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ASH > SEC Filings for ASH > Form 10-Q on 30-Jan-2014All Recent SEC Filings

Show all filings for ASHLAND INC.

Form 10-Q for ASHLAND INC.


30-Jan-2014

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 50% and 48% for the three months ended December 31, 2013 and 2012, respectively. Sales by region expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:

Three months ended
                            December 31
Sales by Geography       2013          2012
North America (a)          50 %          52 %
Europe                     26 %          27 %
Asia Pacific               16 %          14 %
Latin America & other       8 %           7 %
                          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 31. The contribution to sales by each business segment expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:

                            Three months ended
                                December 31
Sales by Business Segment    2013          2012
Specialty Ingredients          32 %          33 %
Water Technologies             23 %          23 %
Performance Materials          19 %          18 %
Consumer Markets               26 %          26 %
                              100 %         100 %


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

KEY DEVELOPMENTS
During the three months ended December 31, 2013 and 2012, the following transactions and operational decisions had an impact on Ashland's current and future cash flows, results of operations and financial position. Divestitures
During the December 2013 quarter, Ashland announced that a formal sale process is currently ongoing for both Water Technologies and the Elastomers business within Performance Materials. Ashland expects to complete certain sale activities and announce that it has entered into agreements to sell Water Technologies during the March 2014 quarter and the Elastomers business later during fiscal 2014. Ashland currently anticipates the primary use of net proceeds from these two divestitures to be a return of capital to shareholders in the form of share repurchases.
Additionally, in conjunction with its applicable partners, Ashland periodically reviews equity investments and joint venture arrangements for potential sale. As part of the divestiture process, Ashland continues to monitor these businesses and related assets for potential impairment. As of December 31, 2013, no impairment related to these businesses had been identified. Should indicators of impairment occur in future periods, Ashland will test for impairment in accordance with U.S. GAAP and record the applicable adjustments as required. The potential exists that an impairment or loss on a divestiture transaction could occur in future periods.
Global restructuring
Ashland is currently in the process of a significant restructuring of its businesses. The restructuring is expected to improve operational performance while recognizing annualized cost savings of $150 million to $200 million. Ashland expects the majority of the run-rate savings to be in place during the first half of fiscal 2015.
Upon the planned sale of Water Technologies, Ashland will have three commercial units: Specialty Ingredients, Performance Materials and Valvoline. Specialty Ingredients will be organized into two businesses: Consumer Specialties and Industrial Specialties, with adhesives joining the Industrial Specialties group, moving over from Performance Materials. This will enable Ashland to provide higher levels of customization and service demanded by the adhesives market. Also as part of the realignment, Specialty Ingredients will move from a global to regional structure, providing increased customer focus for North America, Europe, Asia and Latin America.
Performance Materials will comprise three businesses: 1) Intermediates and Solvents, which will move over from Specialty Ingredients and will serve both Ashland's internal butanediol needs as well as the merchant market; 2) Composites, which will serve construction, transportation, marine and other markets; and 3) Elastomers, which primarily serves the North American replacement tire market.
Within Valvoline, the restructuring plan is focused on reducing costs and improving margins, with a goal of growing EBITDA margin.
Ashland also announced several other changes related to the restructuring:
The global supply chain, which currently operates on a centralized basis, will be integrated into each of the business segments.

Approximately 800 to 1,000 employees are expected to leave the Company in calendar 2014 as Ashland realigns its cost structure to be more competitive. Ashland expects to provide a voluntary severance offer to eligible U.S.-based employees as part of that realignment.

An additional 800 to 1,000 jobs are expected to be moved to existing, lower-cost regional centers of excellence both in the U.S. and abroad in conjunction with a planned global office consolidation.


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

Stock repurchase and annual dividend increase Ashland has the ability to make discretionary purchases of Ashland Common Stock on the open market, pursuant to a $600 million share repurchase authorization, approved by the Board of Directors of Ashland in May 2013, of which $450 million is still available at December 31, 2013. This authorization replaced Ashland's previous $400 million share repurchase authorization, approved in March 2011, which had $329 million remaining as of December 31, 2012. During the three months ended December 31, 2013 and 2012, Ashland did not execute any share repurchases.
During the December 2013 quarter, the Board of Directors of Ashland announced and paid a quarterly cash dividend of 34 cents per share to eligible shareholders of record. This amount was paid for quarterly dividends in June and September of 2013 and was an increase from the quarterly dividend of 22.5 cents per share paid during the first and second quarters of 2013.
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.
Consolidated review
Net income
Ashland's net income amounted to $110 million and $101 million for the three months ended December 31, 2013 and 2012, respectively, or $1.40 and $1.26 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 $111 million and $102 million for the three months ended December 31, 2013 and 2012, respectively, or $1.42 and $1.27 diluted earnings per share, respectively. Operating income was $179 million and $176 million for the three months ended December 31, 2013 and 2012, respectively. See the "Operating income" discussion for an analysis of these results.


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

Ashland incurred pretax net interest and other financing expense of $42 million and $44 million for the three months ended December 31, 2013 and 2012, respectively. 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 21.8% and 22.7% for the three months ended December 31, 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 a loss of $1 million for the three months ended December 31, 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. Operating income
Operating income amounted to $179 million and $176 million for the three months ended December 31, 2013 and 2012, respectively. The prior year quarter was impacted by a $31 million loss on straight guar, as well as a $22 million gain resulting from Ashland's settlement of an insurance claim.
Operating income for the three months ended December 31, 2013 and 2012 included depreciation and amortization of $105 million (which excludes accelerated depreciation of $2 million for the three months ended December 31, 2012), respectively. EBITDA totaled $288 million and $280 million for the three months ended December 31, 2013 and 2012, respectively. Adjusted EBITDA results in the table below have been prepared to illustrate the ongoing effects of Ashland's operations, which exclude certain key items.

                                                             Three months ended
                                                                December 31
(In millions)                                                2013             2012
Net income                                              $     110            $ 101
Income tax expense                                             31               30
Net interest and other financing expense                       42               44
Depreciation and amortization (a)                             105              105
EBITDA                                                        288              280
Loss from discontinued operations (net of income taxes)         1                1
Insurance settlement                                            -              (22 )
Restructuring and other integration costs                       -                7
Accelerated depreciation                                        -                2
Adjusted EBITDA                                         $     289            $ 268

(a)Excludes $2 million of accelerated depreciation for the three months ended December 31, 2012.

Statements of Consolidated Comprehensive Income - caption review A comparative analysis of the Statements of Consolidated Comprehensive Income by caption is provided as follows for the three months ended December 31, 2013 and 2012.
Three months ended December 31 (In millions) 2013 2012 Change Sales $ 1,868 $ 1,869 $ (1 )


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





Sales for the current quarter decreased $1 million compared to the prior year
quarter primarily as a result of pricing declines which decreased sales by $72
million. Improved volume, change in product mix and favorable currency exchange
increased sales by $57 million, $12 million, and $2 million, respectively.
                                          Three months ended December 31
(In millions)                              2013               2012      Change
Cost of sales                      $      1,333       $      1,332     $     1
Gross profit as a percent of sales         28.6 %             28.7 %

Cost of sales for the current quarter increased $1 million compared to the prior year quarter due to higher volume and currency exchange, which caused increases of $39 million and $3 million, respectively. Lower raw material costs resulted in decreased cost of sales of $22 million, in addition to changes in product mix, which resulted in a decrease of $10 million. The prior year quarter also included a $31 million loss on straight guar, as well as a $22 million gain resulting from Ashland's settlement of an insurance claim and accelerated depreciation of $2 million related to plant closure costs.

                                                   Three months ended December 31
(In millions)                                      2013                2012      Change
Selling, general and administrative expense $       343         $       343     $     -
As a percent of sales                              18.4 %              18.4 %

Selling, general and administrative expenses remained consistent between quarters. Pension and other postretirement net periodic income decreased by $4 million compared to the prior year quarter. The prior year quarter also included $7 million of restructuring and other integration costs.
Three months ended December 31 (In millions) 2013 2012 Change Research and development expense $ 36 $ 32 $ 4

Research and development expense increased $4 million compared to the prior year quarter primarily due to increased expense within the Specialty Ingredients business.

                                  Three months ended December 31
(In millions)                 2013                         2012     Change
Equity and other income
Equity income           $        6                        $   5    $     1
Other income                    17                            9          8
                        $       23                        $  14    $     9

Equity income remained consistent between quarters. The increase in other income during the current quarter is primarily due to income of $6 million from a favorable arbitration ruling on a commercial contract within the Consumer Markets business.

                                                              Three months ended December 31
(In millions)                                              2013                2012           Change
Net interest and other financing expense (income)
Interest expense                                    $        41         $        43       $       (2 )
Interest income                                              (1 )                (1 )              -
Other financing costs                                         2                   2                -
                                                    $        42         $        44       $       (2 )


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





The decrease in interest expense and other financing costs of $2 million in the
current quarter compared to the prior year quarter was primarily due to lower
debt carried during the current quarter as overall debt was reduced by $291
million at December 31, 2013 compared to the same date in the prior year.
                                       Three months ended December 31
(In millions)                    2013                           2012     Change
Net gain on divestitures
MAP Transaction adjustments $       5                          $   -    $     5
                            $       5                          $   -    $     5

The gain recorded during the current quarter relates to a subsequent cash receipt for a tax credit reimbursement from the 2005 transfer of Ashland's 38% interest in the Marathon Ashland Petroleum joint venture and two other small businesses to Marathon Oil Corporation (Marathon) (the MAP Transaction).

                          Three months ended December 31
(In millions)           2013              2012          Change
Income tax expense $      31         $      30         $     1
Effective tax rate      21.8 %            22.7 %

The overall effective tax rate was 21.8% for the three months ended December 31, 2013 and includes net favorable discrete items of $6 million primarily related to the release of a foreign valuation allowance and certain non-taxable pretax income amounts. The overall effective tax rate was 22.7% for the three months ended December 31, 2012 and includes two net discrete tax benefit adjustments of $6 million and $4 million related to the reversal of an unrecognized tax benefit and a foreign income tax rate change, respectively.

                                                              Three months ended December 31
(In millions)                                                  2013           2012         Change
Loss from discontinued operations (net of income taxes)
Distribution                                            $         -     $        1     $       (1 )
Asbestos-related litigation                                       1              -              1
                                                        $         1     $        1     $        -

The current and prior year quarter results were a loss of $1 million. The current quarter included expenses related to asbestos litigation defense while the prior year quarter expense resulted from subsequent tax and environmental reserve adjustments related to the 2011 divestiture of the Ashland Distribution (Distribution) segment. See Note B of Notes to Condensed Consolidated Financial Statements for further information.
RESULTS OF OPERATIONS - BUSINESS SEGMENT REVIEW Ashland's businesses are managed along four industry segments: Specialty Ingredients, Water Technologies, Performance Materials and Consumer Markets. Results of Ashland's business segments are presented based on its management structure and internal accounting practices. The structure and practices are specific to Ashland; therefore, the financial results of Ashland's business segments are not necessarily comparable with similar information for other comparable companies. Ashland allocates all costs to its business segments except for certain significant company-wide restructuring and integration activities, such as certain restructuring plans described in Note C of Notes to Condensed Consolidated Financial Statements, and other costs or adjustments that generally relate to former businesses that Ashland no longer operates, such as environmental costs on legacy sites, as well as certain components of pension and other postretirement costs. Ashland refines its expense allocation methodologies to the reportable segments from time to time as


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

internal accounting practices are improved, more refined information becomes available and businesses change. Revisions to Ashland's methodologies that are deemed insignificant are applied on a prospective basis.
The EBITDA and Adjusted EBITDA amounts presented within this business section are provided as a means to enhance the understanding of financial measurements that Ashland has internally determined to be relevant measures of comparison for each segment. Each of these non-GAAP measures is defined as follows: EBITDA (operating income plus depreciation and amortization), Adjusted EBITDA (EBITDA adjusted for key items, which may include pro forma effects for significant acquisitions or divestitures, as applicable), and Adjusted EBITDA margin (Adjusted EBITDA, which may include pro forma adjustments, divided by sales or sales adjusted for pro forma results). Ashland does not allocate items to each business segment below operating income, such as interest expense and income taxes. As a result, business segment EBITDA and Adjusted EBITDA are reconciled directly to operating income since it is the most directly comparable Statement of Consolidated Comprehensive Income caption.
The following table shows sales, operating income and statistical operating information by business segment for the three months ended December 31, 2013 and 2012.


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





                                                        Three months ended
                                                           December 31
(In millions)                                             2013         2012
Sales
Specialty Ingredients                                $     599      $   622
Water Technologies                                         436          421
Performance Materials                                      347          345
Consumer Markets                                           486          481
                                                     $   1,868      $ 1,869
Operating income
Specialty Ingredients                                $      45      $    72
Water Technologies                                          27           17
Performance Materials                                       20           13
Consumer Markets                                            75           66
Unallocated and other                                       12            8
                                                     $     179      $   176
Depreciation and amortization
Specialty Ingredients                                $      65      $    66
Water Technologies                                          18           17
Performance Materials                                       14           15
Consumer Markets                                             8            9
                                                     $     105      $   107
Operating information
Specialty Ingredients
Sales per shipping day                               $     9.7      $  10.0
Metric tons sold (thousands)                              91.2         88.9
Gross profit as a percent of sales (a)                    28.3 %       31.0 %
Water Technologies
Sales per shipping day                               $     7.0      $   6.8
Gross profit as a percent of sales (a)                    34.4 %       33.3 %
Performance Materials
Sales per shipping day                               $     5.6      $   5.6
Metric tons sold (thousands)                             127.6        124.6
Gross profit as a percent of sales (a)                    17.3 %       15.6 %
Consumer Markets
Lubricant sales gallons                                   38.6         37.1
Premium lubricants (percent of U.S. branded volumes)      35.8 %       32.6 %
Gross profit as a percent of sales (a)                    31.2 %       30.1 %

(a)Gross profit is defined as sales, less cost of sales divided by sales.

Specialty Ingredients
Specialty Ingredients offers industry-leading products, technologies and resources for solving formulation and product-performance challenges in key markets including personal and home care, pharmaceutical, food and beverage, coatings, construction, energy and other industries. Using natural, synthetic and semisynthetic polymers derived from plant and seed extract, cellulose ethers and vinyl pyrrolidones, Specialty Ingredients offers comprehensive and innovative solutions for today's demanding consumer and industrial applications.


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

December 2013 quarter compared to December 2012 quarter Specialty Ingredients' sales decreased to $599 million in the current quarter compared to $622 million in the prior year quarter, primarily as a result of lower pricing, which decreased sales $58 million, or 9%. Volume increased sales $21 million, or 3%, during the current quarter as metric tons sold increased to 91.2 thousand. Mix of product sold and foreign currency exchange also increased sales $9 million and $5 million, respectively.
Gross profit during the current quarter decreased $23 million compared to the prior year quarter. The prior year quarter included a $31 million loss on straight guar, as well as a $22 million gain resulting from Ashland's settlement . . .

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