent acquisitions have
made Water Technologies a much larger and more distinct part of
Ashland. Performance Materials includes three related business groups:
Composite Polymers, Casting Solutions, and Specialty Polymers and
Adhesives. Water Technologies also includes three related business
groups: Drew Industrial, Drew Marine, and Environmental and Process
Solutions (which is the business acquired from Degussa AG in May
2006). Disclosing Performance Materials and Water Technologies
separately provides greater visibility to Ashland's strategy of
expanding its products, services and geographical reach in key market
segments where it competes. For further information on this revised
disclosure see "Information by Industry Segment" immediately following
the Notes to Condensed Consolidated Financial Statements on pages 15
and 16 of this document. Prior periods have been conformed to the
current period presentation.
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 and environmental remediation. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
NOTE B - NEW ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 157 (FAS 157), "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements since the FASB has previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. FAS 157 becomes effective for Ashland on October 1, 2008. Ashland is currently in the process of determining the effect, if any, the adoption of FAS 157 will have on the consolidated financial statements.
In September 2006, the FASB issued Financial Accounting Standard No.
158 (FAS 158), "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans," which requires an employer to
NOTE B - NEW ACCOUNTING STANDARDS (CONTINUED)
recognize the overfunded or underfunded status of a defined benefit pension or other postretirement plan (other than a multiemployer plan) as an asset or liability in its Consolidated Balance Sheet and to recognize changes in that funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders' equity. FAS 158 also requires additional disclosures in the notes to the consolidated financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. FAS 158 is effective for Ashland on September 30, 2007 and will not have an impact on the Statement of Consolidated Income, but will affect Ashland's Consolidated Balance Sheet. If Ashland had adopted this statement as of September 30, 2006, it would have increased accrued benefit liabilities by $117 million with a corresponding deferred tax asset increase of $46 million and an additional reduction in accumulated other comprehensive income of $71 million.
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition for tax related positions. FIN 48 becomes effective for Ashland on October 1, 2007. Ashland is currently in the process of determining the effect, if any, the adoption of FIN 48 will have on the consolidated financial statements.
NOTE C - DISCONTINUED OPERATIONS
As described in Note D of Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, APAC, to Oldcastle on August 28, 2006. The sale price of $1.30 billion was subject to adjustments for changes in working capital and certain other accounts from September 30, 2005, until the closing date. Oldcastle paid $34 million at closing as a preliminary estimate of the working capital adjustment that was subsequently calculated at $7 million. During the December 2006 quarter, Ashland repaid $25 million of the estimated purchase price adjustment to Oldcastle. Per the agreement, Oldcastle has a defined period of time to review this working capital calculation; therefore, future adjustments to the gain on the sale are possible until final approval is received. Ashland's Board of Directors authorized that substantially all of the $1.23 billion after-tax proceeds of the sale of APAC be distributed to the shareholders of Ashland by funding the completion of the then existing share repurchase authorization, an additional repurchase authorization and a one time special dividend. For further information on the special dividend and share repurchase programs see Note J - Capital Stock.
The total gain on the sale of APAC recorded in the September 2006 quarter, including a pension and other postretirement curtailment gain, amounted to $162 million pretax and $110 million after-tax. In the December 2006 quarter subsequent post-closing adjustments were made to the gain, which adjusted the total gain on sale of APAC to $162 million pretax and $105 million after-tax.
APAC qualifies as discontinued operations under FASB Statement No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, the results, net of tax, and assets and liabilities of discontinued operations are presented separately in Ashland's condensed consolidated financial statements and the notes to condensed consolidated financial statements have been adjusted to reflect discontinued operations. The amounts eliminated from continuing operations did not include allocations of corporate expenses included in the selling, general and administrative expenses caption in the Statements of Consolidated Income and the related combined 39% U.S. federal (35%) and state (4%, net of federal deductions) statutory income tax benefits of such expenses. These corporate expenses were $10 million for the December 2005 quarter. In accordance with a consensus of the Emerging Issues Task Force
NOTE C - DISCONTINUED OPERATIONS (CONTINUED)
(EITF 87-24), allocations of general corporate overhead may not be allocated to discontinued operations for financial statement presentation.
Due to refinements in the working capital calculation and other post-closing adjustments, the gain may continue to be adjusted in future periods. Adjustments to the gain will be reflected in the quarter they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.
Components of amounts in the Statements of Consolidated Income related to discontinued operations are presented in the following table for the three months ended December 31, 2006 and 2005.
--------------------------------------------------------------------------------------------------- (In millions) 2006 2005 --------------------------------------------------------------------------------------------------- REVENUES FROM DISCONTINUED OPERATIONS APAC $ - $ 733 INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES) APAC - 31 LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (NET OF INCOME TAXES) APAC (4) - |
NOTE D - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
In December 2006, Performance Materials acquired Northwest Coatings of Oak Creek, Wisconsin, a formulator and manufacturer of adhesives and coatings employing ultraviolet and electron beam (UV/EB) polymerization technologies from Caltius Equity Partners. The transaction, which includes production facilities in Milwaukee, Wisconsin and Greensboro, North Carolina, was valued at $74 million. At the time this purchase transaction was announced, Northwest Coatings had trailing twelve month sales of approximately $40 million. The results of Northwest Coatings are included in the Statement of Consolidated Income from the date of acquisition.
In May 2006, Ashland acquired the water treatment business of Degussa AG (Degussa), branded under the Stockhausen name, with five manufacturing facilities operating in Germany, China, Brazil, Russia and the United States. The acquisition allows Ashland's Water Technologies segment to expand its technology base, product line and service levels while continuing to develop its presence in key emerging international markets. For its fiscal year ended December 31, 2005, Degussa reported sales and operating revenues (translated to U.S. dollars) of $258 million and operating income of $10 million. The transaction, denominated in Euros, was valued at $162 million at the exchange rate on the acquisition date. For further information on the purchase price allocation of this transaction see Note L in Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
DIVESTITURES
On August 28, 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC), to Oldcastle Materials, Inc. (Oldcastle). The operating results and assets and liabilities related to APAC have been reflected as discontinued operations in the condensed consolidated financial statements for all periods presented. For further information on this transaction see Note C - Discontinued Operations.
NOTE E - 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. The carrying value of the investments to defease debt, including other defeasements that occurred in fiscal 2005, at December 31, 2006 was $45 million and at September 30, 2006 was $51 million. The carrying value of the debt at December 31, 2006 was $39 million and $44 million at September 30, 2006.
NOTE F - 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 Condensed Consolidated Balance Sheet dates.
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December 31 September 30 December 31
(In millions) 2006 2006 2005
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Chemicals and plastics $ 577 $ 540 $ 497
Lubricants 94 84 88
Other products and supplies 53 55 56
Excess of replacement costs over LIFO carrying values (144) (147) (142)
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$ 580 $ 532 $ 499
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NOTE G - GOODWILL AND OTHER INTANGIBLES
In accordance with FASB Statement No. 142 (FAS 142), "Goodwill and Other Intangible Assets," Ashland conducts an annual review for impairment. Impairment is to be examined more frequently if certain indicators are encountered. In accordance with FAS 142, Ashland reviewed goodwill for impairment based on reporting units, which are defined as operating segments or groupings of businesses one level below the operating segment level. Ashland has completed its most recent annual goodwill impairment test required by FAS 142 as of July 1, 2006 and has determined that no impairment exists. The following is a progression of goodwill by segment for the three months ended December 31, 2006. There was no significant goodwill activity for the three months ended December 31, 2005.
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Performance Water
(In millions) Materials Distribution Valvoline Technologies Total
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Balance at September 30, 2006 $ 110 $ 1 $ 29 $ 70 $ 210
Acquisitions 47 - - 1 48
Currency translation adjustment 1 - - 1 2
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Balance at December 31, 2006 $ 158 $ 1 $ 29 $ 72 $ 260
=========== ============= ========= ============ ========
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Intangible assets consist of trademarks and trade names, patents and licenses, non-compete agreements, sale contracts, customer lists and intellectual property. Intangibles are amortized on a straight-line basis over their estimated useful lives. The cost of trademarks and trade names is amortized principally over 10 to 25 years, intellectual property over 5 to 17 years and other intangibles over 3 to 30 years. Ashland reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Intangible assets were comprised of the following as of December 31, 2006 and 2005.
NOTE G - GOODWILL AND OTHER INTANGIBLES (CONTINUED)
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2006 2005
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Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(In millions) amount amortization amount amount amortization amount
--------------------------------------------------------------------------- --------------------------------------
Trademarks and trade names $ 64 $ (20) $ 44 $ 55 $ (19) $ 36
Intellectual property 40 (6) 34 19 (4) 15
Other intangibles 50 (11) 39 24 (8) 16
-------- ------------ -------- -------- ------------ --------
Total intangible assets $ 154 $ (37) $ 117 $ 98 $ (31) $ 67
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Amortization expense recognized on intangible assets for the three months ended December 31 was $3 million for 2006 and $1 million for 2005. As of December 31, 2006, all of Ashland's intangible assets that had a carrying value were being amortized except for certain trademarks and trade names that currently have been determined to have indefinite lives. These assets had a balance of $32 million as of December 31, 2006 and $23 million as of December 31, 2005. In accordance with FAS 142, Ashland annually reviews these assets to determine whether events and circumstances continue to support the indefinite useful life. Estimated amortization expense for future periods is $11 million in 2007 (includes three months actual and nine months estimated), $11 million in 2008, $10 million in 2009, $7 million in 2010 and $6 million in 2011.
NOTE H - EARNINGS PER SHARE
Following is the computation of basic and diluted earnings per share
(EPS) from continuing operations.
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Three months ended
December 31
--------------------------
(In millions except per share data) 2006 2005
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NUMERATOR
Numerator for basic and diluted EPS - Income
from continuing operations $ 53 $ 35
=========== ===========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 64 72
Common shares issuable upon exercise of stock options and stock appreciation rights 1 1
----------- -----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 65 73
=========== ===========
EPS FROM CONTINUING OPERATIONS
Basic $ .76 $ .92
Diluted $ .75 $ .91
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NOTE I - EMPLOYEE BENEFIT PLANS
Presently, Ashland anticipates contributing $51 million to its U.S.
pension plans and $7 million to its non-U.S. pension plans during
fiscal 2007. As of December 31, 2006, contributions of $20 million
have been made to the U.S. plans and $1 million to the non-U.S. plans.
The following table details the components of pension and other
postretirement benefit costs.
------------------------------------------------------------------------------------------------
Other postretirement
Pension benefits benefits
------------------------ ------------------------
(In millions) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31
Service cost $ 9 $ 15 $ 1 $ 2
Interest cost 19 21 3 3
Expected return on plan assets (21) (25) - -
Amortization of prior service credit - - (1) (2)
Amortization of net actuarial loss 5 10 - -
---------- ---------- ---------- ----------
$ 12 $ 21 $ 3 $ 3
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NOTE J - CAPITAL STOCK
On September 14, 2006 Ashland's Board of Directors authorized the distribution of a substantial portion of the proceeds of the sale of APAC to the Ashland Common Stock shareholders as a one-time special dividend. Each shareholder of record as of October 10, 2006, received $10.20 per share, for a total of $674 million. This amount was accrued as dividends payable in the Condensed Consolidated Balance Sheet at September 30, 2006. Substantially all of the remaining proceeds were directed to be used to repurchase Ashland Common Stock in accordance with the terms authorized by Ashland's Board of Directors and as further described below.
The stock repurchases were made pursuant to two different programs authorized by Ashland's Board of Directors. The first program, originally approved on July 21, 2005, authorized the purchase of $270 million of Ashland common stock in the open market. After 3.5 million shares at a cost of $196 million had been purchased under the initial authorization, on January 25, 2006, Ashland's Board of Directors increased the remaining authorization by $176 million to $250 million. As of September 14, 2006, Ashland had completed all repurchases to be made under this program.
The second program was authorized by Ashland's Board of Directors on September 14, 2006, employing the remaining after-tax proceeds from the sale of APAC to repurchase up to an additional 7 million shares. To facilitate this repurchase program, Ashland entered into a stock trading plan with Credit Suisse Securities (USA) LLC (Credit Suisse). The stock trading plan, amended and restated on September 20, 2006, allowed Credit Suisse to make daily repurchases of stock starting on October 2, 2006, in accordance with the instructions set forth in the filed plan and within the safe harbor from insider trading liability provided under Exchange Act Rule 10b5-1.
Ashland repurchased 4.7 million shares for $288 million in the December 2006 quarter and 1.8 million shares for $96 million in the December 2005 quarter. Since the inception of the first described share repurchase program on July 21, 2005 through the completion of the second share repurchase program on December 19, 2006, Ashland repurchased a total of 13.2 million shares at a cost of $793 million. These repurchases represent approximately 18% of shares outstanding on June 30, 2005. The stock repurchase actions are consistent with certain representations of intent made to the Internal Revenue Service with respect to the transfer of MAP.
NOTE K - 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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Three months ended
December 31 Years ended September 30
-------------------------- ----------------------------------------
(In thousands) 2006 2005 2006 2005 2004
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Open claims - beginning of period 162 184 184 196 198
New claims filed 1 2 6 12 29
Claims settled - (1) (3) (6) (7)
Claims dismissed (12) (4) (25) (18) (24)
---------- ----------- ---------- ---------- ----------
Open claims - end of period 151 181 162 184 196
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Since October 1, 2003, Riley has been dismissed as a defendant in 82% of the resolved claims. Amounts spent on litigation defense and claim settlements averaged $686 per claim resolved in the three months ended December 31, 2006, compared to $1,961 in the three months ended December 31, 2005, and annual averages of $1,428 in 2006, $1,985 in 2005 and $1,655 in 2004. A progression of activity in the asbestos reserve is presented in the following table.
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Three months ended
December 31 Years ended September 30
-------------------------- ----------------------------------------
(In millions) 2006 2005 2006 2005 2004
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Asbestos reserve - beginning of period $ 635 $ 571 $ 571 $ 618 $ 610
Expense incurred - - 104 - 59
Amounts paid (8) (9) (40) (47) (51)
---------- ----------- ---------- ---------- ----------
Asbestos reserve - end of period $ 627 $ 562 $ 635 $ 571 $ 618
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Ashland retained Hamilton, Rabinovitz & Alschuler, Inc. (HR&A) to assist in developing and periodically updating independent and accurate reserve estimates for future asbestos claims and related costs given various assumptions. The methodology used by HR&A to project future asbestos costs is based largely on Ashland's recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims, and litigation defense and claim settlement costs. Ashland's claim experience is compared to the results of previously conducted epidemiological studies estimating the number of people likely to develop asbestos-related diseases. Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos. Using that information, HR&A estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims.
From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs. During the most recent update of this estimate completed during the June 2006 quarter, it was determined that the reserves for asbestos claims should be increased by $104 million. This increase in the reserves was based on the results of a non-inflated, non-
NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
discounted 51-year model developed with the assistance of HR&A. This increase resulted in total reserves for asbestos claims of $627 million at December 31, 2006, compared to $635 million at September 30, 2006 and $562 million at December 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. These models are based on national studies that predict the number of people likely to develop asbestos-related diseases and are heavily influenced by assumptions regarding long-term inflation rates for indemnity payments and legal defense costs, as well as other variables mentioned previously. Ashland has estimated that it is reasonably possible that total future litigation defense and claim settlement costs on an inflated and undiscounted basis could range as high as approximately $1.9 billion, depending on the combination of assumptions selected in the various models. If actual experience is worse than projected relative to the number of claims filed, the severity of alleged disease associated with those claims or costs incurred to resolve those claims, Ashland may need to increase further the estimates of the costs associated with asbestos claims and these increases could potentially be material over time.
Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide substantially all of the coverage currently being accessed. As a result, increases in the asbestos reserve have been largely offset by probable insurance recoveries. The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland's insurance coverage.
Ashland has estimated the value of probable insurance recoveries associated with Ashland's estimate of its asbestos liabilities. Such recoveries are based on management's assumptions and estimates surrounding the available or applicable insurance coverage. One such assumption is that all solvent insurance carriers remain solvent. Although coverage limits are resolved in the coverage-in-place agreement with Equitas Limited (Equitas) and other London companies, which collectively provide a significant portion of Ashland's insurance coverage for asbestos claims, there was a disagreement with these companies over the timing of recoveries. In estimating the value of future recoveries, Ashland has historically used the least favorable interpretation of this agreement under which the ultimate recoveries are extended for many years, resulting in a significant discount being applied to value those recoveries. On June 16, 2006 an arbitrator reached a decision essentially confirming that interpretation. Ashland will continue to apply this methodology based on this arbitration decision.
At December 31, 2006, Ashland's receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $470 million, of which $69 million relates to costs previously paid. Receivables from insurers amounted to $474 million at September 30, 2006 and $393 million at December 31, 2005. The receivable was increased by $104 million during the June 2006 quarter, reflecting the updated model used for purposes of valuing the reserve described above, and its impact on the valuation of future recoveries from insurers. About 31% of the estimated receivables from insurance companies at December 31, 2006 are expected to be due from Equitas and other London companies. Of the remainder, approximately 97% is expected to come from companies or groups that are rated A or higher by A. M. Best.
NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
On October 20, 2006, Equitas announced an agreement in principle on a structure in which National Indemnity Company, a member of the Berkshire Hathaway group of insurance companies, will reinsure all of Equitas's liabilities, provide up to a further $7 billion of reinsurance coverage to Equitas, and take on the staff and operations of Equitas and conduct the run-off of Equitas's liabilities. Ashland is currently evaluating whether or not this transaction may have an impact on the valuation assumptions for the receivable recorded from Equitas.
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 December 31, 2006, such locations included 73 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 115 current and former operating facilities (including certain operating facilities conveyed to MAP) and about 1,230 service station properties, of which 223 are being actively remediated. Ashland's reserves for environmental remediation amounted to $200 million at December 31, 2006 compared to $199 million at September 30, 2006 and $179 million at December 31, 2005, of which $169 million at December 31, 2006, $168 million at September 30, 2006 and $147 million at December 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. Ashland regularly adjusts its reserves as environmental remediation continues. Environmental remediation expense amounted to $4 million for the three months ended December 31, 2006 and $8 million for the three months ended December 31, 2005, and annual expense was $57 million in 2006, $52 million in 2005 and $7 million in 2004.
Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland's ability to estimate its share of the costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites. Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range of future costs for identified sites could be as high as approximately $310 million. No individual remediation location is material to Ashland, as its largest reserve for any site is less than 10% of the remediation reserve.
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.
Three months ended
December 31
---------------------------
(In millions - unaudited) 2006 2005
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REVENUES
Sales and operating revenues
Performance Materials (a) $ 366 $ 352
Distribution 948 967
Valvoline 351 310
Water Technologies (a) 179 97
Intersegment sales
Performance Materials (a) (35) (33)
Distribution (5) (6)
Valvoline (1) (1)
------------ ------------
1,803 1,686
Equity income
Performance Materials (a) 3 2
Valvoline 1 -
------------ ------------
4 2
Other income
Performance Materials (a) 1 1
Distribution 1 1
Valvoline 2 3
Water Technologies (a) 1 1
Unallocated and other 1 2
------------ ------------
6 8
------------ ------------
$ 1,813 $ 1,696
============ ============
OPERATING INCOME
Performance Materials (a) $ 26 $ 26
Distribution 14 34
Valvoline 18 1
Water Technologies (a) 5 1
Unallocated and other (b) (5) (16)
------------ ------------
$ 58 $ 46
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
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(In millions) 2006 2005
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PERFORMANCE MATERIALS (a) (b)
Sales per shipping day $ 6.0 $ 5.8
Pounds sold per shipping day 5.0 5.2
Gross profit as a percent of sales 21.1% 21.6%
DISTRIBUTION (a)
Sales per shipping day $ 15.5 $ 15.9
Pounds sold per shipping day 19.1 20.5
Gross profit as a percent of sales 8.6% 10.2%
VALVOLINE (a)
Lubricant sales (gallons) 38.5 38.5
Premium lubricants (percent of U.S. branded volumes) 21.9% 22.9%
Gross profit as a percent of sales 23.8% 22.1%
WATER TECHNOLOGIES (a) (b)
Sales per shipping day $ 2.9 $ 1.6
Gross profit as a percent of sales 40.4% 48.5%
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(a) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
(b) In June 2006, Ashland redefined its reportable business segments as it
continues to evolve into a diversified chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland
Specialty Chemical, have now been separately disclosed. Prior periods
have been conformed to the current period presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Ashland reported income from continuing operations of $53 million for the quarter ended December 31, 2006 compared to $35 million for the quarter ended December 31, 2005. The $18 million increase in the current quarter was primarily due to increased operating income of $12 million and a $6 million increase in net interest and other financing income. Ashland's net income decreased $17 million to $49 million for the December 2006 quarter, compared to $66 million for the December 2005 quarter. The net income comparison is affected by the sale of Ashland Paving And Construction, Inc. (APAC) on August 28, 2006, which qualified as a discontinued operation in the Statements of Consolidated Income. Net income for the December 2005 quarter included $31 million of income from the discontinued APAC operations. Operating income for both periods excludes income from discontinued operations other than $10 million of corporate costs which had been allocated to APAC in the December 2005 quarter. Much of these previously allocated costs have been eliminated as of the December 2006 quarter, contributing to the $12 million increase in operating income.
Compared to the prior year's quarter, operating income increased 26% to $58 million driven by the recovery in Valvoline's results. Valvoline achieved a significant rebound in earnings, benefiting from stabilizing base oil costs and the effects of previously announced price increases, along with reductions in selling, general and administrative costs. Water Technologies recorded an 85% increase in sales and operating revenues and operating income grew substantially, both bolstered by the Environmental and Process Solutions (E&PS) business acquired last May. However, softness in U.S. industrial production adversely affected Distribution's results. Performance Materials was also impacted by soft automotive, marine and housing markets, but to a much lesser extent.
In the June 2006 quarter, Ashland redefined its reportable business segments as it continues to evolve into a diversified chemical company. Performance Materials and Water Technologies, formerly combined under Ashland Specialty Chemical have now been separately disclosed since these businesses serve different markets and recent acquisitions have made Water Technologies a much larger and more distinct part of Ashland.
PERFORMANCE MATERIALS
Performance Materials recorded operating income of $26 million for the December 2006 quarter which was essentially flat versus its operating income in the December 2005 quarter. Unit volume decreased 4% from 5.2 million pounds per shipping day in the December 2005 quarter to 5.0 million pounds per shipping day in the December 2006 quarter, resulting in a $4 million decline in operating income. The decline was primarily due to softness in the North American automotive, marine and construction markets. However, a more favorable product mix during the current quarter coupled with increased pricing led to a 4% increase in sales and operating revenues to $366 million, from $352 million in the December 2005 quarter. These factors plus reduced manufacturing costs had an offsetting $4 million positive impact on operating income.
DISTRIBUTION
Distribution reported disappointing quarterly results as operating income decreased 59% to $14 million compared to the December 2005 quarter, where hurricane-related product shortages and increased demand resulted in strong margins and record operating income of $34 million. Sales and operating revenues declined 2% from $967 million in the December 2005 quarter to $948 million in the December 2006 quarter, reflecting a 7% reduction in volume. Pounds sold per shipping day decreased in the current quarter to 19.1 million pounds from 20.5 million pounds in the December 2005 quarter, resulting in a $7 million decline in operating income. The month of December was particularly difficult in the current quarter, where volume decreased 17% compared to the prior December. This volume decrease in the month of December accounted for nearly 75% of the quarter-versus-quarter volume decline, as many customers elected to reduce
DISTRIBUTION (CONTINUED)
inventory levels in the last two weeks of December over the holiday period. Gross profit as a percent of sales declined from 10.2% to 8.6%, primarily due to the negative effect of lower volume on unit costs such as the fixed components of freight and warehousing. The decline in margin lowered operating income by $10 million compared to the December 2005 results. During the December 2006 quarter, Distribution implemented Ashland's new SAP(TM) enterprise resource planning (ERP) system which had a one-time negative impact of approximately $3 to $4 million on operating income and was partially the cause for a $3 million increase in selling, general and administrative expenses.
VALVOLINE
Valvoline reported record operating income results of $18 million during the current quarter compared to $1 million in the December 2005 quarter. Sales and operating revenues increased 13% over the December 2005 quarter to $351 million, reflecting increased pricing as volume levels were flat at 38.5 million lubricant gallons for both quarters. Gross profit as a percent of sales increased from 22.1% to 23.8%, resulting in a $17 million increase in operating income. A stable base oil market and the full effect of the September 2006 quarter price increases, coupled with lower expenses, led to significant margin recovery in the current quarter. Despite raising prices throughout fiscal year 2006, these price increases were not able to be implemented fast enough to offset rising feedstock costs. Lube oil feedstock costs had been steadily increasing for the past two years, but in the December 2006 quarter lubricant costs stabilized, with a small price decline actually occurring in November.
WATER TECHNOLOGIES
Water Technologies recorded operating income of $5 million during the December 2006 quarter compared to the $1 million reported in the December 2005 quarter. Sales and operating revenues increased 85% to $179 million in the current quarter compared to $97 million in the prior year's quarter, primarily due to the $79 million in sales and operating revenues contributed by the E&PS business, which was acquired from Degussa AG last May. Gross profit as a percent of sales decreased to 40.4% from 48.5%, reflecting the lower-margin E&PS business as opposed to gross profit margin declines in the industrial and marine businesses. Operating income for the December 2006 quarter was impacted by a $1.4 million bad debt charge for an industrial customer. Despite this charge, combined operating income for the marine and industrial businesses nearly tripled compared to the December 2005 quarter and combined revenues increased 5% compared to the same period.
UNALLOCATED AND OTHER
Unallocated and other costs were $5 million in the December 2006 quarter compared to $16 million in the December 2005 quarter. The December 2005 quarter included $10 million of corporate costs previously allocated to APAC that were included in this caption to reflect required generally accepted accounting principles presentation within the Statements of Consolidated Income.
GAIN ON THE MAP TRANSACTION
Ashland recorded an increase in the gain on the MAP Transaction of $2 million in the December 2005 quarter as a result of an increase in the discounted receivable from Marathon for the estimated present value of future tax deductions. See Note E of Notes to Condensed Consolidated Financial Statements in Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2006, for further explanation of this receivable.
NET INTEREST AND OTHER FINANCING INCOME
Net interest and other financing income amounted to $16 million in the December 2006 quarter, compared to $10 million in the December 2005 quarter. The increase in the current quarter is due to the investment of the remaining proceeds from the APAC sale before these funds were utilized in the quarter as part of the share repurchase program and special shareholder dividend paid on October 25, 2006.
INCOME TAXES
Ashland's effective income tax rate was 28.6% for the December 2006 quarter, compared to 39.4% for the December 2005 quarter. The decline from the prior year's quarter reflects an approximate 5% reduction due to the effect of tax deductions for the special dividend paid in October on shares held in Ashland's employee stock ownership plan. The decline also reflects an approximate 1% reduction for research and development credits, an approximate 2% decrease resulting from the reclassification of APAC operating results in the December 2005 quarter to discontinued operations and an approximate 1% decline due to an adjustment in tax reserves.
DISCONTINUED OPERATIONS (NET OF INCOME TAXES)
A loss from discontinued operations of $4 million was recorded in the December 2006 quarter, reflecting post-closing adjustments to the gain on the sale of APAC recorded in the September 2006 quarter. Income from discontinued operations of $31 million in the December 2005 quarter reflects APAC's operating earnings, excluding the previously allocated corporate costs, which were included in operating income under "unallocated and other." For further information on the sale of APAC and its classification as a discontinued operation see Note C to the Condensed Consolidated Financial Statements.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operating activities from continuing operations, a major source of Ashland's liquidity, amounted to a cash outflow of $122 million for the three months ended December 31, 2006, compared to a cash outflow of $211 million for the three months ended December 31, 2005. The cash outflow in the December 2006 quarter reflects a $212 million cash outflow resulting from a net increase in operating assets and liabilities. The largest component of this change was a $204 million decrease in trade and other payables, which includes a $21 million contribution to Ashland's pension plans as well as the seasonal decline in accounts payable. Ashland typically accelerates payments to vendors at the end of December to coincide with their fiscal year-ends, versus delaying some payments at the end of September. The December 2005 quarter had a similar seasonal decline in trade and other payables of $186 million.
Following shareholder approval of the MAP Transaction in June 2005, Moody's lowered Ashland's senior debt rating from Baa2 to Ba1, their highest non-investment grade rating, and also lowered Ashland's commercial paper rating from P-3 to N-P (Not-Prime), citing the annual cash flow lost from the operations sold. In August 2006, Standard & Poor's lowered Ashland's senior debt rating from BBB- to BB+, their highest non-investment grade rating, and lowered Ashland's commercial paper rating from A-3 to B, citing Ashland's intention to distribute the APAC proceeds to shareholders instead of using the proceeds for business investment. Ashland has a revolving credit agreement that expires on March 21, 2010, which provides for up to $350 million in borrowings. The borrowing capacity under this facility was reduced by $105 million of letters of credit outstanding at December 31, 2006. The revolving credit agreement contains a covenant limiting the total debt Ashland may incur from all sources as a function of Ashland's stockholders' equity. The covenant's terms would have permitted Ashland to borrow $4.2 billion at December 31, 2006, in addition to the actual total debt incurred at that time. Permissible total Ashland debt under the covenant's terms increases (or decreases) by 150% of any increase (or decrease) in stockholders' equity.
At December 31, 2006, working capital (excluding debt due within one year) amounted to $1,945 million, compared to $2,221 million at September 30, 2006 and $1,889 million at December 31, 2005 (excluding assets and liabilities of discontinued operations). 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 $144 million at December 31, 2006, $147 million at September 30, 2006 and $142 million at December 31, 2005. Liquid assets (cash, cash equivalents, available-for-sale securities and accounts receivable) amounted
LIQUIDITY (CONTINUED)
to 213% of current liabilities at December 31, 2006, compared to 175% at September 30, 2006 and 218% at December 31, 2005 (excluding current liabilities of discontinued operations). Ashland has defeased $39 million of its outstanding debt at December 31, 2006 with $44 million recorded for both September 30, 2006 and December 31, 2005. See Note E to the Condensed Consolidated Financial Statements for further information on this debt defeasance.
CAPITAL RESOURCES
On September 14, 2006, Ashland's Board of Directors authorized the distribution of a substantial portion of the proceeds of the sale of APAC to the Ashland Common Stock shareholders as a one-time special dividend. Each shareholder of record as of October 10, 2006, received $10.20 per share, for a total of $674 million. This amount was accrued as "dividends payable" in the Condensed Consolidated Balance Sheet at September 30, 2006. Substantially all of the remaining proceeds were directed to be used to repurchase Ashland Common Stock in accordance with the terms authorized by Ashland's Board of Directors. Ashland repurchased 4.7 million shares for $288 million in the December 2006 quarter and 1.8 million shares for $96 million in the December 2005 quarter. See Note J to the Condensed Consolidated Financial Statements for a description of Ashland's share repurchase programs.
For the three months ended December 31, 2006, property additions amounted to $35 million, compared to $25 million for the same period last year. Ashland anticipates meeting its remaining 2007 capital requirements for property additions and dividends from internally generated funds.
Ashland's debt level amounted to $77 million at December 31, 2006, compared to $82 million at September 30, 2006 and $89 million at December 31, 2005. Debt as a percent of capital employed amounted to 2.6% at December 31, 2006, compared to 2.6% at September 30, 2006 and 2.4% at December 31, 2005.
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 for the fiscal year ended September 30, 2006. For a discussion of Ashland's asbestos-related litigation and environmental remediation matters, see Note K to the Condensed Consolidated Financial Statements.
OUTLOOK
The December 2006 quarter marked the first full quarter for Ashland as a singularly focused, diversified chemical company. Ashland continues to be committed to growing, both organically and through acquisitions. This balanced approach to growth, as well as Ashland's strong financial position are intended to create value for its investors and deliver needed solutions to its customers.
Performance Materials' results in 2007 across its three business groups will, in large part, be determined by the pace of recovery in the North American automotive, marine and construction markets. While the timing or pace of this recovery cannot be predicted, the division continues to focus on expense control management to maximize its earnings potential in the near term despite sluggish volume levels, as its U.S. operations prepare for the ERP system integration in February 2007.
With the ERP system implementation and depressed volume levels for the last half of the month of December behind, Distribution's sales for January 2007 rebounded to a level comparable to January 2006, although softness in U.S. industrial production could continue to be an issue throughout the fiscal year. In addition, Distribution's contract with Dow Chemical to distribute its plastics in North America ends March 1, 2007. Ashland is working hard to transfer as much of this business as possible to plastics
OUTLOOK (CONTINUED)
provided by other suppliers. During this transition phase the impact on Distribution's profitability from the business lost is expected to be approximately $4 to $5 million per quarter. However, Ashland is diligently working to replace this lost volume and expects the long-term impact to be less. As a result of this contract expiration and the projected softness in U.S. industrial production previously mentioned, operating income in the March 2007 quarter will likely fall below the prior year's level.
Valvoline's recovery during the December quarter was highlighted by its record first quarter earnings, though gross profit margins remain below historical levels. While these margins have improved over prior quarters, volume levels were flat and continue to be an area of focus. Valvoline's efforts to reduce annual costs by $20 million have also been successful, as targeted costs declined by roughly $5 million in the quarter. This cost reduction as well as the gross profit margin recovery have Valvoline well positioned for the upcoming prime car care months. In addition, Valvoline Instant Oil Change, which opened its 500th franchise store during the current quarter, recently unveiled a new strategy of increasing customer satisfaction through speed and concentrating services to those that deliver the greatest customer value. This new strategy has been met with rising customer satisfaction ratings, increasing 13 percentage points compared to the prior year's quarter.
Water Technologies performance for the remainder of the year should continue to benefit from its business model redesign as well as the $10 million of cost reductions and a full year of the E&PS business. However, raw material pricing is still a significant metric that will continue to affect the margins and overall profitability within this business segment. As Water Technologies' U.S. operations prepare for the ERP system integration in February 2007, mitigating potential business interruptions is a key focus.
When APAC was sold in the September 2006 quarter there were remaining costs that had been previously allocated to this business. To help address these costs and improve Ashland's overall competitiveness, 1,100 administrative and corporate employees were offered an enhanced early retirement or voluntary severance opportunity in December 2006, of which 236 employees subsequently applied for this package. In late January 2007, Ashland completed its review of these applications and has accepted 172 of the employee requests and currently expects to record approximately a $25 million pretax reserve for these accepted employee offers during the March 2007 quarter. However, since employee termination dates will occur over the next several months, the estimated cost savings of approximately $10 to $12 million pretax annually will not begin to be fully realized until December 2007.
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 for the fiscal year ended September 30, 2006. 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 December 31, 2006 is generally consistent with the types and amounts of market risk exposures presented in Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
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) During the quarter ended December 31, 2006, as part of an ongoing SAP(TM) enterprise resource planning (ERP) project, the ERP system was implemented for Valvoline's U.S. operations and certain corporate functions in October 2006 and for Ashland Distribution's U.S. operations in December 2006. As a result, internal controls in the affected corporate functions and the U.S. operations of Valvoline and Distribution related to user security, account structure and hierarchy, system reporting and approval procedures were modified and redesigned to conform with and support the new ERP system. Although management believes internal controls have been maintained or enhanced by the ERP systems implemented during the quarter, the controls in the newly upgraded environments have not been completely tested. As such there is a risk that deficiencies may exist and not yet be identified that could constitute significant deficiencies or in the aggregate, a material weakness. Management will be performing tests of controls relating to the new SAP(TM) environment in these business units over the course of fiscal 2007. Otherwise, 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.
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
49,700 active lawsuits pending as of December 31, 2006. In these active
lawsuits, approximately 0.4% of the active lawsuits involve claims between
$0 and $100,000; approximately 1.6% of the active lawsuits involve claims
between $100,000 and $1 million; less than 1% of the active lawsuits
involve claims between $1 million and $5 million; less than 0.2% of the
active lawsuits involve claims between $5 million and $10 million; less
than 2% of the active lawsuits involve claims between $10 million and $15
million; and less than .02% of the active lawsuits involve claims between
$15 million and $100 million. The variability of requested damages, coupled
with the actual experience of resolving claims over an extended period,
demonstrates that damages requested in any particular lawsuit or complaint
bear little or no relevance to the merits or disposition value of a
particular case. Rather, the amount potentially recoverable by a specific
plaintiff or group of plaintiffs is determined by other factors such as
product identification or lack thereof, the type and severity of the
disease alleged, the number and culpability of other defendants, the impact
of bankruptcies of other 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 K of "Notes to Condensed Consolidated Financial Statements" in this quarterly report on Form 10-Q.
Foundry Class Action - In response to an investigation by the United States Department of Justice that was closed in 2006 without criminal or civil allegations being made by the government, several foundry owners have filed lawsuits seeking class action status for classes of customers of foundry resins manufacturers such as Ashland. These cases have been consolidated for pretrial purposes in the United States District Court, Southern District of Ohio. Ashland will vigorously defend these civil actions.
Environmental Proceedings - Under the federal Comprehensive Environmental Response Compensation and Liability Act (as amended) and similar state laws, Ashland may be subject to joint and several liability for clean-up costs in connection with alleged releases of hazardous substances at sites where it has been identified as a "potentially responsible party" ("PRP"). As of December 31, 2006, Ashland had been named a PRP at 73 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 K of "Notes to Condensed Consolidated Financial Statements" in this quarterly report on Form 10-Q.
MTBE Litigation - Ashland is a defendant along with many other companies in approximately 30 cases alleging methyl tertiary-butyl ether ("MTBE") contamination in groundwater. All of these cases have been consolidated in a multi-district litigation in the Southern District of New York for preliminary proceedings. The plaintiffs generally are water providers or governmental authorities and they allege that refiners, manufacturers and sellers of gasoline containing MTBE are liable for manufacturing a defective product and that owners and operators of retail gasoline sites have allowed MTBE to be discharged into the groundwater. Ashland's involvement in these cases relates to gasoline containing MTBE allegedly produced and sold by Ashland, or one or more of its subsidiaries, in the period prior to the formation of Marathon Ashland Petroleum LLC ("MAP"). Ashland only distributed MTBE or gasoline containing MTBE in a limited number of states and has been dismissed in a number of cases in which it was established that Ashland did not market MTBE or gasoline containing MTBE in the state or region at issue. Many MTBE cases allege class action status and seek punitive damages or treble damages under a variety of statutes and theories. The potential impact of these cases and any future similar cases is uncertain. Ashland will vigorously defend these actions.
Other Legal Proceedings - In addition to the matters described above, there are various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability and other environmental matters, which seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable.
ITEM 1A. RISK FACTORS
During the period covered by this report, two of the risk factors previously disclosed in Ashland's Form 10-K for the year ended September 30, 2006 materially changed. The risk factor regarding the implementation of an enterprise resource planning project and the risk factor regarding increases in raw material costs are now amended to read in their entirety as set forth below.
ASHLAND'S IMPLEMENTATION OF ITS SAP(TM) ENTERPRISE RESOURCE PLANNING ("ERP") PROJECT HAS THE POTENTIAL FOR BUSINESS INTERRUPTION AND ASSOCIATED ADVERSE IMPACT ON OPERATING RESULTS AS WELL AS INTERNAL CONTROLS.
In 2004, Ashland initiated a multi-year ERP project that is expected to achieve increased efficiency and effectiveness in supply chain, financial and environmental, health and safety processes. The ERP system was implemented in Canada in 2005. During the first fiscal quarter of 2007, the ERP system was implemented in the U.S. operations of Valvoline and Distribution. The ERP system was implemented in February 2007 for the U.S. operations of Performance Materials and Water Technologies. In late fiscal 2007, Ashland will begin the first phase of implementing the ERP system in its European operations. In fiscal 2008, Ashland will begin implementing the ERP system for most of its remaining operations.
Extensive planning has occurred to support effective implementation of the ERP system; however, such implementations carry certain risks, including potential for business interruption with the associated adverse impact on operating income. In addition, internal controls that are modified or redesigned to support the new ERP system may not have been completely tested. As a result, there is a risk that deficiencies may or will exist in the future, and could constitute significant deficiencies, or in the aggregate, a material weakness. The first phase of the European implementation poses increased risk related to the testing of controls as of the end of the fiscal year due to its timing late in the year. While that risk could be reduced by deferring the ERP implementation into 2008, Ashland's management believes the ERP provides for a stronger control environment and, thus, its implementation should proceed as scheduled.
CERTAIN OF ASHLAND'S SUPPLY ARRANGEMENTS SUBJECT THE COMPANY TO THE RISK THAT IT MAY NOT BE ABLE TO PASS THROUGH INCREASES IN RAW MATERIALS COSTS. IN ADDITION, CERTAIN OF ASHLAND'S SUPPLIERS MAY BE UNABLE TO DELIVER PRODUCTS OR RAW MATERIALS OR MAY WITHDRAW FROM CONTRACTUAL ARRANGEMENTS. THE OCCURRENCE OF EITHER EVENT COULD ADVERSELY AFFECT ASHLAND'S RESULTS OF OPERATIONS.
Rising and volatile raw material prices, especially those of hydrocarbon derivatives, may negatively impact Ashland's costs. Ashland is not always able to raise prices in response to such increased costs, and its ability to pass on the costs of such price increases is dependent upon market conditions. Likewise, Ashland purchases certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers are unable to timely meet Ashland's orders or choose to terminate or otherwise avoid contractual arrangements, Ashland may not be able to make alternative supply arrangements. If Ashland is unable to obtain and retain qualified suppliers under commercially acceptable terms, its ability to manufacture and deliver products in a timely, competitive and profitable manner could be adversely affected.
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 first quarter of fiscal 2007.
Issuer Purchases of Equity Securities (1)
Maximum number
(or approximate
dollar value) of
Average price Total number of shares shares that may yet
paid per share, purchased as part of be purchased under
Total number of including publicly announced the plans or
Period shares purchased commission plans or programs programs
------ ---------------- --------------- ---------------------- -------------------
(a) (b) (c) (d)
October 1 - October 31 2,664,500 $58.22 2,664,500 $132,722,734.61
November 1 - November 30 1,252,500 $62.87 1,252,500 $ 53,972,668.36
December 1 - December 31 795,000 $67.84 795,000 $ 43,107.86
---------- ------ --------- ---------------
Total 4,712,000 $61.08 4,712,000 $ 43,107.86
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(1) During the quarter ended December 31, 2006, Ashland repurchased shares of Ashland Common Stock (the "Shares") pursuant to a repurchase program publicly announced on September 14, 2006. Under the program, Ashland was authorized to repurchase up to 7 million Shares or the dollar amount represented by the after-tax proceeds of the APAC Transaction remaining after payment of the special dividend on October 25, 2006, and the completion of a prior Share repurchase authorization, whichever was first exhausted. The dollar amount was substantially exhausted on December 22, 2006, and Ashland does not intend to make further repurchases under the program.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 25, 2007, Ashland's Annual Meeting of Shareholders was held at the Metropolitan Club, 50 E. RiverCenter Boulevard, Covington, Kentucky at 10:30 a.m. The following are the results of the shareholder vote at the meeting:
(1) Ernest H. Drew, Mannie L. Jackson, Theodore M. Solso and Michael J. Ward were elected as Class III directors to a three-year term and John F. Turner was elected as a Class II director to a two-year term with the vote totals referenced below.
Votes
---------------------------
Affirmative Withheld
----------- ---------
Ernest H. Drew 51,090,798 2,013,067
Mannie L. Jackson 49,737,295 3,366,570
Theodore M. Solso 48,824,422 4,279,443
John F. Turner 51,074,703 2,029,162
Michael J. Ward 50,269,753 2,834,112
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Bernadine P. Healy, M.D., Kathleen Ligocki, James J. O'Brien, Roger W. Hale and George A. Schaefer, Jr. continue to serve as directors. In addition, subsequent to the Annual Meeting, the Board of Directors met and approved the appointment of Barry W. Perry as a Class I director for a one-year term.
2) The appointment of Ernst & Young LLP as independent auditors for fiscal year ending September 30, 2007, was ratified by a vote of 51,114,946 shares voting for, 1,501,269 shares voting against, and 487,649 shares abstaining.
3) A shareholder proposal to initiate the appropriate process to implement majority voting for election of directors was rejected by Ashland's shareholders by a vote of 19,120,852 shares voting for, 24,724,656 shares voting against, and 943,845 shares abstaining.
ITEM 6. EXHIBITS
(a) Exhibits
4 Agreement of Resignation, Appointment and Acceptance, dated as of
November 30, 2006, by and among Ashland, Wilmington Trust Company
("Wilmington") and Citibank, N.A. ("Citibank") whereby Wilmington
replaced Citibank as Trustee under the Indenture, dated as of August
15, 1989, as amended and restated as of August 15, 1990, between
Ashland and Citibank.
10.1 Separation Agreement and General Release between Ashland Inc. and
Gary A. Cappeline, effective January 10, 2007.
10.2 Amended and Restated Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (2005).
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.
Date: February 7, 2007 /s/ J. Marvin Quin
-------------------------------------------------
J. Marvin Quin
Senior Vice President and Chief Financial Officer
(on behalf of the Registrant and as principal
financial officer)
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EXHIBIT INDEX
Exhibit
No. Description
------- ------------------------------------------------------------------
4 Agreement of Resignation, Appointment and Acceptance, dated as of
November 30, 2006, by and among Ashland, Wilmington Trust Company
("Wilmington") and Citibank, N.A. ("Citibank") whereby Wilmington
replaced Citibank as Trustee under the Indenture, dated as of
August 15, 1989, as amended and restated as of August 15, 1990,
between Ashland and Citibank.
10.1 Separation Agreement and General Release between Ashland Inc. and
Gary A. Cappeline, effective January 10, 2007.
10.2 Amended and Restated Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (2005).
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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Exhibit 4
AGREEMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, dated as of November 30, 2006 by and among ASHLAND INC., a corporation duly organized and existing under the laws of Commonwealth of Kentucky and having its principal office at 50 E. RiverCenter Blvd., P.O. Box 391, Covington, Kentucky 41012 (the "Company"), WILMINGTON TRUST COMPANY, a Delaware banking corporation having its principal corporate trust office at 1100 N. Market Street, Wilmington, Delaware 19890 ("Successor Trustee") and CITIBANK, N.A., a national banking association duly organized and existing under the laws of the United States of America and having its principal corporate trust office at 388 Greenwich Street, New York, New York 10013 ("Resigning Trustee").
RECITALS:
WHEREAS, there are currently $20,136,000 aggregate principal amount of the Company's 8.80% Sinking Fund Debentures due 2012 and $8,000,000 aggregate principal amount of the Company's Medium-Term Notes, Series E (collectively, the "Securities") outstanding under the Amendment and Restatement as of August 15, 1990 of the Indenture dated as of August 15, 1989, by and between the Company and Resigning Trustee as amended by the First Supplemental Indenture dated as of June 15, 2005, the Second Supplemental Indenture dated as of June 30, 2005 and the Third Supplemental Indenture dated as of June 30, 2005 (collectively hereinafter, the "Indenture," unless context clearly indicates otherwise).
WHEREAS, the Company appointed Resigning Trustee as the Trustee, Security Registrar and Paying Agent under the Indenture;
WHEREAS, Section 6.10 of the Indenture provides that the Trustee may at any time resign with respect to the Securities of one or more series by giving written notice of such resignation to the Company, effective upon the acceptance by a successor Trustee of its appointment as a successor Trustee;
WHEREAS, Section 6.10 of the Indenture provides that, if the Trustee shall resign, the Company shall promptly appoint a successor Trustee;
WHEREAS, Section 6.11 of the Indenture provides that any successor Trustee appointed in accordance with the Indenture shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment under the Indenture, and thereupon the resignation of the predecessor Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations of the predecessor trustee;
WHEREAS, the Company desires to appoint Successor Trustee as Trustee to succeed Resigning Trustee in such capacity under the Indenture; and
WHEREAS, Successor Trustee is willing to accept such appointment as successor Trustee, under the Indenture;
NOW, THEREFORE, the Company, Resigning Trustee and Successor Trustee, for and in consideration of the premises and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby consent and agree as follows:
1.1 Pursuant to Section 6.10 of the Indenture, Resigning Trustee has by letter notified the Company that Resigning Trustee is resigning as Trustee under the Indenture, but will retain the roles of Security Registrar, Paying Agent and Authenticating Agent.
1.2 Resigning Trustee hereby represents and warrants to Successor Trustee that:
(a) No covenant or condition contained in the Indenture has been waived by Resigning Trustee or, to the best knowledge of responsible officers of Resigning Trustee's corporate trust department, by the Holders of the percentage in aggregate principal amount of the Securities required by the Indenture to effect any such waiver.
(b) There is no action, suit or proceeding pending or, to the best knowledge of responsible officers of Resigning Trustee's corporate trust department, threatened against Resigning Trustee before any court or any governmental authority arising out of any act or omission of Resigning Trustee as Trustee under the Indenture.
(c) As of the effective date of this Agreement, Resigning Trustee will hold no moneys or property under the Indenture.
(d) Pursuant to Section 3.03 of the Indenture, Resigning Trustee has duly authenticated and delivered the Securities, of which $20,136,000 aggregate principal amount of the 8.80% Sinking Fund Debenture due 2012 and $8,000,000 aggregate principal amount of the Medium-Term Notes, Series E are outstanding as of the effective date hereof.
(e) The registers in which it has registered and transferred registered Securities accurately reflect the amount of Securities issued and outstanding and the amounts payable thereon.
(f) Each person who so authenticated the Securities was duly elected, qualified and acting as an officer or authorized signatory of Resigning Trustee and empowered to authenticate the Securities at the respective times of such authentication and the signature of such person or persons appearing on such Securities is each such person's genuine signature.
(g) This Agreement has been duly authorized, executed and delivered on behalf of Resigning Trustee and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms.
(h) To the best knowledge of responsible officers of the
Resigning Trustee's corporate trust department, no event has
occurred and is continuing which is, or after notice or
lapse of time would become, an Event of Default under
Section 5.01 of the Indenture.
1.3 Resigning Trustee hereby assigns, transfers, delivers and confirms to Successor Trustee all right, title and interest of Resigning Trustee in and to the trust under the Indenture and all the rights, powers and trusts of the Trustee under the Indenture. Resigning Trustee shall execute and deliver such further instruments and shall do such other things as Successor Trustee may reasonably require so as to more fully and certainly vest and confirm in Successor Trustee all the rights, powers and trusts hereby assigned, transferred, delivered and confirmed to Successor Trustee as Trustee.
1.4 Resigning Trustee shall deliver to Successor Trustee, as of or promptly after the effective date hereof, all of the documents listed on Exhibit A hereto.
2.1 The Company hereby accepts the resignation of Resigning Trustee as Trustee under the Indenture.
2.2 The Company hereby certifies that it has authorized certain officers of the Company to: (a) accept Resigning Trustee's resignation as Trustee under the Indenture; (b) appoint Successor Trustee as Trustee under the Indenture; and (c) execute and deliver such agreements and other instruments as may be necessary or desirable to effectuate the succession of Successor Trustee as Trustee under the Indenture.
2.3 The Company hereby appoints Successor Trustee as Trustee under the Indenture to succeed to, and hereby vests Successor Trustee with, all the rights, powers, duties and obligations of Resigning Trustee under the Indenture with like effect as if originally named as Trustee in the Indenture.
2.4 Promptly after the effective date of this Agreement, the Company shall cause a notice, substantially in the form of Exhibit B annexed hereto, to be sent to each Holder of the Securities in accordance with the provisions of Section 6.10 of the Indenture.
2.5 The Company hereby represents and warrants to Resigning Trustee and Successor Trustee that:
(a) The Company is a corporation duly and validly organized and existing pursuant to the laws of the Commonwealth of Kentucky.
(b) The Indenture was validly and lawfully executed and delivered by the Company and the Securities were validly issued by the Company.
(c) The Company has performed or fulfilled prior to the date hereof, and will continue to perform and fulfill after the date hereof, each covenant, agreement, condition, obligation and responsibility under the Indenture.
(d) No event has occurred and is continuing which is, or after notice or lapse of time would become, an Event of Default under Section 5.01 of the Indenture.
(e) No covenant or condition contained in the Indenture has been waived by the Company or, to the best of the Company's knowledge, by Holders of the percentage in aggregate principal amount of the Securities required to effect any such waiver.
(f) There is no action, suit or proceeding pending or, to the best of the Company's knowledge, threatened against the Company before any court or any governmental authority arising out of any act or omission of the Company under the Indenture.
(g) This Agreement has been duly authorized, executed and delivered on behalf of the Company and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms.
(h) All conditions precedent relating to the appointment of Wilmington Trust Company as successor Trustee under the Indenture have been complied with by the Company.
3.1 Successor Trustee hereby represents and warrants to Resigning Trustee and to the Company that:
(a) Successor Trustee is not disqualified under the provisions
of Section 6.08 and is eligible under the provisions of
Section 6.09 of the Indenture to act as Trustee under the
Indenture.
(b) This Agreement has been duly authorized, executed and delivered on behalf of Successor Trustee and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms.
3.2 Successor Trustee hereby accepts its appointment as successor Trustee under the Indenture and accepts the rights, powers, duties and obligations of Resigning Trustee as Trustee under the Indenture, upon the terms and conditions set forth therein, with like effect as if originally named as Trustee under the Indenture.
3.3 References in the Indenture to "Principal Office" or other similar terms shall be deemed to refer to the principal corporate trust office of Successor Trustee, which is presently located at 1100 N. Market Street, Wilmington, Delaware 19890.
4.1 Except as otherwise expressly provided herein or unless the context otherwise requires, all terms used herein which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
4.2 This Agreement and the resignation, appointment and acceptance effected hereby shall be effective as of the opening of business on November 30, 2006.
4.3 Resigning Trustee hereby acknowledges payment or provision for payment in full by the Company of compensation for all services rendered by Resigning Trustee in its capacity as Trustee under Section 6.07 of the Indenture and reimbursement in full by the Company of the expenses, disbursements and advances incurred or made by Resigning Trustee in its capacity as Trustee in accordance with the provisions of the Indenture. Resigning Trustee acknowledges that it relinquishes any lien it may have upon all property or funds held or collected by it to secure any amounts due it pursuant to the provisions of Section 6.07 of the Indenture. This Agreement does not constitute a waiver or assignment by the Resigning Trustee of any compensation, reimbursement, expenses or indemnity to which it is or may be entitled pursuant to the Indenture, nor does this Agreement constitute a waiver by the Company of claims against Resigning Trustee arising under the Indenture on or prior to the date this Agreement is executed of which the Company is not then aware. The Company acknowledges its obligation set forth in Section 6.07 of the Indenture to indemnify Resigning Trustee for, and to hold Resigning Trustee harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of Resigning Trustee and arising out of or in connection with the acceptance or
administration of the trust evidenced by the Indenture (which obligation shall survive the execution hereof).
4.4 This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof.
4.5 This Agreement may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.
4.6 The Company, Resigning Trustee and Successor Trustee hereby acknowledge receipt of an executed and acknowledged counterpart of this Agreement and the effectiveness thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of Resignation, Appointment and Acceptance to be duly executed, all as of the day and year first above written.
ASHLAND INC.
By: /s/ Daragh L. Porter
----------------------------------
Name: Daragh L. Porter
Title: VP of Finance and Treasurer
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CITIBANK, N.A.
as Resigning Trustee
By: /s/ Nancy Forte
----------------------------------
Name: Nancy Forte
Title: Assistant Vice President
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WILMINGTON TRUST COMPANY
as Successor Trustee
By: /s/ Geoffrey J. Lewis
----------------------------------
Name: Geoffrey J. Lewis
Title: Financial Services Officer
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EXHIBIT A
Documents to be delivered to Successor Trustee
1. Conformed copy of the Indenture.
2. File of closing documents from initial issuance.
3. Copies of the most recent of each of the SEC reports delivered by the Company pursuant to Section 7.04 of the Indenture.
4. A copy of the most recent compliance certificate delivered pursuant to
Section 10.04 of the Indenture.
5. Certified list of Holders as of _______, __, 2006 including certificate detail and all "stop transfers" and the reason for such "stop transfers" (or, alternatively, if there are a substantial number of registered Holders, the computer tape reflecting the identity of such Holders).
6. Copies of any official notices sent by the Trustee to all the Holders of the Securities pursuant to the terms of the Indenture during the past twelve months and a copy of the most recent Trustee's annual report to Holders delivered pursuant to Section 7.03 of the Indenture.
7. List of any documents which, to the knowledge of Resigning Trustee, are required to be furnished but have not been furnished to Resigning Trustee.
EXHIBIT B
[COMPANY LETTERHEAD]
NOTICE
To the Holders of:
8.80% Sinking Fund Debentures due 2012 CUSIP # 044540 AH5
Medium-Term Notes, Series E CUSIP # 04454 CCW4
of ASHLAND INC.
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NOTICE IS HEREBY GIVEN, pursuant to Section 6.10 of the Amendment and Restatement as of August 15, 1990 of the Indenture dated as of August 15, 1989 (the "Indenture"), by and between Ashland Inc. (the "Company") and Citibank, N.A., as Trustee, that Citibank, N.A. has resigned as Trustee under the Indenture, but will retain the roles of Security Registrar and Paying Agent.
Pursuant to Section 6.11 of the Indenture, Wilmington Trust Company, a corporation duly organized and existing under the laws of the State of Delaware, has accepted appointment as Trustee under the Indenture. The address of the corporate trust office of the successor Trustee is 1100 N. Market Street, Wilmington, Delaware 19890.
Citibank's resignation as Trustee and Wilmington Trust Company's appointment as successor Trustee were effective as of the opening of business on November 30, 2006.
Dated: November 30, 2006
ASHLAND INC.
Exhibit 10.1
I, Gary A. Cappeline, understand that on December 31, 2006 ("Release Date"), my employment with Ashland Inc. (the "Company" or "Ashland") will end. I am signing this General Release in return for the special severance benefits offered to me by Ashland, which are more than would otherwise be provided to me upon termination. Specifically, I understand that I will receive the severance benefits more fully described in Attachment I (Summary of Benefits), which is hereby incorporated by reference.
(a) General Release. In exchange for these special severance benefits offered by Ashland, I completely release all claims I may have at this time against Ashland, its divisions, subsidiaries, insurers and affiliates, their successors and assigns, and their officers, directors or employees (collectively referred to hereafter as "Releasees"). This Release is intended to be a broad release and shall apply to any relief, no matter how denominated, including, but not limited to, claims for future reemployment, rights or causes of action for wages, backpay, front pay, compensatory damages, punitive damages, or attorneys fees. I also agree that I will not file any such claim and I hereby agree to indemnify and hold Releasees harmless from any such claim. In addition, I agree to waive the right to receive any recovery under any charge or lawsuit filed on my behalf.
(b) Extent of Release. This release includes all claims I may have which relate either to the time of my employment or to my termination, except the claims mentioned in Section 2(c) below. Some of the types of claims that I am releasing, although there also may be others not listed here, are claims under local, state or federal law relating to:
1. Discrimination on the basis of sex, race, color, national origin, religion, disability or veteran status;
2. Restrictions, if any, upon the rights of Ashland to terminate its employees at will, including (i) violation of public policy, (ii) breach of any express or implied covenant of the employment contract, and (iii) breach of any covenant of good faith and fair dealing;
3. Discrimination on the basis of age, including claims under the Age Discrimination in Employment Act (the "ADEA"), which is located at 29 United States Code, Sections 621 through 634;
Employee Initials: /s/ GAC
--------
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4. Payments, if any, that might otherwise be owed and payable to me pursuant to the Workers' Adjustment and Retraining Notification (WARN) Act; and
5. Civil actions relating to negligence, defamation, invasion of privacy, fraud, misrepresentation, or infliction of emotional or mental distress.
(c) Exceptions to Release. The only claims that this release does not include are claims related to:
1. Claims for benefits to which I am entitled under this special severance offer;
2. Any applicable worker's compensation or unemployment compensation laws;
3. My rights under the employee benefit plans of the Company that are governed by the Employee Retirement Income Security Act of 1974, as amended (ERISA), in effect as of my Release Date; and
4. Any claims that the law states may not be waived.
If I breach my promise in Section 2 of this General Release and file a claim or lawsuit based on what I released in this General Release, I agree to pay for all liabilities and costs incurred by Releasees, including reasonable attorneys' fees, in defending against my claim or lawsuit. Provided, however, that this provision shall not apply to any alleged breach due to a challenge of the validity of the ADEA waiver contained herein.
I agree that I will not make any oral or written communication to any person or entity which disparages, or has the effect of damaging the reputation of, the Company, its affiliates, or their respective products, services, officers, directors or employees, whether past or current; provided, that this prohibition shall not be applied to prevent me from providing truthful testimony in compliance with a lawful subpoena or court order, or as otherwise may be required by law.
I further agree that I have acquired Company Information as defined herein. I understand and agree that such Company Information has been disclosed to me in confidence and for Company use only. I will not disclose or communicate Company Information to any third party, and I will not make use of
Employee Initials: /s/ GAC
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Company Information on my own behalf, or on behalf of any third party. Further, I agree that I will continue to be bound by the Service Agreement executed during my employment with the Company and in effect on my Release Date, the terms and conditions of which are incorporated herein by reference.
In addition, I specifically agree and affirm that for a two (2) year period following my Release Date, I will not, without prior written consent from Ashland's General Counsel, accept a directorship or employment with, participate in the management or control of, engage in consulting or otherwise render services for, hold greater than ten percent (10%) of the outstanding ownership interest in, or otherwise engage in any business activity with, any corporation, partnership, firm or other form of business enterprise which competes within the same geographical territory with the products, activities and/or services currently offered by a business of the Company or under development by a business of the Company as of my Release Date (a "Competing Business"). Provided, that it will not be deemed a violation of this section for me to work for a subsidiary, division, affiliate, joint venture, or other business enterprise of a Competing Business, which does not itself compete within the same geographical territory with the products, activities and/or services currently offered by a business of the Company or under development by a business of the Company as of my Release Date, so long as I do not engage in any activity with respect to the management or operations of any other part of the Competing Business.
I further agree that during this non-compete period, I will not interfere with or disrupt the business or employment relationship, contractual or otherwise, between the Company or its successors and any other party, including other employees of the Company or its successors; nor will I assist any party in any attempt to acquire a controlling interest in the Company.
I agree that all of the above restrictions are reasonable, and that they do not unreasonably preclude me from being gainfully employed. I also understand that I continue to be subject to the non-compete provisions of Ashland's Supplemental Early Retirement Plan, and nothing in this Agreement abrogates my obligations thereunder.
I agree that on or prior to my Release Date I returned to the Company all Company Information and related reports, maps, files, memoranda, and records; credit cards, cardkey passes; door and file keys; computer access codes; software; and other physical or personal property which I received or prepared or helped prepare in connection with my employment.
I further represent that I have not retained and will not retain any copies, duplicates, reproductions, or excerpts thereof. I understand that the term "Company Information" as used in this Agreement refers to information obtained
Employee Initials: /s/ GAC
--------
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during my employment with Ashland, and/or any division, subsidiary, or affiliate of Ashland, and includes (a) confidential information including, without limitation, information received from third parties under confidential conditions; and (b) other technical, business, or financial information, the use or disclosure of which might reasonably be construed to be contrary to the interests of the Company.
I understand that I am advised to consult with an attorney before signing this General Release.
I understand and agree that I have been given at least twenty-one (21) days to review and consider this General Release. I understand that I may use as much or as little of this period of time as I wish to prior to reaching a decision regarding the signing of this General Release. I understand that if I sign this General Release prior to my Release Date or if I do not sign, date, and return this General Release by January 12, 2007 the General Release will not be valid and I will not receive the special severance benefits under the terms of this special severance offer.
In accordance with federal law, I understand that this General Release may be revoked by me at any time within seven (7) calendar days after the date of execution noted below. To be effective, the revocation must be in writing and delivered to Susan Esler, Vice President Human Resources, Ashland Inc., 50 E RiverCenter Blvd., PO Box 391, Covington, KY 41012, either by hand or mail within a seven (7) day period following my execution of this General Release. If delivered by mail, the recision must be:
1. Postmarked within the seven (7) day period;
2. Properly addressed as noted above; and
3. Sent by Certified Mail, Return Receipt Requested.
I understand that this General Release and my acceptance of it shall not become effective or enforceable until the seven (7) day revocation period has expired.
It is agreed that this General Release shall be interpreted in accordance with the laws of the State of Kentucky.
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I agree that if any term or provision of this General Release is determined by a court or other appropriate authority to be invalid, void, or unenforceable for any reason, the remainder of the terms and provisions of this General Release shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
It is agreed that the foregoing constitutes the entire agreement between the Employee and the Company, and that there are no other agreements, oral or written, express or implied, relating to any matters covered by this Agreement, or any other agreement in effect and relating to any other matter whatsoever, whether or not within the knowledge or contemplation of either of the Parties at the time of execution of this Agreement.
I M P O R T A N T N O T I C E
I acknowledge that:
o I have read this General Release and I understand fully its final and binding effect;
o The only promises made to me to sign this General Release are those stated herein;
o I am signing this General Release voluntarily; and
o I have no other claim or expectation of any additional pay or benefits incident to my Employment. The benefits I am receiving for this General Release are in lieu of, and fully satisfy, all monetary amounts, if any, to which I might otherwise be entitled under federal or state statute or common law.
ASHLAND INC.
/s/ Gary A. Cappeline By: /s/ Susan B. Esler
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Gary A. Cappeline
Jan. 2, 2007 Title: VP Human Resources
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Date of Execution
(Do Not Sign Prior To Release Date)
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NAME: GARY A. CAPPELINE
DATE OF PRESENTATION: DECEMBER 19, 2006
On December 31, 2006 (your "Release Date"), your employment with the Company will terminate. On July 1, 2007, Ashland will provide you with the following payments:
1. a severance payment (your "Severance Benefit") equal to 24 months
of base pay, using your rate of base pay in effect on your
Release Date,
2. a payment of $1,500; and
3. a payment equal to three (3) months base compensation, using your
rate of base pay in effect on your Release Date.
The above payments, plus interest on these amounts calculated at a rate equal to Ashland's average three month money market rate compounded quarterly over the six-month period between January 1, 2007 and June 30, 2007, will be made to you in a lump sum, less all applicable tax withholdings.
The following summarizes selected terms and conditions from some of the employee benefit plans in which you were participating on your Release Date. The actual terms of these plans are in their plan documents. You should refer to the relevant summary plan description for more information on a particular plan and the effect that your severance has with regard to that plan.
In the event you do not sign this Separation Agreement and General Release within the time period provided herein, or you revoke your acceptance of the General Release within the 7-day period provided for revocation, you understand and agree that you will not be eligible for any benefits under this Agreement, or under Ashland's Severance Pay program.
Your rights under the Ashland Inc. and Affiliates Pension Plan (Pension Plan) depend on whether you are in the traditional formula or the retirement growth account formula. In general you are in the traditional formula if you had 10 years of continuous service under the plan on June 30, 2003 and you were an employee on that day. In general, all others are in the retirement growth account formula. You can call the HR Service Center at (800) 782-4669 to find out which formula applies to you.
Your benefit will be based on the plan terms and the company's records of your employment and plan benefit on your Release Date. You will be eligible for an
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immediate pension benefit commencing as of the first day of the month coincident with or next following your Release Date if either of the following applies: on your Release Date you are at least age 55; or on your Release Date the sum of your age and years of continuous service is at least 80. Such benefits will not be automatically distributed. You will have to make a proper election for a distribution to begin.
If you are at least age 55 or the sum of your age and years of continuous service is at least 80, you have 5 years of service, and you had plan coverage on your Release Date, you will be eligible for company-paid retiree life coverage equal to $10,000. Contributory coverage, spouse coverage, dependent child coverage and accidental death and dismemberment coverage end at your Release Date.
You may be eligible to continue your non-contributory and/or contributory life insurance coverage, and spouse and dependent child life coverages after your Release Date. Continuing this coverage, though, is strictly between you and the applicable insurance companies that provide this coverage. You have a 31-day window following your Release Date to arrange to continue these coverages. To find out more about your ability to continue these coverages contact the HR Service Center at (800) 782-4669.
If you are at least age 55 or the sum of your age and years of continuous service is at least 80, and you have 5 years of service on your Release Date, you may be eligible for retiree coverage under the Medical Plan and the Dental Plan. Dental coverage during retirement is only available if you were covered by the plan on your Termination Date. Your dental coverage during retirement also must end on the last day of the month before the month in which you attain age 65. Medical coverage during retirement is generally only available if you were covered by the plan on your Release Date. The exceptions to this general rule are described in the summary plan description. If you elect retiree coverage, your retiree contributions would be determined using your service to your Termination Date.
Although you may be eligible to elect retiree coverage, federal law requires that COBRA continuation coverage also be offered for the plan or plans in which you were covered. If the amount you have to pay for retiree coverage is greater than what you paid for the same coverage as an active employee, you can choose to elect the COBRA continuation coverage instead of the retiree coverage. You will receive a written summary of your options. If you choose the COBRA continuation coverage you need to be aware that elected COBRA coverage is for a limited duration, while retiree medical coverage may last for life and retiree dental coverage may last until the end of the month before the month in which you reach age 65.
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Any amount you have remaining in the Dependent Day Care Account and/or the Health Care Account is available to reimburse you for covered services incurred before your Release Date. Claims for services performed after that time are not eligible for reimbursement. Claims for reimbursement must be filed by June 30 in the calendar year following your Release Date. Any amounts in your accounts that are not used will be forfeited according to IRS rules. Because your Release Date will occur on the last day of the calendar year, you are not eligible to elect COBRA continuation coverage for your Health Care Account.
Upon your Release Date, you have a number of withdrawal options. If your account is valued at more than $1,000 on your Release Date, you have the option of leaving your account in the plan. If your account is valued at $1,000 or less, it will be paid to you as a mandatory lump sum cash-out. If you have an unpaid loan, you may continue to make monthly payments after your Release Date. Fidelity will send you payment instructions approximately 4 weeks following your Release Date. To receive Savings Plan information, call Fidelity Investments at (800) 827-4526. You may also access Savings Plan information on the internet by clicking "Access My Account" under NetBenefits at www.401k.com.
If you are enrolled in one or more of these plans on your Release Date, your eligibility for coverage ends on your Release Date for all the benefits identified in the above title of this section. If you were covered by the voluntary accidental death and dismemberment plan you may be eligible for conversion privileges within 31 days of your Release Date. To find out if this applies to you contact the HR Service Center at (800) 782-4669. They will be able to give you contact information for the applicable insurance company.
If you are enrolled for this coverage, it will end on your Release Date, although you may be able to elect COBRA continuation of coverage at that time. Ashland's Employee Benefits Department will provide you with a summary of your COBRA rights that will tell you how to elect to continue coverage.
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If you were enrolled for the Legal Plan, your participation ends on your Release Date. You may be eligible for coverage for covered legal matters that are not completed as of your Release Date. Consult your summary plan description for details.
You may continue any coverage you had in the group auto and homeowners insurance and the long term care insurance beyond your Release Date on the same basis as any other former employee. Continuing that coverage, though, is strictly between you and the applicable insurance company that provides the coverage.
If you are enrolled for the group financial services at the time of your Release Date, you may continue them for the remainder of the calendar year if you make appropriate arrangements with the provider to make any required payments then remaining for the services.
Payment for unused earned and accrued vacation is included as part of the lump sum severance benefit received under this agreement. You will not be paid for any unused sick pay.
If you are a member of the Credit Union at the time of your Release Date, you will be able to participate in the Credit Union after your Release Date. You will need to contact them directly to discuss handling of credit union business.
If the course has been approved for reimbursement prior to your Release Date and will be completed within six months of your Release Date, you will be reimbursed for approved costs provided you complete the course within policy guidelines.
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To be reimbursed, you must provide the following:
1. Your name, social security number, complete mailing address and
phone number;
2. An itemized receipt for tuition and fees issued by the
educational institution; and
3. A grade report from the educational institution.
All of the above information should be sent to: Employee Services, Corporate Human Resources, Ashland Inc., 3499 Blazer Parkway, Lexington, KY 40509.
State laws control whether you are eligible to receive unemployment compensation. If you decide to file for unemployment compensation, the Company is obligated to inform the state's unemployment commission of the nature of your termination.
If you have incurred any expenses that are reimbursable by the Company, you should submit an approved Expense Report to your supervisor, along with required receipts immediately. In the event there is an outstanding balance owed on your Corporate American Express or Purchasing Card account on your Release Date, Ashland will make deductions from your severance benefits in order to cover the balances due for (i) any authorized expenses for which you have already received reimbursement from the Company but have not yet remitted to American Express, or (ii) for any charges on your account(s) that are not properly reimbursable under Ashland's reimbursement Policies.
The Company will only verify dates of employment and last job title, department and work location. The Company will only release other information concerning your employment as required by law, or at your request and with your written consent. The Company further agrees that it will not make any oral or written communication to any person or entity which disparages you, or has the effect of damaging your reputation, and that, if any inquiry is made concerning your employment, no negative reference of any kind will be made; provided, that this prohibition shall not be applied to prevent the Company or its representatives from providing truthful testimony in compliance with a lawful subpoena or court order, or as otherwise may be required by law.
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Your participation in the Employee Assistance Program will end on your Release Date
Any future information from the Company will be sent to the address you currently have on file (i.e. employee benefit information, W-2's, etc.). Should your address change in the near future you should contact the HR Service Center at (800) 782-4669.
DETAILS ON THE BENEFITS FROM THE EMPLOYEE BENEFIT PLANS DISCUSSED ABOVE ARE PROVIDED IN THE SUMMARY PLAN DESCRIPTION BOOKLET FOR EACH PLAN. IN ALL EVENTS, THE RIGHTS AND OBLIGATIONS OF THE COMPANY AND ALL COVERED EMPLOYEES, BENEFICIARIES OR OTHER CLAIMANTS ARE GOVERNED SOLELY BY THE TERMS OF THE OFFICIAL DOCUMENTS UNDER WHICH EACH PARTICULAR PLAN, POLICY OR PROGRAM IS OPERATED.
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You will not be eligible to participate in the Ashland Inc. Incentive Compensation Plan for FY 2007.
If and when payments are made, if eligible, you shall receive payment in cash of any portion of the amount(s) you would have received under Ashland's Long Term Incentive Plans for the 2005-2007 and 2006-2008 plan cycles. You will not be eligible to participate in the 2007-2009 plan cycle. Payment under these plans will be pro-rated through your Release Date, and based on actual Ashland Inc. measures (as specified in the plans and your awards under the plans) through the entire three-year plan cycles (including adjustments for unusual items).
Upon your Release Date, you shall receive distribution of your "DCP" account(s) in accordance with your DCP election(s) subject the requirements of Code Section 409A. Any changes regarding the distribution of your DCP account(s) must be made in accordance with plan terms and are subject to the requirements of Code Section 409A.
You shall be reimbursed for eligible financial planning expenses incurred through the end of calendar year in which your Release Date occurs and the following calendar year.
You will be provided with executive level outplacement assistance for the 12-month period following your Release Date, to assist you in your search and transition into other employment. This assistance will be provided for you at the Company's expense. Please contact your Human Resources Representative for more information about this benefit.
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You shall be eligible for an Executive Physical during the calendar year in which your Release Date occurs and the following calendar year.
If eligible, and if you have a vested benefit under the Non-qualified Excess Benefit Pension Plan and/or the SERP, you will be entitled to receive the benefit provided under such plan in accordance with the terms of each plan and subject to the requirements of Code Section 409A. For purposes of determining your benefits under the Non-qualified Excess Benefit Pension Plan, your compensation history will be determined as of your Release Date. For purposes of determining your benefits under the SERP, your compensation history will be determined using the seven (7) year period ending on your Release Date.
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Once You Have Signed Both Originals of This Document, Please Return Both Original Signed Agreements To:
Susan Esler Vice President Human Resources Ashland Inc. 50 E RiverCenter Boulevard PO Box 391 Covington, KY 41012
A Fully Executed Original Agreement will be returned to your home address.
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Exhibit 10.2
WHEREAS, the Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) (hereinafter the "Plan") was approved by the Board of Directors of Ashland Inc. on November 4, 2004 to be effective January 1, 2005;
WHEREAS, the Plan as approved and effective reserved the right to amend it;
WHEREAS, the right to amend the Plan was exercised on November 15, 2006 as identified hereinafter;
NOW, THEREFORE, generally effective January 1, 2005, except as otherwise provided herein, the first amendment and restatement of the Plan is as follows:
The purpose of this Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) (the "Plan") is to provide each Director with an opportunity to defer some or all of the Director's Fees as a means of saving for retirement or other purposes. In addition, the Plan provides Directors with the ability to increase their proprietary interest in the Company's long-term prospects by permitting Directors to receive all or a portion of their Fees in Ashland Common Stock. The obligations of the Company hereunder constitute a mere promise to make the payments provided for in this Plan. No Director, his or her spouse or the estate of either of them shall have, by reason of this Plan, any right, title or interest of any kind in or to any property of the Company. To the extent any Participant has a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.
This Plan is a replacement of the prior Ashland Inc. Deferred Compensation Plan for Non-Employee Directors amended as of April 1, 2003 (the "Former Plan"). Fees deferred under the Former Plan shall remain subject to all of the rules, terms and conditions in effect under the Former Plan as of December 31, 2004. For this purpose, the Fees deferred under the Former Plan shall include all income, gains and losses connected to such Deferred Fees.
The rules, terms and conditions of this Plan shall apply to Fees deferred after December 31, 2004, including any Election to defer such Fees made in 2004. For this purpose, the Fees deferred after December 31, 2004 shall include all income, gains and losses connected to such Fees.
The following definitions shall be applicable throughout the Plan:
(a) "Accounting Date" means the Business Day on which a calculation concerning a Participant's Deferral Account is performed, or as otherwise defined by the Committee.
(b) "Act" means the Securities Act of 1933, as amended from time to time.
(c) "Beneficiary" means the person(s) designated by a Participant in accordance with Article IV, Section 1.
(d) "Board" means the Board of Directors of Ashland Inc. or its designee.
(e) "Business Day" means a day on which the New York Stock Exchange is open for trading activity.
(f) "Change in Control" shall be deemed to occur (1) upon the approval
of the shareholders of the Company (or if such approval is not required,
upon the approval of the Board) of (A) any consolidation or merger of the
Company, other than a consolidation or merger of the Company into or with a
direct or indirect wholly-owned subsidiary, in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Common
Stock would be converted into cash, securities or other property other than
a merger in which the holders of Common Stock immediately prior to the
merger will have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, (B) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Company,
provided, however, that no sale, lease, exchange or other transfer of all
or substantially all the assets of the Company shall be deemed to occur
unless assets constituting 80% of the total assets of the Company are
transferred pursuant to such sale, lease, exchange or other transfer, or
(C) adoption of any plan or proposal for the liquidation or dissolution of
the Company, (2) when any "person" (as defined in Section 3(a)(9) or 13(d)
of the Exchange Act), other than the Company or any subsidiary or employee
benefit plan or trust maintained by the Company, shall become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of more than 15% of the Common Stock outstanding at
the time, without the approval of the Board, or (3) if at any time during a
period of two consecutive years, individuals who at the beginning of such
period constituted the Board shall cease for any reason to constitute at
least a majority thereof, unless the election or the nomination for
election by the Company's shareholders of each new director during such
two-year period was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of such
two-year period.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(h) "Committee" means the Governance and Nominating Committee of the Board or its designee.
(i) "Common Stock" means the common stock, $.01 par value, of Ashland Inc.
(j) "Common Stock Fund" means that investment option, approved by the Committee, in which a Participant's Deferral Account may be deemed to be invested and may earn income based on a hypothetical investment in Common Stock.
(k) "Company" means Ashland Inc., its divisions and subsidiaries.
(l) "Corporate Human Resources" means the Corporate Human Resources Department of the Company.
(m) "Credit Date" means the date on which any Fees would otherwise have been paid to the Participant.
(n) "Deferral Account" means the account(s) to which the Participant's Deferred Fees, Stock Units and Restricted Stock Units are credited and from which distributions are made.
(o) "Deferred Fees" mean the Fees elected by the Participant to be deferred pursuant to the Plan.
(p) "Director" means any non-employee director of the Company.
(q) "Disability" means that a Participant is unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or
last for a continuous period of 12 or more months. Corporate Human Resources or its delegate shall determine whether a Participant has incurred a Disability.
(r) "Election" means a Participant's delivery of a written notice to the Vice-President of Human Resources for the Company (or his or her delegate) directing how his or her Fees will be paid under the terms of the Plan. The Committee or the Company may prescribe other means of making and delivering an Election. An Election shall also include instructions specifying the time and form under which the Participant's Deferral Account will be paid. Such elections shall be irrevocable except as otherwise provided in the Plan.
(s) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(t) "Fair Market Value" means the price of a share of Common Stock, as reported on the Composite Tape for New York Stock Exchange on the date and at the time designated by the Company.
(u) "Fees" mean the annual retainer, any committee retainer and, as applicable, other additional retainers or compensation earned by a Director for service as a member of the Board during all or part of a calendar year.
(v) "Fiscal Year" means that annual period commencing October 1 and ending the following September 30.
(w) "Participant" means a Director.
(x) "Payment Commencement Date" means the date payments of amounts deferred begin pursuant to Article III, Section 5.
(y) "Personal Representative" means the person or persons who, upon the disability or incompetence of a Participant, have acquired on behalf of the Participant, by legal proceeding or otherwise, the right to receive the benefits specified in this Plan.
(z) "Plan" means this Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) as it now exists or may be hereafter amended.
(aa) "Restricted Stock Account" means the portion of a Participant's Stock Account that is separately accounted for and to which Restricted Stock Units are credited.
(bb) "Restricted Stock Unit(s)" means the share equivalents credited
to a Participant's Restricted Stock Account pursuant to Article III,
Section 1.
(cc) "Secretary of the Treasury" or "Treasury" means the United States Department of Treasury.
(dd) "Stock Account" means the portion of a Participant's Deferral Account that is separately accounted for and to which Stock Units are credited.
(ee) "Stock Unit(s)" means the share equivalents credited to a Participant's Stock Account pursuant to Article III, Section 1.
(ff) "Termination" means retirement from the Board or termination of service as a Director for any other reason.
(gg) "Unforeseeable Emergency" means a severe financial hardship of a Participant because of -
1. An illness or accident of the Participant, the Participant's
spouse or dependent (as defined in Internal Revenue Code
section 152(a));
2. A loss of the Participant's property due to casualty; or
3. Such other similar extraordinary unforeseeable circumstances
because of events beyond the control of the Participant.
Corporate Human Resources or its delegate shall determine whether a Participant has incurred an Unforeseeable Emergency.
(a) Shares Authorized for Issuance. There shall be reserved for issuance under the Plan 500,000 shares of Common Stock, subject to adjustment pursuant to subsection (b) below. Such shares shall be authorized but unissued shares of Common Stock.
(b) Adjustments in Certain Events. In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares, split-up, split-off, spin-off, liquidation or other similar change in capitalization, or any distribution to common shareholders other than ordinary cash dividends, the number or kind of shares that may be issued under the Plan shall be automatically adjusted so that the proportionate interest of the Directors shall be maintained as before the occurrence of such event. Such adjustment shall be conclusive and binding for all purposes of the Plan.
Any non-employee Director of the Company shall be eligible to participate in the Plan.
Full power and authority to construe, interpret and administer the Plan shall be vested in the Company and the Committee or one or more of their delegates. This power and authority includes, but is not limited to, establishing deferral terms and conditions and adopting modifications and amendments to procedures as may be deemed necessary or appropriate. This power and authority also includes, without limitation, the ability to construe and interpret provisions of the Plan, make determinations regarding law and fact, reconcile any inconsistencies between provisions in the Plan or between provisions of the Plan and any other statement concerning the Plan, whether oral or written, supply any omissions to the Plan or any document associated with the Plan, and to correct any defect in the Plan or in any document associated with the Plan. Decisions of the Company and the Committee (or their delegates) shall be final, conclusive and binding upon all parties. Day-to-day administration of the Plan shall be the responsibility of Corporate Human Resources. This responsibility includes authority to create new administrative forms or modify existing forms for use under this Plan so long as any such modified or new forms are not inconsistent with the terms of the Plan.
Each Participant may make an Election to receive all or a portion of his or her Fees in shares of Common Stock or make an Election to defer Fees pursuant to Article III, Section 3. A Participant who elects to receive Fees in shares of Common Stock shall receive such shares at the end of each quarter beginning in the quarter the Election is effective. The number of shares of Common Stock so issued shall be equal to the amount of Fees which otherwise would have been payable during the quarter divided by the Fair Market Value. Only whole number of shares of Common Stock will be issued, with any fractional shares to be paid in cash.
(a) For each Participant, there shall be established a Deferral Account to which there shall be credited any Deferred Fees as of each Credit Date. The Deferral Account shall be credited (or debited) on each Accounting Date with income (or loss) based upon a hypothetical investment in any one or more of the investment options available under the Plan, as prescribed by the Committee, which may include a Common Stock Fund, as elected by the Participant under the terms of Article III, Section 3. The crediting or debiting on each Accounting Date of income (or loss) shall be made for the respective amounts that were subject to each Election under Article III Section 3.
(b) The Stock Account of a Participant shall be credited on each Accounting Date with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with the amount of such Deferred Fees as to which a stock deferral election has been made at the Fair Market Value on the Accounting Date. As of the date of any dividend distribution date for the Common Stock, the Participant's Stock Account shall be credited with additional Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the Fair Market Value on such date, with the amount which would have been paid as dividends on that number of shares (including fractions of a share) of Common Stock which is equal to the number of Stock Units then credited to the Participant's Stock Account with respect to a particular Election under Article III Section 3.
(c) Each Participant may have his or her Stock Account credited on an Accounting Date determined by the Committee with the number of Restricted Stock Units approved for such allocation equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with the dollar amount of the approved grant for this purpose at the Fair Market Value on the Accounting Date. The Stock Units so credited shall be separately maintained and accounted for in a Restricted Stock Account for the Participant. Amounts credited to the Restricted Stock Account shall be forfeitable until the earlier of (i) one year anniversary of the date on which such amounts were so credited, or (ii) the date of the next annual shareholders' meeting of the Company. As of the date of any dividend distribution date for the Common Stock, the Participant's Restricted Stock Account shall be credited with additional Restricted Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the Fair Market Value on such date, with the amount which would have been paid as dividends on that number of shares (including fractions of a share) of Common Stock which is equal to the number of Restricted Stock Units then credited to the Participant's Restricted Stock Account. The additional Restricted Stock Units so allocated shall remain forfeitable until the date on which the Restricted Stock Units with respect to which the additional Restricted Stock Units were credited become non-forfeitable. On the date that a Participant ceases to be a Director, all Stock Units (including fractional Stock Units) that have not become non-forfeitable shall be forfeited. Upon a Change in Control, all forfeitable amounts in the Restricted Stock Account shall become non-forfeitable.
(a) Unforeseeable Emergency. A Participant or a Participant's legal representative may submit an application for a distribution from the Participant's Deferral Account (including the non-forfeitable portion of the Restricted Stock Account) because of an Unforeseeable Emergency. The amount of the distribution shall not exceed the amount necessary to satisfy the needs of the Unforeseeable Emergency. Such distribution shall include an amount to pay taxes reasonably anticipated as a result of the distribution. The amount allowed as a distribution under this Section 2(a) shall take into account the extent to which the Unforeseeable Emergency may be relieved through reimbursement or compensation from insurance or liquidation of the Participant's assets (but only to the extent such liquidation would itself not cause a severe financial hardship). The distribution shall be made in a single sum and paid as soon as practicable after the application for the distribution on account of the Unforeseeable Emergency is approved. The provisions of this Section 2(a) shall be interpreted and administered in accordance with applicable guidance that may be issued by the Treasury.
(b) Disability. A Participant or a Participant's legal representative may submit an application for a total distribution from the Participant's Deferral Account (including the non-forfeitable portion of the Restricted Stock Account) because of the Participant's Disability. The distribution shall be made in a single sum and paid as soon as practicable after the application is approved.
(c) Prohibition on Acceleration. Except as otherwise provided in the Plan and except as may be allowed in guidance from the Secretary of the Treasury, distributions from a Participant's Deferral Account may not be made earlier than the time such amounts would otherwise be distributed pursuant to the terms of the Plan.
(a) General. Any Participant wishing to defer Fees under the Plan may elect to do so by delivering to the Vice-President of Human Resources of the Company (including a delegate thereof) an Election on a form prescribed by Corporate Human Resources designating the manner in which such Deferred Fees are to be invested in accordance with Article III, Section 1 and electing the timing and form of distribution. The timing of the filing of the appropriate form with Corporate Human Resources shall be determined by the Company or the Committee. An effective election to defer Fees may not be revoked or modified except as otherwise determined by the Company or the Committee or as stated herein.
(b) Permissible Deferral Election. A Participant's Election to defer
Fees may only be made in the taxable year before the Fees are earned, with
one exception. The exception applies to a Participant during his or her
first year of eligibility to participate in the Plan. In that event such a
Participant may, if so offered by the Company or the Committee, elect to
defer Fees for services performed after the Election, provided that the
Election is made within 30 days of the date the Participant becomes
eligible to participate in the Plan. A Participant's Election under this
Section 3(b) shall specify the amount or percentage of Fees deferred and
the time and form of distribution from among those described in Article III
Section 4 of the Plan. Each Election to defer Fees may be treated as a
separate election regarding the time and form of distribution, if so
determined at the time of a particular election by the Company.
(c) Investment Alternatives - Existing Balances. A Participant may elect to change an existing selection as to the investment alternatives in effect with respect to existing deferred Fees (in increments prescribed by the Committee or the Company) as often, and with such restrictions, as determined by the Committee or by the Company.
(d) Change of Beneficiary. A Participant may, at any time, elect to
change the designation of a Beneficiary in accordance with Article IV,
Section 1 hereof.
(a) Deferral Account. In accordance with the Participant's Election and as prescribed by the Committee, Deferred Fees credited to a Participant's Deferral Account, which shall include the non-forfeitable portion of the Participant's Restricted Stock Account, shall be distributed in cash or shares of Common Stock (or a combination of both). Unless otherwise directed by the Committee, if no Election is made by a Participant as to the distribution or form of payment of his or her Deferral Account, upon Termination such account shall be paid in cash in a lump sum. The entire Deferral Account must be paid out within fifteen years following the date of the Participant's Termination. In accordance with a Participant's Election under Article III Section 3, but subject to Sections 2 and 6 of Article III, amounts subject to such Election in the Deferred Account (determined in accordance with Article III Section 1) shall be distributed -
1. Upon a Participant's separation from service, including death, as a Director as either a lump sum or in installments not exceeding 15 years; or
2. At a specified time or under a fixed schedule not exceeding 15 years.
(b) Medium of Distribution and Default Method. In accordance with the Participant's Election and within the guidelines established by the Committee or the Company, a Participant's Deferral Account (including the non-forfeitable portion of the Restricted Stock Account) shall be distributed in cash or shares of Common Stock (or a combination of both). To the extent permissible under law, a Participant may make this Election at any time before a distribution is to be made. If no Election is made by a Participant as to the distribution or form of payment of his or her Deferral Account, upon the earliest time that a distribution from such account is to be made pursuant to the terms of the Plan, such account shall be paid in cash or shares of Common Stock (or a combination of both) in lump sum.
(c) Election to Delay the Time or Change the Form of Distribution. A Participant may make an Election to delay the time of a distribution or change the form of a distribution, or may elect to do both, with respect to an amount that would be payable pursuant to an Election under paragraph (a) of this Section 4, except in the event of a distribution on account of the Participant's death, if all of the following requirements are met -
1. Such an Election may not take effect until at least 12 months after it is made;
2. Any delay to the distribution that would take effect because of the Election is at least to a date five years after the date the distribution otherwise would have begun; and
3. In the case of a distribution that would be made under paragraph
(a)(2) of this Section 4 such an Election may not be made less than 12
months before the date of the first scheduled payment.
Payments of amounts deferred pursuant to a valid Election shall commence in accord with the Participant's Election. If a Participant dies prior to the first deferred payment specified in an Election, payments shall commence to the Participant's Beneficiary on the first payment date so specified.
Notwithstanding any provision of this Plan to the contrary, in the event of a "Change in Control" (as defined in Section 2(f) of Article I), each Participant in the Plan shall receive an automatic lump sum cash distribution of all amounts accrued in the Participant's Cash and/or Stock Account(s) (including interest at the Prime Rate of Interest through the business day immediately preceding the date of distribution) not later than fifteen (15) days after the date of the "Change in Control." For this purpose, the balance in the Stock Account shall be determined by multiplying the number of Stock Units by the higher of (a) the highest closing price of a share of Common Stock during the period commencing 30 days prior to such Change in Control or (b) if the Change in Control of the Company occurs as a result of a tender or exchange offer or consummation of a corporate transaction, then the highest price paid per share of Common Stock pursuant thereto. Any consideration other than cash forming a part or all of the consideration for Common Stock to be paid pursuant to the applicable transaction shall be valued at the valuation price thereon determined by the Board.
In addition, the Company shall reimburse a Participant for the legal fees and expenses incurred if the Participant is required to seek to obtain or enforce any right to distribution. In the event that it is determined that such Participant is properly entitled to a cash distribution hereunder, such Participant shall also be entitled to interest thereon at the Prime Rate of Interest quoted by Citibank, N.A. as its prime commercial lending rate on the subject date from the date such distribution should have been made to and including the date it is made. Notwithstanding any provision of this Plan to the contrary, Article I, Section 2(f) and Section 6 of this Article may not be amended after a "Change in Control" occurs without the written consent of a majority in number of Participants.
A Participant may designate one or more persons (including a trust) to whom or to which payments are to be made if the Participant dies before receiving payment of all amounts due hereunder. A designation of Beneficiary will be effective only after the signed Election is filed with the Vice-President of Human Resources for the Company (or a delegate thereof) while the Participant is alive and will cancel all designations of a Beneficiary signed and filed earlier. If the Participant fails to designate a Beneficiary as provided above or if all of a Participant's Beneficiaries predecease him or her and he or she fails to designate a new Beneficiary, remaining unpaid amounts shall be paid in one lump sum to the estate of such Participant. If all Beneficiaries of the Participant die before the Participant or before complete payment of all amounts due hereunder, the remaining unpaid amounts shall be paid in one lump sum to the estate of the last to die of such Beneficiaries.
The interests of a Participant and his or her Beneficiaries under the Plan may not in any way be voluntarily or involuntarily transferred, alienated or assigned, nor be subject to attachment, execution, garnishment or other such equitable or legal process.
The provisions of this Plan shall be interpreted and construed in accordance with the laws of the Commonwealth of Kentucky.
The Committee may amend, alter or terminate this Plan at any time; provided, however, that the Committee may not, without approval by the Board:
(a) materially increase the number of securities that may be issued under the Plan (except as provided in Article I, Section 3),
(b) materially modify the requirements as to eligibility for participation in the Plan, or
(c) otherwise materially increase the benefits accruing to participants under the Plan.
It is the intention of the Company that the Plan comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that Plan Participants remain non-employee directors ("Non-Employee Directors") for purposes of administering other employee benefit plans of the Company and having such other plans be exempt from Section 16(b) of the Exchange Act. Therefore, if any Plan provision is found not to be in compliance with Rule 16b-3 or if any Plan provision would disqualify Plan participants from remaining Non-Employee Directors, that provision shall be deemed amended so that the Plan does so comply and the Plan participants remain Non-Employee Directors, to the extent permitted by law and deemed advisable by the Committee, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.
It is the intention of the Company and the Committee that the Plan be administered in compliance with Code section 409A and the applicable guidance issued thereunder by the Secretary of the Treasury. Any provision that is found to be inconsistent with Code section 409A or the applicable guidance issued thereunder by the Secretary of the Treasury shall be reformed and applied by the Company in a manner consistent with applicable law, as determined by the Company.
The Plan was approved and originally became effective as of January 1, 2005; provided, however, that Article I Sections 2 (n), (u), (aa) and (bb); and Article III Section 1 (c) are effective January 26, 2007.
EXHIBIT 12
ASHLAND INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions)
Three months ended
Years ended September 30 December 31
---------------------------------------------------------- --------------------
2002 2003 2004 2005 2006 2005 2006
-------- -------- --------- --------- -------- -------- --------
EARNINGS
--------
Income from continuing operations $ 27 $ 103 $ 311 $ 1,958 $ 183 $ 35 $ 53
Income taxes 14 52 100 (230) 29 23 21
Interest expense 133 121 112 87 8 2 2
Interest portion of rental expense 19 20 20 20 18 5 5
Amortization of deferred debt expense 2 2 2 3 - - -
Distributions in excess of (less than) earnings
of unconsolidated affiliates 20 (89) (260) (246) (6) (1) (2)
-------- -------- --------- --------- -------- -------- --------
$ 215 $ 209 $ 285 $ 1,592 $ 232 $ 64 $ 79
======== ======== ========= ========= ======== ======== ========
FIXED CHARGES
-------------
Interest expense $ 133 $ 121 $ 112 $ 87 $ 8 $ 2 $ 2
Interest portion of rental expense 19 20 20 20 18 5 5
Amortization of deferred debt expense 2 2 2 3 - - -
Capitalized interest - - - 1 3 1 1
-------- -------- --------- --------- -------- -------- --------
$ 154 $ 143 $ 134 $ 111 $ 29 $ 8 $ 8
======== ======== ========= ========= ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 1.40 1.46 2.13 14.34 8.00 8.00 9.88
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Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 7, 2007
/s/ James J. O'Brien
------------------------------------
James J. O'Brien
Chairman and Chief Executive Officer
(Principal Executive Officer)
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Exhibit 31.2
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 7, 2007
/s/ J. Marvin Quin
-----------------------------
J. Marvin Quin
Chief Financial Officer
(Principal Financial Officer)
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Exhibit 32
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 December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, James J. O'Brien, Chief Executive Officer of the Company, and 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, 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 February 7, 2007 /s/ J. Marvin Quin ------------------------- J. Marvin Quin Chief Financial Officer February 7, 2007 |