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ASH > SEC Filings for ASH > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for ASHLAND INC.

Form 10-Q for ASHLAND INC.


1-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements herein.
BUSINESS OVERVIEW
Ashland profile
Ashland is a leading, global specialty chemical company that provides products, services and solutions that meet customer needs throughout a variety of industries. Ashland's chemistry is used in a wide variety of markets and applications, including architectural coatings, automotive, construction, energy, food and beverage, personal care, pharmaceutical, paper and water treatment. With approximately 15,000 employees worldwide, Ashland serves customers in more than 100 countries.
Ashland's sales generated outside of North America were 49% and 47% for the nine months ended June 30, 2013 and 2012, respectively. Sales by region expressed as a percentage of total consolidated sales for the three and nine months ended June 30 were as follows:

                        Three months ended         Nine months ended
                              June 30                   June 30
Sales by Geography       2013          2012        2013          2012
North America (a)          51 %          54 %        51 %          53 %
Europe                     28 %          26 %        28 %          27 %
Asia Pacific               14 %          13 %        14 %          13 %
Latin America & other       7 %           7 %         7 %           7 %
                          100 %         100 %       100 %         100 %

(a)Ashland includes only U.S. and Canada in its North America designation. Business segments Ashland's reporting structure is composed of four reporting segments: Ashland Specialty Ingredients (Specialty Ingredients), Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets). For further descriptions of each business segment, see "Results of Operations - Business Segment Review" beginning on page 43. The contribution to sales by each business segment expressed as a percentage of total consolidated sales for the three and nine months ended June 30 were as follows:

                            Three months ended         Nine months ended
                                  June 30                   June 30
Sales by Business Segment    2013          2012        2013          2012
Specialty Ingredients          35 %          37 %        34 %          35 %
Water Technologies             21 %          20 %        22 %          21 %
Performance Materials          19 %          19 %        19 %          19 %
Consumer Markets               25 %          24 %        25 %          25 %
                              100 %         100 %       100 %         100 %


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

KEY DEVELOPMENTS
During 2013 and other previous periods, the following transactions and operational decisions had an impact on Ashland's current and future cash flows, results of operations and financial position. Financing activities
Senior notes refinancing
During the March 2013 quarter, Ashland completed its issuance of senior notes with an aggregate principal amount of $2.3 billion. These senior notes are comprised of 3.000% senior notes due 2016 ($600 million), 3.875% senior notes due 2018 ($700 million), 4.750% senior notes due 2022 ($625 million) and 6.875% senior notes due 2043 ($375 million). The 2022 notes were issued as additional notes under the existing 2022 notes indenture issued in August 2012 and have the same terms as the originally issued notes. The 2043 notes were issued at a $1 million premium, while the new 2022 notes were issued at a $6 million discount. In accordance with U.S. GAAP, the premium and discount are being accreted into the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income over the terms of the respective notes. During the March 2013 quarter, Ashland also entered into the 2013 Senior Credit Facility in an aggregate amount of $1.2 billion, which replaced the previous $1.0 billion senior secured revolving credit facility under the 2011 Senior Credit Facility.
Ashland used the net proceeds from its issuance of the senior notes, along with the initial $85 million borrowing under the 2013 Senior Credit Facility and cash on hand, (i) to pay in full the 2011 Senior Credit Facility, including the $1.41 billion outstanding principal of the term loan A facility and the $1.03 billion outstanding principal of the term loan B facility, (ii) to pay $52 million to terminate the interest rate swaps associated with the term loan A and term loan B facilities, (iii) to pay accrued interest, fees and expenses under the 2011 Senior Credit Facility and (iv) to pay $38 million in fees and expenses with respect to the issuance of the senior notes and entry into the 2013 Senior Credit Facility. The $52 million charge to terminate the interest rate swaps is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2013. The $38 million of new fees and expense is being amortized proportionately for each tranche of the senior notes and the 2013 Senior Credit Facility.
As a result of the repayment and the termination of the 2011 Senior Credit Facility, Ashland recognized a $47 million charge for the accelerated amortization of previous debt issuance and other costs, which is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2013. 9.125% senior notes and 4.750% senior notes In July 2012, Ashland commenced a tender offer to purchase for cash any and all of the $650 million aggregate principal of the 9.125% senior notes. In conjunction with this tender offer, Ashland issued $500 million aggregate principal amount of 4.750% senior unsecured notes due 2022. The proceeds of the new notes, together with available cash, were used to pay the consideration, accrued and unpaid interest and related fees and expenses in connection with Ashland's cash tender offer for the 9.125% senior notes. At the close of the tender offer, $572 million aggregate principal amount of the 9.125% senior notes was redeemed by Ashland, representing 88% of the 9.125% senior notes. Ashland recognized a $24 million charge for debt issuance costs and original issue discount related to the portion of the 9.125% senior notes that were redeemed early, as well as a $67 million charge related to an early redemption premium payment, both of which are included in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income for the September 2012 quarter.
During the June 2013 quarter, Ashland redeemed the remaining $78 million outstanding principal of the 9.125% senior notes. Ashland recognized a $3 million charge for debt issuance costs and the original issue discount related to the 9.125% senior notes, as well as a $4 million charge related to an early redemption premium


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

payment, both of which are included in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income for the three and nine months ended June 30, 2013. Accounts receivable securitization
On August 31, 2012, Ashland entered into a $350 million accounts receivable securitization facility pursuant to (i) a Sale Agreement, among Ashland and certain of its direct and indirect subsidiaries (each an Originator and collectively, the Originators) and CVG Capital III LLC, a wholly-owned "bankruptcy remote" special purpose subsidiary of the Originators (CVG) and (ii) a Transfer and Administration Agreement, as amended, among CVG, each Originator, Ashland, as Master Servicer, certain Conduit Investors, Uncommitted Investors, Letter of Credit Issuers, Managing Agents, Administrators and Committed Investors, and The Bank of Nova Scotia, as agent for various secured parties (the Agent).
Under the Sale Agreement, each Originator will transfer, on an ongoing basis, substantially all of its accounts receivable, certain related assets and the right to the collections on those accounts receivable to CVG. Under the terms of the Transfer and Administration Agreement, CVG may, from time to time, obtain up to $350 million (in the form of cash or letters of credit for the benefit of Ashland and its subsidiaries) from the Conduit Investors, the Uncommitted Investors and/or the Committed Investors through the sale of an undivided interest in such accounts receivable, related assets and collections. The Transfer and Administration Agreement has a term of three years, but is extendable at the discretion of the Investors. Ashland accounts for the securitization facility as secured borrowings, and the receivables sold pursuant to the facility are included in the Condensed Consolidated Balance Sheets as accounts receivable. Fundings under the Transfer and Administration Agreement will be repaid as accounts receivable are collected, with new fundings being advanced (through daily reinvestments) as new accounts receivable are originated by the Originators and transferred to CVG, with settlement generally occurring monthly. Ashland continues to classify any borrowings under this facility as a short-term debt instrument within the Condensed Consolidated Balance Sheets. Once sold to CVG, the accounts receivable, related assets and rights to collection described above are separate and distinct from each Originator's own assets and are not available to its creditors should such Originator become insolvent. Substantially all of CVG's assets have been pledged to the Agent in support of its obligations under the Transfer and Administration Agreement. At June 30, 2013, Ashland had drawn all of the $350 million in available funding provided by the $603 million in qualifying accounts receivable transferred by Ashland to CVG. The weighted-average interest rate for this instrument was 1.0% for the nine months ended June 30, 2013. Other financing activities
Ashland's corporate credit ratings have remained unchanged from those reported in its Form 10-K filed in November 2012. Standard & Poor's ratings are BB, while Moody's Investor Services are Ba1, with a stable outlook from both. Subsequent changes to these ratings may have an effect on Ashland's borrowing rate or ability to access capital markets in the future. As of June 30, 2013, Ashland's access to cash has remained largely unchanged since September 30, 2012 with a total of approximately $1.4 billion of liquidity, defined as cash and availability under liquidity facilities. Acquisitions/Divestitures
Synlubes business divestiture
In January 2012, Ashland completed the sale of its aviation and refrigerant lubricants business, a polyol/ester-based synlubes (Synlubes) business previously included within the Water Technologies business segment to Monument Chemical Inc., a Heritage Group Company. Annual sales of the business were approximately $50 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The transaction resulted in a pretax loss of less than $1 million recognized during the nine months ended June 30, 2012.


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

PVAc business divestiture
In January 2012, Ashland completed the sale of its polyvinyl acetate homopolymer and copolymer (PVAc) business previously included within the Performance Materials business segment to Celanese Corporation. Annual sales of the business were approximately $45 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The sale included the transfer of the PVAc business, inventory and related technology, but did not include any real estate or manufacturing facilities. Ashland's PVAc business included two brands, Flexbond™ and Vinac™ emulsions. The transaction resulted in a pretax gain of $2 million recognized during the nine months ended June 30, 2012. International Specialty Products acquisition On August 23, 2011, Ashland completed its acquisition of ISP, a global specialty chemical manufacturer of innovative functional ingredients and technologies, in a transaction valued at $3.2 billion. ISP reported sales of $1.9 billion for the twelve month period ended September 30, 2011. The purchase price of $2.2 billion was an all cash transaction, reduced by the amount of ISP's net indebtedness at closing. Ashland has included ISP within the Specialty Ingredients reportable segment, with the exception of ISP's Elastomers business line, which has been included within the Performance Materials reportable segment. The acquisition was recorded by Ashland using the acquisition method of accounting in accordance with applicable U.S. GAAP, whereby the total purchase price was allocated to tangible and intangible assets and liabilities acquired based on respective fair values. The purchase price allocation for the acquisition was completed as of September 30, 2012.
Distribution divestiture
On March 31, 2011, Ashland completed the sale to Nexeo Solutions, LLC (Nexeo) of substantially all of the assets and certain liabilities of its global distribution business which previously comprised the Ashland Distribution (Distribution) segment. The transaction was an asset sale with the total post-closing adjusted cash proceeds received by Ashland of $972 million, before transaction fees and taxes. Ashland recognized an after-tax gain of $271 million during 2011. Because this transaction signified Ashland's exit from the distribution business, the results of operations and cash flows of Distribution have been classified as discontinued operations for all periods presented. During the year following the sale of Distribution, certain indirect corporate costs included within selling, general and administrative expense that were previously allocated to the Distribution reporting segment that did not qualify for discontinued operations accounting classification were reported as costs within the Unallocated and other section of continuing operations for segment reporting purposes and equaled $5 million for the nine months ended June 30, 2012.
Ashland retained and agreed to indemnify Nexeo for certain liabilities of the Distribution business arising prior to the closing of the sale. This includes pension and other postretirement benefits, as well as certain other liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in the definitive agreement. The ongoing effects of the pension and postretirement plans for former Distribution employees are reported within the Unallocated and other section of continuing operations for segment reporting purposes.
As part of this sale, Ashland received transition service fees for ongoing administrative and other services provided to Nexeo. Ashland recognized transition service fees of $6 million and $22 million, respectively, during the three and nine months ended June 30, 2012, which offset the costs of providing transition services and were classified within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. While the transition service agreements varied in duration depending upon the type of service provided, Ashland implemented plans to reduce costs as the transition services were phased out.


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

Restructuring and integration programs
Ashland periodically implements corporate restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure.
Severance costs
During the prior years, Ashland announced steps to reduce stranded costs resulting from the divestiture of Distribution and the contribution of the Casting Solutions business to an expanded global joint venture. Targeted cost reductions for the Distribution and Casting Solutions' stranded costs were $40 million. In addition, Ashland continues to integrate ISP, subsequent to its purchase in August 2011. Targeted synergy cost reductions related to this acquisition are $50 million.
Steps to address cost reduction opportunities included Ashland's announced voluntary severance offer (VSO) in June 2011 to approximately 1,500 regular, full-time, non-union, U.S.-based employees, primarily within various shared resource groups as well as certain positions within the Specialty Ingredients business, which ultimately resulted in 150 employees being formally approved for the VSO. An involuntary program was also initiated in 2011 as a further step to capture targeted saving levels from these transactions and other business cost savings initiatives. The VSO and involuntary programs resulted in a severance charge of $34 million during the September 2011 quarter. The involuntary program continued during 2012 and resulted in an expense of $21 million being recognized within the selling, general and administrative expense caption during the nine months ended June 30, 2012. As of June 30, 2013, the remaining restructuring reserve for these programs totaled $16 million.
As of June 30, 2013, approximately $75 million of annualized cost savings have been achieved from these cost reduction programs primarily through reductions in supply chain, IT and finance resource groups. The $40 million original estimated cost savings were principally achieved as of the end of the March 2012 quarter for the Distribution and Casting Solutions stranded costs, while $35 million of the total $50 million of synergy savings were achieved through June 30, 2013, with the remaining $15 million expected to be completed once full implementation of Ashland's ERP platform is completed. Additional charges related to the involuntary program may occur in subsequent periods as they are identified through ongoing internal assessments and efforts to maximize operational efficiencies.
Facility costs
During the March 2012 quarter, Ashland incurred a $20 million lease abandonment charge related to its exit from an office facility that was retained as part of the Hercules acquisition. The costs related to the reserve will be paid over the remaining lease term through May 2016. Also during the March 2012 quarter, in order to maximize operational efficiencies, Ashland abandoned a construction project for a multi-purpose facility in China. This project abandonment resulted in a $16 million charge which primarily related to expenses incurred for engineering and construction in progress. Both charges were recognized within the selling, general and administrative expense caption during the nine months ended June 30, 2012. As of June 30, 2013, the remaining restructuring reserve for these programs totaled $8 million.
Stock repurchase and annual dividend increase During the June 2013 quarter, the Board of Directors of Ashland authorized a $600 million common stock repurchase program. This new authorization replaced Ashland's previous $400 million share repurchase authorization, approved in March 2011, which had $329 million remaining. Under the new program, Ashland's common shares may be repurchased in open market transactions, privately negotiated transactions or pursuant to one or more accelerated stock repurchase programs or Rule 10b5-1 plans. This new repurchase program will expire on December 31, 2014.


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

As part of the $600 million common stock repurchase program, Ashland announced and completed an accelerated share repurchase agreement (ASR Agreement) with Citibank, N.A. (Citibank) during the June 2013 quarter. Under the ASR Agreement, Ashland paid an initial purchase price of $150 million to Citibank and received an initial delivery of approximately 1.3 million shares of its common stock. The ASR Agreement had a variable maturity, at Citibank's option, with a maximum pricing period termination date of August 21, 2013. In June 2013, Citibank exercised its early termination option under the ASR Agreement and the pricing period was closed. The settlement price, which represents the weighted average price of Ashland's common stock over the pricing period less a discount, was $86.32 per share. Based on this settlement price, the final number of shares repurchased by Ashland that were to be delivered by Citibank under the ASR Agreement was 1.7 million shares. Ashland received the additional 0.4 million shares from Citibank in June 2013 to settle the difference between the initial share delivery and the total number of shares repurchased.
During the June 2013 quarter, the Board of Directors of Ashland announced and paid a quarterly cash dividend of $0.34 per share to eligible shareholders of record. This amount was an increase from the quarterly dividend of $0.225 per share paid during the first and second quarters of fiscal 2013. During the year ended September 30, 2012, a quarterly dividend of $0.175 per share was paid for the first and second quarters, while $0.225 per share was paid for the third and fourth quarters.
RESULTS OF OPERATIONS - CONSOLIDATED REVIEW Use of non-GAAP measures
Ashland has included within this document certain non-GAAP measures which include EBITDA (net income, plus income tax expense (benefit), net interest and other financing expenses, and depreciation and amortization), adjusted EBITDA (EBITDA adjusted for discontinued operations, other income and (expense) and key items, which may include pro forma effects for significant acquisitions or divestitures, as applicable) and adjusted EBITDA margin (adjusted EBITDA, which can include pro forma adjustments, divided by sales). Such measurements are not prepared in accordance with U.S. GAAP and as related to pro forma adjustments, contain Ashland's best estimates of cost allocations and shared resource costs. Management believes the use of non-GAAP measures on a consolidated and business segment basis assists investors in understanding the ongoing operating performance by presenting comparable financial results between periods. The non-GAAP information provided is used by Ashland management and may not be determined in a manner consistent with the methodologies used by other companies. EBITDA and Adjusted EBITDA provide a supplemental presentation of Ashland's operating performance on a consolidated and business segment basis. Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities. In addition, certain financial covenants related to Ashland's senior credit facility are based on similar non-GAAP measures and are defined further in the sections that reference this metric.
Ashland has included free cash flow as an additional non-GAAP metric of cash flow generation. Ashland believes free cash flow is relevant because capital expenditures are an important element of Ashland's ongoing cash activities. By deducting capital expenditures from operating cash flows, Ashland is able to provide a better indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Prior to 2013, Ashland deducted dividends from this calculation but has discontinued this deduction to be more reflective of the broader industry's definition of the term free cash flow. Consolidated review
Net income
Current Quarter - Ashland's net income amounted to $124 million and $151 million for the three months ended June 30, 2013 and 2012, respectively, or $1.55 and $1.90 diluted earnings per share, respectively. Ashland's net income is primarily affected by results within operating income, net interest and other financing expense,


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring.
Income from continuing operations, which excludes results from discontinued operations, amounted to $117 million and $160 million for the three months ended June 30, 2013 and 2012, respectively, or $1.47 and $2.00 diluted earnings per share, respectively. Operating income was $210 million and $263 million for the three months ended June 30, 2013 and 2012, respectively. See the "Operating income" discussion for an analysis of these results.
Ashland incurred pretax net interest and other financing expense of $51 million and $53 million for the three months ended June 30, 2013 and 2012, respectively. Both quarters were impacted by certain charges associated with debt refinancing activity. For further information on items reported within this caption, see the net interest and other financing expense caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis.
The effective income tax expense rates of 25.9% and 25.6% for the three months ended June 30, 2013 and 2012, respectively, were both affected by certain discrete items disclosed in further detail within the income tax expense caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis.
Discontinued operations, which are reported net of taxes, resulted in income of $7 million and expense of $9 million for the three months ended June 30, 2013 and 2012, respectively. For further information on items reported within this caption, see the discontinued operations caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis. Year-to-Date - Ashland's net income amounted to $278 million and $300 million for the nine months ended June 30, 2013 and 2012, respectively, or $3.47 and $3.77 diluted earnings per share, respectively. Ashland's net income is primarily affected by results within operating income, net interest and other financing expense, income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring.
Income from continuing operations, which excludes results from discontinued operations, amounted to $274 million and $310 million for the nine months ended June 30, 2013 and 2012, respectively, or $3.42 and $3.90 diluted earnings per share, respectively. Operating income was $591 million and $586 million for the nine months ended June 30, 2013 and 2012, respectively. See the "Operating income" discussion for an analysis of these results.
Ashland incurred pretax net interest and other financing expense of $239 million and $166 million for the nine months ended June 30, 2013 and 2012, respectively. Both periods were impacted by certain charges associated with debt refinancing activity. For further information on items reported within this caption, see the net interest and other financing expense caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis.
The effective income tax expense rates of 23.5% and 26.5% for the nine months ended June 30, 2013 and 2012, respectively, were both affected by certain discrete items disclosed in further detail within the income tax expense caption . . .

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