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ASH > SEC Filings for ASH > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for ASHLAND INC.

Form 10-Q for ASHLAND INC.


1-May-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 and pharmaceutical. With approximately 11,000 employees worldwide, Ashland serves customers in more than 100 countries. Ashland's sales generated outside of North America were 48% and 46% for the six months ended March 31, 2014 and 2013, respectively. Sales by region expressed as a percentage of total consolidated sales for the three and six months ended March 31 were as follows:

                        Three months ended        Six months ended
                             March 31                 March 31
Sales by Geography       2014          2013       2014         2013
North America (a)          52 %          54 %       52 %         54 %
Europe                     26 %          26 %       25 %         25 %
Asia Pacific               16 %          14 %       16 %         15 %
Latin America & other       6 %           6 %        7 %          6 %
                          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 three reporting segments: Ashland Specialty Ingredients (Specialty Ingredients), 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 six months ended March 31 were as follows:

                            Three months ended        Six months ended
                                 March 31                 March 31
Sales by Business Segment    2014          2013       2014         2013
Specialty Ingredients          43 %          44 %       43 %         43 %
Performance Materials          24 %          24 %       24 %         24 %
Consumer Markets               33 %          32 %       33 %         33 %
                              100 %         100 %      100 %        100 %


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

KEY DEVELOPMENTS
During the six months ended March 31, 2014, the following transactions and operational decisions had an impact on Ashland's current and future cash flows, results of operations and financial position. Divestitures
Water Technologies
On February 18, 2014, Ashland entered into a definitive agreement to sell the Water Technologies segment to a fund managed by Clayton, Dubilier & Rice (CD&R) in a transaction valued at approximately $1.8 billion. The transaction is expected to close by September 30, 2014, contingent on certain customary regulatory approvals and standard closing conditions. Ashland expects after-tax net proceeds from the sale to total approximately $1.4 billion, which primarily will be used to return capital to shareholders in the form of share repurchases. Water Technologies recorded sales of $1.7 billion during the most recently completed fiscal year ended September 30, 2013 and employs approximately 3,000 employees throughout the Americas, Europe and Asia Pacific.
Since this transaction signifies Ashland's exit from the Water Technologies business, Ashland has classified Water Technologies' results of operations and cash flows within the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows as discontinued operations for all periods presented. Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income that were previously allocated to the Water Technologies segment do not qualify for classification within discontinued operations and are now reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were $9 million and $8 million during the three months ended March 31, 2014 and 2013, respectively, and $18 million during the six months ended March 31, 2014 and 2013. Ashland is currently implementing plans to eliminate these costs as part of the global restructuring program. Ashland will retain and has agreed to indemnify CD&R for certain liabilities of the Water Technologies business arising prior to the closing of the sale, including certain pension and postretirement liabilities, environmental remediation liabilities and certain legacy liabilities relating to businesses disposed or discontinued by the Water Technologies business. Costs directly related to these retained liabilities have been included within the discontinued operations caption of the Statements of Consolidated Comprehensive Income during the three and six months ended March 31, 2014 and 2013, respectively. Subsequent to the completion of the sale, Ashland expects to provide certain transition services to CD&R for a fee. While the transition services are expected to vary in duration depending upon the type of service provided, Ashland expects to reduce costs as the transition services are completed. See Note C of the Notes to the Condensed Consolidated Financial Statements for further information on the results of operations of Water Technologies for all periods presented.
Casting Solutions joint venture
Ashland, in conjunction with its partner, initiated a process to sell the ASK Chemicals GmbH (ASK) joint venture, in which Ashland has 50% ownership. As part of the ongoing sale process, Ashland determined during March 2014 that the fair value of its investment in the ASK joint venture was less than the carrying value and that an other than temporary impairment had occurred. As a result, Ashland recognized an impairment charge of $46 million related to its investment in the ASK joint venture during the three and six months ended March 31, 2014. The charge was recognized within the equity and other income (loss) caption of the Statements of Consolidated Comprehensive Income.


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

In April 2014, Ashland announced that it had entered into a definitive agreement to sell its 50% ownership in the ASK joint venture to investment funds affiliated with Rhône Capital, LLC (Rhône), a London and New York-based private equity investment firm. Total pre-tax proceeds to the sellers will be $205 million, which includes $176 million in cash and a $29 million note from Rhône. Proceeds will be split evenly between Ashland and its partner under terms of the 50/50 joint venture. The transaction is expected to close prior to the end of Ashland's fiscal fourth quarter on September 30, 2014 and is subject to customary closing conditions, including regulatory approvals. Any additional gain or loss recognized as a result of the transaction is expected to be nominal and would be recognized in the period that the transaction closes. Elastomers
During the September 2013 quarter, Ashland announced that a formal sale process was ongoing for the Elastomers division within Performance Materials. Ashland expects to complete certain sale activities and announce that it has entered into an agreement to sell the Elastomers division during calendar year 2014. As part of the divestiture process, Ashland continues to monitor this division and related assets for potential impairment. As of March 31, 2014, no impairment related to the Elastomers division 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 if any are 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 global restructuring program is expected to improve operational performance while recognizing significant annualized cost savings. To date, Ashland has identified approximately $200 million in annualized cost savings opportunities. Among the actions taken to date:
• Approximately 800 employees will leave Ashland by the end of calendar 2014 through either a voluntary severance program or job elimination.

• In addition, Ashland is continuing to develop plans for substantially reducing certain external support services and for moving a significant number of jobs to existing, lower-cost regional centers of excellence.

• Most of Ashland's previously centralized supply chain organization has been integrated into the businesses.

• As of April 1, 2014, the adhesives and intermediates and solvents divisions have been realigned within Specialty Ingredients and Performance Materials.

As part of this global restructuring program, Ashland announced a voluntary severance offer (VSO) in January 2014 to certain U.S. employees. As of March 31, 2014, approximately 400 employees were formally approved for the VSO. All payments related to the VSO are expected to be paid out from May through December 31, 2014. The first phase of an involuntary program for employees was also initiated as part of the global restructuring program during the current quarter and will continue in subsequent quarters. The VSO and involuntary programs resulted in expense of $75 million being recognized, $13 million within the cost of sales caption and $62 million within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income during the three and six months ended March 31, 2014. In addition, the employee reductions resulted in a pension curtailment being recorded during the current quarter. See Note J of the Notes to the Condensed Consolidated Financial Statements for further information. As of March 31, 2014, the remaining restructuring reserve for the global restructuring program was $75 million. Business realignment
Upon the sale of Water Technologies, Ashland will have three commercial units:
Specialty Ingredients, Performance Materials and Valvoline (formerly Consumer Markets). Specialty Ingredients will be organized


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

into two divisions: Consumer Specialties and Industrial Specialties, with adhesives joining the Industrial Specialties division, 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 be comprised of three divisions: 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 has targeted being able to report financial results under this new realignment during its third quarter of fiscal 2014. Stock repurchase programs
During the March 2014 quarter, the Board of Directors of Ashland authorized a $1.35 billion common stock repurchase program. This new authorization replaced Ashland's previous $600 million share repurchase authorization, approved in May 2013, which had $450 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, 2015. As of March 31, 2013, a previous $400 million share repurchase authorization, approved in March 2011, had $329 million remaining. This authorization was replaced during May 2013.
During the three and six months ended March 31, 2014 and 2013, Ashland did not execute any share repurchases.
Stockholder dividends
During the March 2014 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 December, September and June 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


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

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.
In accordance with U.S. GAAP, Ashland recognizes actuarial gains and losses for defined benefit pension and other postretirement benefit plans annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of pension and other postretirement benefit plans to expense throughout the year or when assumptions change, as they may each year. Significant factors that can contribute to the recognition of actuarial gains and losses include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets and other changes in actuarial assumptions, such as the life expectancy of plan participants. Management believes Adjusted EBITDA, which includes the expected return on pension plan assets and excludes both the actual return on pension plan assets and the impact of actuarial gains and losses, provides investors with a meaningful supplemental presentation of Ashland's operating performance. Management believes these actuarial gains and losses are primarily financing activities that are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly related to the underlying business and that do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees and retirees. For further information on the actuarial assumptions and plan assets referenced above, see MD&A - Critical Accounting Policies - Employee benefit obligations in the Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and Note J of the Notes to Condensed Consolidated Financial Statements.
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 (loss)
Current Quarter - Ashland's net loss amounted to $44 million for the three months ended March 31, 2014 and net income amounted to $53 million for the three months ended March 31, 2013, or $(0.57) and $0.66 diluted earnings per share, respectively. Ashland's net income and loss are 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 (loss) from continuing operations, which excludes results from discontinued operations, amounted to a loss of $61 million and income of $48 million for the three months ended March 31, 2014 and 2013, respectively, or $(0.78) and $0.61 diluted earnings per share, respectively. Operating income
(loss) was a loss of $64 million for the three months ended March 31, 2014 and income of $184 million for the three months ended March, 31, 2013. See the "Operating income (loss)" discussion for an analysis of these results. Ashland incurred pretax net interest and other financing expense of $41 million and $145 million for the three months ended March 31, 2014 and 2013, 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 benefit rates of 41.3% and 4.3% for the three months ended March 31, 2014 and 2013, respectively, were both affected by certain discrete items disclosed in further detail within the income tax expense (benefit) caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis.


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

Discontinued operations, which are reported net of taxes, resulted in income of $17 million and $5 million for the three months ended March 31, 2014 and 2013, 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 $66 million and $154 million for the six months ended March 31, 2014 and 2013, respectively, or $0.84 and $1.92 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 $27 million and $129 million for the six months ended March 31, 2014 and 2013, respectively, or $0.35 and $1.60 diluted earnings per share, respectively. Operating income was $79 million and $332 million for the six months ended March 31, 2014 and 2013, respectively. See the "Operating income (loss)" discussion for an analysis of these results.
Ashland incurred pretax net interest and other financing expense of $83 million and $189 million for the six months ended March 31, 2014 and 2013, 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 benefit rate of 1,250.0% and expense rate of 14.0% for the six months ended March 31, 2014 and 2013, 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 $39 million and $25 million for the six months ended March 31, 2014 and 2013, 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 (loss)
Current Quarter - Operating income (loss) amounted to a loss of $64 million and income of $184 million for the three months ended March 31, 2014 and 2013, respectively. The current quarter was impacted by the $105 million of key items related to pension plan remeasurement losses discussed in Note J of the Notes to the Condensed Consolidated Financial Statements. Additionally, the current quarter included $87 million of global restructuring program costs (including $7 million of accelerated depreciation), a $46 million impairment charge related to the ASK joint venture equity investment, and a $9 million impairment charge related to certain in-process research and development (IPR&D) assets. The prior year quarter was impacted by $6 million of restructuring and integration costs and a $4 million impairment charge related to certain IPR&D assets. Operating income for the three months ended March 31, 2014 and 2013 included depreciation and amortization of $88 million and $87 million (which excludes accelerated depreciation of $7 million for the three months ended March 31, 2014), respectively. EBITDA totaled $42 million and $283 million for the three months ended March 31, 2014 and 2013, 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.


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





                                                    Three months ended
                                                         March 31
(In millions)                                        2014           2013
Net income (loss)                                $    (44 )     $     53
Income tax benefit                                    (43 )           (2 )
Net interest and other financing expense               41            145
Depreciation and amortization (a)                      88             87
EBITDA                                                 42            283
Income from discontinued operations (net of tax)      (17 )           (5 )
Impairment of IPR&D assets                              9              4
Foreign tax assessment                                  -              2
Losses on pension plan remeasurement                  105              -
Restructuring and other integration costs              80              6
Impairment of ASK joint venture                        46              -
Accelerated depreciation                                7              -
Adjusted EBITDA                                  $    272       $    290

(a) Excludes $7 million of accelerated depreciation for the three months ended March 31, 2014. Year-to-Date - Operating income amounted to $79 million and $332 million for the six months ended March 31, 2014 and 2013, respectively. The current period was impacted by the $105 million of key items related to pension plan remeasurement losses previously discussed. The current period also included $87 million of global restructuring program costs (including $7 million of accelerated depreciation), a $46 million impairment charge related to the ASK joint venture equity investment, and a $9 million impairment charge related to certain IPR&D assets. The prior year period included $14 million of restructuring and integration costs, a $31 million loss on straight guar and a $22 million gain resulting from Ashland's settlement of an insurance claim. The prior year period also included a $4 million impairment charge related to certain IPR&D assets. Operating income for the six months ended March 31, 2014 and 2013 each included depreciation and amortization of $176 million (which excluded accelerated depreciation of $7 million and $2 million for the six months ended March 31, 2014 and 2013, respectively). EBITDA totaled $300 million and $540 million for the six months ended March 31, 2014 and 2013, 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.


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





                                                    Six months ended
                                                        March 31
(In millions)                                        2014        2013
Net income                                       $     66       $ 154
Income tax expense (benefit)                          (25 )        21
Net interest and other financing expense               83         189
Depreciation and amortization (a)                     176         176
EBITDA                                                300         540
Income from discontinued operations (net of tax)      (39 )       (25 )
Insurance settlement                                    -         (22 )
Impairment of IPR&D assets                              9           4
Foreign tax assessment                                  -           2
Losses on pension plan remeasurement                  105           -
Restructuring and other integration costs              80          12
Impairment of ASK joint venture                        46           -
Accelerated depreciation                                7           2
Adjusted EBITDA                                  $    508       $ 513

(a)Excludes $7 million and $2 million of accelerated depreciation for the six months ended March 31, 2014 and 2013, respectively.

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 and six months ended March 31, 2014 and 2013. . . .

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