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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
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 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
At March 31, 2004, based on the New York Stock Exchange closing price,
the aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $3,249,782,427. In determining this amount,
the Registrant has assumed that its directors and executive officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purpose.
At November 30, 2004, there were 71,941,455 shares of Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for its January
27, 2005 Annual Meeting of Shareholders are incorporated by reference into
Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................... 1
Corporate Developments....................................... 2
APAC......................................................... 2
Ashland Distribution......................................... 3
Ashland Specialty Chemical................................... 3
Valvoline.................................................... 4
Refining and Marketing....................................... 5
Miscellaneous................................................ 8
Item 2. Properties..................................................... 12
Item 3. Legal Proceedings.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item X. Executive Officers of Ashland ................................. 14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 15
Item 6. Selected Financial Data........................................ 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 15
Item 8. Financial Statements and Supplementary Data.................... 15
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure...................... 15
Item 9A. Controls and Procedures........................................ 16
Item 9B. Other Information.............................................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant............. 16
Item 11. Executive Compensation......................................... 16
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters....... 16
Item 13. Certain Relationships and Related Transactions................. 17
Item 14. Principal Accountant Fees and Services......................... 17
PART IV
Item 15. Exhibits and Financial Statement Schedules..................... 17
PART I
ITEM 1. BUSINESS
Ashland Inc. is a Kentucky corporation, organized on October 22, 1936,
with its principal executive offices located at 50 E. RiverCenter
Boulevard, Covington, Kentucky 41011 (Mailing Address: 50 E. RiverCenter
Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391) (Telephone: (859)
815-3333). The terms "Ashland" and the "Company" as used herein include
Ashland Inc. and its consolidated subsidiaries, except where the context
indicates otherwise.
Ashland's businesses are grouped into five industry segments: APAC,
Ashland Distribution, Ashland Specialty Chemical, Valvoline and Refining
and Marketing. Financial information about these segments for the three
fiscal years ended September 30, 2004, is set forth on pages F-26 and F-27
of this annual report on Form 10-K.
APAC performs asphalt and concrete contract construction work,
including highway paving and repair, excavation and grading, and bridge
construction, and produces asphaltic and ready-mix concrete, crushed stone
and other aggregate in the southern and mid-continent United States.
Ashland Distribution distributes chemicals, plastics and resins in
North America and plastics in Europe. Ashland Distribution also provides
environmental services.
Ashland Specialty Chemical is focused on two primary businesses:
thermoset resins and water technologies. It is a, worldwide supplier of
specialty chemicals serving industries including building and construction;
commercial and institutional water treatment; graphic arts and printing;
industrial water treatment; marine; metal casting; packaging and
converting; pulp and paper; recreational marine; and transportation.
Valvoline is a producer and marketer of premium packaged motor oil and
automotive chemicals, including appearance products, antifreeze, filters,
and automotive fragrances. In addition, Valvoline is engaged in the "fast
oil change" business through outlets operating under the Valvoline Instant
Oil Change(R) name.
Marathon Ashland Petroleum LLC ("MAP"), a joint venture with Marathon
Oil Company ("Marathon"), operates seven refineries with a total crude oil
refining capacity of 948,000 barrels per day. Refined products are
distributed through a network of independent and company-owned outlets in
the Midwest, the upper Great Plains and the southeastern United States.
Marathon holds a 62% interest in MAP, and Ashland holds a 38% interest in
MAP. Ashland accounts for its investment in MAP using the equity method.
At September 30, 2004, Ashland and its consolidated subsidiaries had
approximately 21,200 employees (excluding contract employees).
Available Information. Ashland's Internet address is www.ashland.com.
There, Ashland makes available, free of charge, its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports as well as any beneficial ownership reports of
officers and directors filed electronically on Forms 3, 4 and 5. All such
reports will be available as soon as reasonably practicable after Ashland
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission ("SEC"). Ashland also makes available,
free of charge on its website, its Corporate Governance Guidelines; Board
Committee Charters; Director Independence Standards; and Code of Business
Conduct for directors, officers and employees. These documents are also
available in print to any shareholder who requests it. Information
contained on Ashland's website is not part of this annual report on Form
10-K and is not incorporated by reference in this document.
Ashland has designated a Presiding Director of the Board of Directors,
whose primary responsibility is to preside over regular executive sessions
of the Board in which management directors and other members of management
do not participate. The Presiding Director is an independent director
appointed by the Board. The non-management directors of the Board have
designated Mr. Solso to serve in this capacity through Ashland's 2006
Annual Meeting. Shareholders and others interested in communicating
directly with the Board, the Presiding Director, with a specific member of
the Board or a Committee of the Board, or with the non-management directors
as a group may do so by writing to the Presiding Director, Ashland Inc., 50
E. RiverCenter Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391,
Attn: Secretary. Communications directed to the Presiding Director will be
reviewed by the Secretary and distributed to the Presiding Director as well
as to other individual directors, as appropriate, depending on the subject
matter and facts and circumstances outlined in such correspondence.
Communications that are not related to the duties and responsibilities of
the Board, or are otherwise inappropriate, will not be forwarded to the
Presiding Director, although all communications directed to the Board will
be available to any director upon request.
CORPORATE DEVELOPMENTS
On March 19, 2004, Ashland announced the signing of an agreement under
which it would transfer its 38% interest in MAP and two wholly-owned
businesses to Marathon in a transaction structured to be generally tax free
and valued at approximately $3.0 billion. The two other businesses are
Ashland's maleic anhydride business and 61 Valvoline Instant Oil Change
("VIOC") centers. The transaction is subject to several previously
disclosed conditions, including approval by Ashland's shareholders, consent
from Ashland's public debt holders and receipt of a favorable private
letter ruling from the Internal Revenue Service ("IRS") with respect to the
tax treatment of the transaction. Ashland has filed registration statements
and proxy materials with the SEC and is responding to comments. In
addition, Ashland submitted a request to the IRS for a private letter
ruling on the tax-free status of the proposed transaction. Ashland
continues to discuss the complex tax issues related to this transaction
with the IRS. Ashland has not resolved all issues with the IRS and is
exploring alternatives for the resolution of these issues. At this time,
Ashland cannot predict whether the requested rulings will be received. If
the requested rulings are not received, the transaction would have to be
modified or terminated. In any event, Ashland does not believe that a
transaction will close earlier than March 2005.
APAC
The Ashland Paving And Construction, Inc. group of companies ("APAC")
is one of the nation's largest transportation construction contractors and
is a major supplier of construction materials. APAC performs construction
work, such as paving, repairing and resurfacing highways, streets,
airports, residential and commercial developments, sidewalks and driveways,
and grading and base work. In addition, it performs a number of
construction services such as excavation and related activities in the
construction of bridges and structures, drainage facilities and underground
utilities. APAC conducts its business through 24 market-focused business
units and a Major Projects Group operating in 14 southern and mid-continent
states. These business units provide construction services and materials
throughout the regions in which they operate. The market-focused business
units and Major Projects Group are supported by management and
administrative staff in Atlanta, Georgia.
To deliver its services and products, APAC utilizes extensive
aggregate-producing properties and construction equipment. It currently has
93 aggregate production facilities, including 36 permanent operating quarry
locations; 31 ready-mix concrete plants; 226 hot-mix asphalt plants; and a
fleet of over 13,000 mobile equipment units, including heavy construction
equipment and transportation-related equipment. In certain market areas,
APAC is vertically integrated with asphalt, aggregate and ready-mix
operations, all complementing each other.
Raw materials and aggregate generally consists of sand, gravel,
granite, limestone and sandstone. About 29% of the aggregate produced by
APAC is used in APAC's own contract construction work and the production of
various processed construction materials. The remainder is sold to third
parties. APAC also purchases substantial quantities of raw aggregate from
other producers whose proximity to the job site renders it economically
attractive. Most other materials, such as liquid asphalt, Portland cement
and reinforcing steel, are purchased from third parties.
Approximately 78% of APAC's sales and operating revenues are
construction revenues, with the remaining 22% coming from sales of
construction materials. Approximately 82% of APAC's construction revenues
are derived directly from highway and other public sector sources, with the
remaining 18% coming from industrial and commercial customers and private
developers.
Climate and weather significantly affect revenues and margins in the
construction business. Due to its location, APAC tends to enjoy a
relatively long construction season. Most of APAC's operating income is
generated during the construction period of May to October.
Total backlog at September 30, 2004, was $1,746 million (including
APAC's $19 million proportionate share of work related to an unconsolidated
equity joint venture), compared to $1,745 million at September 30, 2003.
APAC includes a construction project in its backlog when a contract is
awarded or a firm letter of commitment is obtained and funding is in place.
The backlog at September 30, 2004, is considered firm, and a major portion
is expected to be completed during fiscal 2005.
2
OTHER MATTERS
For information on APAC and federal, state and local statutes and
regulations governing releases into, or protection of, the environment, see
"Item 3. Legal Proceedings - Environmental Proceedings" in this annual
report on Form 10-K.
ASHLAND DISTRIBUTION
Ashland Distribution distributes chemicals, plastics and resins in
North America and plastics in Europe. Suppliers include many of the world's
leading chemical manufacturers. Ashland Distribution specializes in
providing mixed truckloads and less-than-truckload quantities to customers
in a wide range of industries. Deliveries are facilitated through a network
of owned or leased facilities including 126 locations in North America.
Distribution of thermoplastic resins in Europe is conducted in 13 countries
primarily through 17 third-party warehouses and one owned warehouse.
Ashland Distribution operates in the following major market segments:
Chemicals - Ashland Distribution distributes specialty and industrial
chemicals, additives and solvents to industrial users in the United States,
Canada, Mexico and Puerto Rico as well as some export operations. Markets
served include the paint and coatings, personal care, inks, adhesives,
polymer, rubber, industrial and institutional compounding, automotive,
appliance and paper industries.
Plastics - Ashland Distribution offers a broad range of thermoplastic
resins and specialties to processors in the United States, Canada, Mexico
and Puerto Rico as well as some export operations. Processors include
injection molders, extruders, blow molders and rotational molders. Ashland
Distribution also provides plastic material transfer and packaging services
and less-than-truckload quantities of packaged thermoplastics.
Additionally, Ashland Distribution markets a broad range of thermoplastics
to processors in Europe via distribution centers located in Belgium,
Denmark, England, Finland, France, Germany, Ireland, Italy, the
Netherlands, Norway, Poland, Portugal, Spain and Sweden.
Composites - Ashland Distribution supplies mixed truckload and
less-than-truckload quantities of polyester thermosetting resins,
fiberglass and other specialty reinforcements, catalysts and allied
products to customers in the reinforced plastics and cultured marble
industries through distribution facilities located throughout North
America.
Environmental Services - Working in cooperation with chemical waste
service companies, Ashland Distribution provides customers with collection,
disposal and recycling of hazardous and non-hazardous waste streams.
Services are offered through a North American network of more than 30
distribution centers, including 10 storage facilities that have been fully
permitted by the United States Environmental Protection Agency ("USEPA").
On August 31, 2004, Ashland Distribution entered into an agreement to
sell its ingestibles line of business - which includes food and beverage
additives and pharmaceutical actives and excipients. Ashland expects the
transaction to be completed by January 31, 2005.
ASHLAND SPECIALTY CHEMICAL
Ashland Specialty Chemical is focused on two primary businesses:
thermoset resins and water technologies. It is a worldwide supplier of
specialty chemicals serving industries including building and construction;
commercial and institutional water treatment; graphic arts and printing;
industrial water treatment; marine; metal casting; packaging and
converting; power generation; pulp and paper; recreational marine and
transportation. Ashland Specialty Chemical owns and operates 38
manufacturing facilities and participates in 12 manufacturing joint
ventures in 19 countries.
THERMOSET RESINS
Composite Polymers - This business group manufactures and sells a
broad range of corrosion-resistant, fire-retardant, general-purpose and
high-performance marine grades of unsaturated polyester and vinyl ester
resins and gel coats for the reinforced plastics industry. Key markets
include the transportation, construction and marine industries. This
business group has manufacturing plants in Jacksonville and Fort Smith,
Arkansas; Los Angeles, California; Bartow, Florida; Pittsburgh and
Philadelphia, Pennsylvania; Johnson Creek, Wisconsin; Kelowna, British
Columbia, Canada; Kunshan, China; Porvoo and Lahti, Finland; Sauveterre,
France; Miszewo, Poland;
3
Benicarlo, Spain; and, through separate joint ventures has manufacturing
plants in Sao Paolo, Brazil, and Jeddah, Saudi Arabia. This business group
also manufactures products through an Ashland Specialty Chemical facility
located in Mississauga, Ontario, Canada. Composite Polymers also
manufactures maleic anhydride in Neal, West Virginia, and markets maleic
anhydride in North America. For information on the transfer of the maleic
business as part of the proposed transfer of Ashland's 38% interest in MAP
to Marathon, see "Item 1. Business - Corporate Developments" in this annual
report on Form 10-K. In November 2004 this business group signed an
agreement to purchase the DERAKANE(TM) epoxy vinyl ester resins business
(which includes the DERAKANE MOMENTUM(TM) product line) from The Dow
Chemical Company in a cash transaction valued at approximately $92 million.
The closing of the transaction, which is anticipated to take place in late
calendar 2004 or early 2005, is conditional upon a number of standard
closing conditions, including several regulatory reviews.
Casting Solutions - This business group manufactures and sells metal
casting chemicals worldwide, including sand-binding resin systems,
refractory coatings, release agents, engineered sand additives and riser
sleeves. This group also provides casting process modeling, core making
process modeling and rapid prototyping services. This business group serves
the global metal casting industry from nine owned and operated
manufacturing sites, which include factories located in Campinas, Brazil;
Mississauga, Ontario, Canada; Changzhou, China; Milan, Italy; Alava,
Cantabria, Spain; Kidderminster, England and Cleveland East and Cleveland
West, Ohio. Casting Solutions also has eight joint venture manufacturing
facilities located in Vienna, Austria; Pons and Le Goulet, France; Bendorf
and Wuelfrath, Germany; Ulsan, South Korea; Alvsjo, Sweden and St. Gallen,
Switzerland.
Specialty Polymers and Adhesives - This business group manufactures
and sells adhesive solutions to the building and construction,
transportation, and packaging and converting markets. Key technologies and
markets include: emulsion polymer isocyanate adhesives for structural wood
bonding; elastomeric polymer adhesives and butyl rubber roofing tapes for
commercial roofing applications; polyurethane and epoxy structural
adhesives for bonding fiberglass reinforced plastics, composites,
thermoplastics and metals in automotive, recreational, and industrial
applications; specialty phenolic resins for paper impregnation and friction
material bonding; induction bonding systems for thermoplastic materials;
acrylic polymers for pressure-sensitive adhesives; urethane adhesives for
flexible packaging applications; and hot melt adhesives for various
packaging applications. It has manufacturing plants in Calumet City,
Illinois; Norwood and Totowa, New Jersey; Ashland and Columbus, Ohio; White
City, Oregon; and Kidderminster, England.
WATER TECHNOLOGIES
Drew Industrial - This business group supplies specialized chemicals
and consulting services for treatment of boiler water, cooling water,
steam, fuel and waste streams. It also supplies process chemicals and
technical services to the pulp and paper and mining industries and
additives to manufacturers of latex and paint. It conducts operations
throughout North America, Europe and the Far East and has manufacturing
plants in Kearny, New Jersey; Houston, Texas; Ajax, Ontario, Canada;
Viiala, Finland; Somercotes, England; Chester Hill, Australia; and
Singapore; and, through separate joint ventures, has production facilities
in Seoul, South Korea and Navi Mumbai, India.
Drew Marine - This business group supplies technical products and
services for the global marine industry. Products and services worldwide
include a comprehensive line of marine chemicals and water treatment
testing, sealing products, welding and refrigeration products, and
firefighting, safety and rescue products for the world's merchant marine
fleet.
OTHER MATTERS
For information on Ashland Distribution and Ashland Specialty Chemical
and federal, state and local statutes and regulations governing releases
into, or protection of, the environment, see "Item 1. Business -
Miscellaneous - Environmental Matters" and "Item 3. Legal Proceedings -
Environmental Proceedings" in this annual report on Form 10-K.
VALVOLINE
Valvoline is a marketer of premium-branded automotive and commercial
lubricants, automotive chemicals, automotive appearance products and
automotive services, with sales in more than 100 countries. The
Valvoline(R) trademark was federally registered in 1873 and is the oldest
trademark for lubricating oil in the United States.
4
Valvoline markets the following key brands of products and services to
the private passenger car and light truck and commercial markets:
Valvoline(R) lubricants, synthetic SynPower(R) automotive chemicals; Eagle
One(R) automotive appearance products; Zerex(R) antifreeze; Pyroil(R)
automotive chemicals; MaxLife(R) automotive products for vehicles with
75,000 miles or more; Premium Blue(R) commercial lubricants and Valvoline
Instant Oil Change(R) automotive services.
In North America, Valvoline is comprised of the following three core
businesses:
Do It Yourself ("DIY") - The DIY business group sells Valvoline
products to consumers who perform their own auto maintenance through retail
auto parts stores, mass merchandisers, and warehouse distributors and their
affiliated jobber stores such as NAPA and Carquest.
Do It For Me ("DIFM") - The DIFM business unit sells Valvoline
products to installers (such as car dealers and quick lubes) through a
network of independent distributors and five company-owned and operated
"direct market" operations. This business also includes a chain of quick
lubes branded "Valvoline Express Care(R)," which consists of 348
independently owned and operated stores. The DIFM business group also has a
strategic alliance with Cummins Engine Company, Inc. ("Cummins") to
distribute heavy duty lubricants to the commercial market.
Valvoline Instant Oil Change(R) - VIOC is one of the largest
competitors in the expanding U.S. "fast oil change" service business,
providing Valvoline with a significant share of the DIFM segment of the
passenger car and light truck motor oil market. As of September 30, 2004,
360 company-owned and 397 franchised service centers were operating in 39
states. (For information on the inclusion of 61 VIOC centers as part of the
proposed transfer of Ashland's 38% interest in MAP to Marathon, see "Item
1. Business - Corporate Developments" in this annual report on Form 10-K.)
VIOC has continued its customer service innovation through its upgraded and
enhanced preventive maintenance tracking system for consumers and fleet
operators. This computer-based system maintains service records on all
customer vehicles and contains a database on all car models, which allows
service technicians to make service recommendations based on vehicle
owner's manual recommendations.
Outside North America, Valvoline is comprised of one core business
group:
Valvoline International - Valvoline International markets Valvoline-
and Eagle One- branded products through wholly-owned affiliates, joint
ventures, licenses, and independent distributors in more than 100
countries. The profitability of the business is dispersed geographically,
with more than half of the profit coming from mature markets in Europe and
Australia. There are smaller, rapidly growing businesses in the emerging
markets of China, India and Mexico, including joint ventures with Cummins
in India and China. These businesses market lubricants for consumer
vehicles and heavy duty engines and equipment and are served by toll
manufacturers and company-owned plants in the United States, Australia, and
the Netherlands.
OTHER MATTERS
For information on Valvoline and federal, state and local statutes and
regulations governing releases into, or protection of, the environment, see
"Item 3. Legal Proceedings - Environmental Proceedings" in this annual
report on Form 10-K.
REFINING AND MARKETING
Refining and Marketing operations are conducted by MAP and its
subsidiaries, including its wholly-owned subsidiaries, Speedway
SuperAmerica LLC and Marathon Ashland Pipe Line LLC. MAP also participates
in the travel center business through its joint venture with Pilot
Corporation ("Pilot"). Marathon holds a 62% interest in MAP, and Ashland
holds a 38% interest in MAP. For information on the proposed transfer of
Ashland's 38% interest in MAP to Marathon, see "Item 1. Business -
Corporate Developments" in this annual report on Form 10-K.
5
Refining - MAP owns and operates seven refineries with an aggregate
refining capacity of 948,000 barrels of crude oil per calendar day (1
barrel = 42 United States gallons). The table below sets forth the location
and daily crude oil throughput capacity (measured in barrels) of each of
MAP's refineries as of September 30, 2004:
Garyville, Louisiana................................... 245,000
Catlettsburg, Kentucky................................. 222,000
Robinson, Illinois..................................... 192,000
Detroit, Michigan...................................... 74,000
Canton, Ohio........................................... 73,000
Texas City, Texas...................................... 72,000
St. Paul Park, Minnesota............................... 70,000
--------
Total..................................... 948,000
========
MAP's refineries include crude oil atmospheric and vacuum
distillation, fluid catalytic cracking, catalytic reforming,
desulfurization and sulfur recovery units. The refineries have the
capability to process a wide variety of crude oils and to produce typical
refinery products, including reformulated gasoline ("RFG"). Approximately
60% of MAP's crude oil throughputs are sour crudes. In addition to typical
refinery products, the Catlettsburg refinery, an ISO-9000 certified
facility, manufactures base lube oil stocks and a wide range of
petrochemicals. For the twelve months ended September 30, 2004, 58% of
MAP's base lube oil production was purchased by Valvoline, and 39% of MAP's
petrochemical production (excluding propylene) was purchased by Ashland
Distribution.
The table below sets forth MAP's refinery total input and refinery
production by product group for the three years ended September 30, 2004.
Refinery total inputs include crude oil and other feedstocks.
Years Ended September 30
----------------------------------
(in thousands of barrels per day) 2004 2003 2002
-------------------------------- ------- ------- -------
Refinery Input 1,086.6 1,033.1 1,080.9
--------------
Refined Product Yields
----------------------
Gasoline 599.5 553.9 594.0
Distillates 291.5 278.4 292.9
Propane 21.3 20.7 21.7
Feedstocks & Special Products 90.3 87.6 83.5
Heavy Fuel Oils 23.2 23.1 21.3
Asphalt 73.8 70.5 73.3
------- ------- -------
Total 1,099.6 1,034.2 1,086.7
======= ======= =======
Planned maintenance activities requiring temporary shutdown of certain
refinery operating units are periodically performed at each refinery.
At its Catlettsburg, Kentucky, refinery, MAP has completed an
approximately $440 million multi-year integrated investment program to
upgrade product yield realizations and reduce fixed and variable
manufacturing expenses. This program involved the expansion, conversion and
retirement of certain refinery processing units which, in addition to
improving profitability, reduced the refinery's total gasoline pool sulfur
below 30 parts per million, thereby eliminating the need for additional low
sulfur gasoline compliance investments at the refinery based on current
regulations.
In the December 2003 quarter, MAP commenced approximately $300 million
in new capital projects for its Detroit, Michigan, refinery, with
completion scheduled for the December 2005 quarter. One of the projects, a
$110 million expansion project, is expected to raise crude throughput at
the refinery by 35% to 100,000 barrels per day. Other projects are expected
to enable the refinery to produce new clean fuels and further control
regulated air emissions. MAP is obtaining financing from Marathon to fund
these capital projects.
Marketing - MAP's principal marketing areas for gasoline and
distillates include the Midwest, the upper Great Plains and the
southeastern United States. Gasoline and distillates are sold in 21 states.
Gasoline is sold at wholesale primarily to independent marketers, jobbers
and chain retailers who resell these products through several thousand
retail outlets. MAP also supplies approximately 3,970 jobber-dealer,
open-dealer and lessee-dealer locations using the Marathon(R) and
Ashland(R) brand names.
6
Gasoline, distillates and aviation products are also sold to
utilities, railroads, river towing companies, commercial fleet operators,
airlines and governmental agencies. About one-half of MAP's propane is sold
into the home heating markets and the balance is purchased by industrial
consumers. Propylene and petrochemicals are marketed to customers in the
chemical industry. Base lube oils, slack wax and extract are sold
throughout the United States. Pitch is also sold domestically, but
approximately 16% of pitch products are exported into growing markets in
Canada, Mexico, India, and South America.
MAP markets asphalt through owned and leased terminals located
throughout the Midwest and Southeast. The MAP customer base includes
approximately 900 asphalt paving contractors, government entities (states,
counties, cities and townships) and asphalt roofing shingle manufacturers.
Retail sales of gasoline and diesel fuel are made through MAP's
wholly-owned subsidiary, Speedway SuperAmerica LLC ("SSA"). As of September
30, 2004, SSA had 1,685 retail outlets in nine states in the Midwest that
sell petroleum products and convenience store merchandise primarily under
the brand names Speedway(R) and SuperAmerica(R). The retail locations sell
a variety of food, merchandise, cigarettes, candy and beverages. Several
locations also have on-premises brand-name restaurants.
During the twelve months ended September 30, 2004, 64% of SSA's
revenues (excluding excise taxes) were derived from the sale of gasoline
and diesel fuel, and the remainder were derived from the sale of
merchandise.
Pilot Travel Centers LLC ("PTC") is the largest operator of travel
centers in the United States with approximately 250 locations in 35 states.
The travel centers offer diesel fuel, gasoline and a variety of other
services associated with such locations, including on-premises brand-name
restaurants. Pilot and MAP each own a 50% interest in PTC.
MAP's retail marketing strategy is focused on SSA's Midwest
operations, additional growth in the Marathon(R) brand and continued growth
for PTC.
The table below shows the volume of MAP's consolidated refined product
sales for the three years ended September 30, 2004.
Years Ended September 30
---------------------------------
(in thousands of barrels per day) 2004 2003 2002
-------------------------------- -------- -------- ---------
Refined Product Sales
---------------------
Gasoline 801.9 772.4 774.3
Distillates 369.1 360.6 345.7
Propane 21.9 20.3 22.7
Feedstocks & Special Products 89.5 94.9 80.3
Heavy Fuel Oils 25.3 23.2 22.0
Asphalt 77.0 73.2 76.2
------- ------- -------
Total 1,384.7 1,344.6 1,321.2
======= ======= =======
Matching Buy/Sell Volumes
included in above 68.4 68.3 69.3
MAP sells RFG in parts of its marketing territory, primarily Chicago,
Illinois; Louisville, Kentucky; Northern Kentucky; and Milwaukee,
Wisconsin. MAP also markets low-vapor-pressure gasolines in nine states.
Supply and Transportation - The crude oil processed in MAP's
refineries is obtained from negotiated contract and spot purchases or
exchanges. For the year ended September 30, 2004, MAP's negotiated contract
and spot purchases for refinery input of crude oil produced in the United
States averaged 424,500 barrels per day, including an average of 22,300 net
barrels per day acquired from Marathon. For the year ended September 30,
2004, MAP's foreign crude oil requirements were met largely through
purchases from various foreign national oil companies, producing companies
and traders. Purchases of foreign crude oil represented 54% of MAP's crude
oil requirements for the year ended September 30, 2004.
MAP's ownership or interest in domestic pipeline systems in its
refining and marketing areas is significant. MAP owns, leases or has an
ownership interest in 6,711 miles of pipelines in 13 states. This network
transports crude oil and refined products to and from terminals, refineries
and other pipelines and includes 2,861 miles of crude oil trunk lines and
3,850 miles of refined product lines.
7
MAP has a 46.7% ownership interest in LOOP LLC ("LOOP"), which is the
owner and operator of the only U.S. deepwater port facility capable of
receiving crude oil from very large crude carriers. Ashland has retained a
4% ownership interest in LOOP. MAP also owns a 49.9% ownership interest in
LOCAP LLC ("LOCAP"), which is the owner and operator of a crude oil
pipeline connecting LOOP to the Capline system. Ashland has retained an
8.62% ownership interest in LOCAP. For information on the transfer of
Ashland's interests in LOOP and LOCAP as part of the proposed transfer of
Ashland's 38% interest in MAP to Marathon, see "Item 1. Business -
Corporate Developments" in this annual report on Form 10-K. In addition,
MAP has a 37.2% ownership interest in the Capline system. These port and
pipeline systems provide MAP with access to common carrier transportation
from the Louisiana Gulf Coast to Patoka, Illinois. At Patoka, the Capline
system connects with other common carrier pipelines owned by MAP that
provide transportation to MAP's refineries in Illinois, Kentucky, Michigan,
Minnesota and Ohio.
Ohio River Pipe Line LLC, a subsidiary of MAP, has completed
construction of a pipeline from Kenova, West Virginia, to Columbus, Ohio.
The pipeline is an interstate common carrier pipeline. The pipeline is
known as Cardinal Products Pipeline. The pipeline, which has a capacity of
up to 80,000 barrels per day, is expected to provide a stable, cost
effective supply of gasoline, diesel and jet fuel to the central Ohio
market.
MAP has a 50% ownership in Centennial Pipeline LLC ("Centennial").
Centennial, a 797-mile refined products pipeline, is designed to transport
approximately 210,000 barrels per day of refined petroleum products from
the Gulf Coast to the Midwest.
MAP has a 33.3% ownership interest Minnesota Pipe Line Company, which
operates a crude oil pipeline in Minnesota. Minnesota Pipe Line Company
provides MAP with access to crude oil common carrier transportation from
Clearbrook, Minnesota, to Cottage Grove, Minnesota, which is in the
vicinity of MAP's St. Paul Park, Minnesota refinery.
MAP's marine transportation operations include towboats and barges
that transport refined products on the Ohio, Mississippi and Illinois
rivers, their tributaries and the Intracoastal Waterway. MAP also leases
and owns railcars in various sizes and capacities for movement and storage
of petroleum products and a large number of tractors, tank trailers and
general service trucks.
In addition, MAP owns and operates 84 terminal facilities from which
it sells a wide range of petroleum products. These facilities are supplied
by a combination of barges, pipeline, truck and/or rail.
OTHER MATTERS
For information on MAP and federal, state and local statutes and
regulations governing releases into the environment or protection of the
environment, see "Item 1. Business - Miscellaneous - Environmental Matters"
in this annual report on Form 10-K.
In connection with the formation of MAP, Ashland and Marathon entered
into a Put/Call, Registration Rights and Standstill Agreement (the
"Put/Call Agreement"). The Put/Call Agreement provides that at any time
after December 31, 2004, Ashland will have the right to sell Marathon all
of Ashland's ownership interest in MAP, for an amount in cash and/or
Marathon debt or equity securities equal to the product of 85% (90% if
equity securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could be made
at closing, or, at Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any time after December
31, 2004, Marathon will have the right to purchase Ashland's ownership
interest in MAP, for an amount in cash equal to the product of 115% of the
fair market value in MAP at that time, multiplied by Ashland's percentage
interest in MAP. The agreement entered into in connection with the proposed
transfer of Ashland's 38% interest in MAP to Marathon provides that Ashland
may not exercise its put right and Marathon may not exercise its call right
under the Put/Call Agreement unless the agreement is terminated in
accordance with its terms. For additional information on the proposed
transfer of Ashland's 38% interest in MAP to Marathon, see "Item 1.
Business - Corporate Developments" in this annual report on Form 10-K.
MISCELLANEOUS
ENVIRONMENTAL MATTERS
Ashland has implemented a companywide environmental policy overseen by
the Environmental, Health and Safety Committee of Ashland's Board of
Directors. Ashland's Environmental, Health and Safety ("EH&S")
8
department has the responsibility to ensure that Ashland's operating groups
maintain environmental compliance in accordance with applicable laws and
regulations. This responsibility is carried out via training; widespread
communication of EH&S policies, information and regulatory updates;
formulation of relevant policies, procedures and work practices; design and
implementation of EH&S management systems; internal auditing by an
independent auditing group within the EH&S department; monitoring of
legislative and regulatory developments that may affect Ashland's
operations; assistance to the operating divisions in identifying compliance
issues and opportunities for voluntary actions that go beyond compliance;
and incident response planning and implementation.
Federal, state and local laws and regulations relating to the
protection of the environment have a significant impact on how Ashland
conducts its businesses. New laws are being enacted and regulations are
being adopted by various regulatory agencies on a continuing basis, and the
costs of compliance with these new rules cannot be estimated until the
manner in which they will be implemented has been more precisely defined.
In addition, most foreign countries in which Ashland conducts business have
laws dealing with similar matters.
At September 30, 2004, Ashland's reserves for environmental
remediation amounted to $152 million, reflecting 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. Environmental remediation reserves are subject to numerous
inherent uncertainties that affect Ashland's ability to estimate its share
of the costs. Such uncertainties involve the nature and extent of
contamination at each site, the extent of required cleanup efforts under
existing environmental regulations, widely varying costs of alternate
cleanup methods, changes in environmental regulations, the potential effect
of continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as environmental remediation
continues. Environmental remediation expense amounted to $2 million in
2004, $22 million in 2003 and $30 million in 2002. No individual
remediation location is material to Ashland as its largest reserve for any
site is less than 10% of the remediation reserve. As a result, Ashland's
exposure to adverse developments with respect to any individual site is not
expected to be material, and these sites are in various stages of ongoing
remediation. Although environmental remediation could have a material
effect on results of operations if a series of adverse developments occurs
in a particular quarter or fiscal year, Ashland believes that the chance of
such developments occurring in the same quarter or fiscal year is remote.
In connection with the formation of MAP, Marathon and Ashland each
retained responsibility for certain environmental costs arising out of
their respective prior ownership and operation of the facilities
transferred to MAP. In certain situations, various threshold provisions
apply, eliminating or reducing the financial responsibility of the
contributing party until certain levels of expenditure have been reached.
In other situations, sunset provisions gradually diminish the level of
financial responsibility of the contributing party over time.
Air - The Clean Air Act (the "CAA") imposes stringent limits on air
emissions, establishes a federally mandated operating permit program, and
allows for civil and criminal enforcement actions. Additionally, it
establishes air quality attainment deadlines and control requirements based
on the severity of air pollution in a given geographical area. Various
state clean air acts implement, complement and, in some instances, add to
the requirements of the federal CAA. The requirements of the CAA and its
state counterparts have a significant impact on the daily operation of
Ashland's businesses and, in many cases, on product formulation and other
long-term business decisions. Ashland's businesses maintain numerous
permits pursuant to these clean air laws and have implemented systems to
oversee ongoing compliance efforts.
In July 1997, the USEPA promulgated revisions to the National Ambient
Air Quality Standards ("NAAQS") for ground level ozone and particulate
matter that could have a significant effect on certain of Ashland's
chemical manufacturing and distribution businesses, and on MAP. The USEPA
has begun to implement the new ozone and particulate matters standards,
which could result in areas of the country, where Ashland and MAP conduct
operations, being designated as not in compliance with the NAAQS. Until
these revisions have been more fully implemented, it is not currently
possible to estimate any potential financial impact that the revised
standards may have on Ashland's or MAP's operations.
Water - Ashland's businesses maintain numerous discharge permits, as
the National Pollutant Discharge Elimination System of the Clean Water Act
and state programs require, and have implemented systems to oversee their
compliance efforts. In addition, several of MAP's operations, in particular
its barge and terminal facilities, are regulated under the Oil Pollution
Act of 1990.
9
Solid Waste - Ashland's businesses are subject to the Resource
Conservation and Recovery Act ("RCRA"), which establishes standards for the
management of solid and hazardous wastes. While many facilities are subject
to the RCRA rules governing generators of hazardous waste, certain
facilities also have hazardous waste storage permits. Ashland has
implemented systems to oversee compliance with the RCRA regulations and,
where applicable, permit conditions. In addition to regulating current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the
storage of regulated substances in underground tanks.
Remediation - Ashland currently operates, and in the past has
operated, various facilities where, during the normal course of business,
releases of hazardous substances have occurred. Federal and state laws,
including but not limited to RCRA and various remediation laws, require
that contamination caused by such releases be assessed and, if necessary,
remediated to meet applicable standards. MAP operates, and in the past has
operated, certain retail outlets where, during the normal course of
business, releases of petroleum products from underground storage tanks
have occurred. Federal and state laws require that contamination caused by
such releases at these sites be assessed and, if necessary, remediated to
meet applicable standards.
RESEARCH
Ashland conducts a program of research and development to invent and
improve products and processes and to improve environmental controls for
its existing facilities. It maintains research facilities in Dublin, Ohio;
Lexington, Kentucky; Boonton, New Jersey; and Atlanta, Georgia. Research
and development costs are expensed as they are incurred and totaled $43
million in fiscal 2004 ($36 million in 2003 and $34 million in 2002).
COMPETITION
In all its operations, Ashland is subject to intense competition both
from companies in the industries in which it operates and from products of
companies in other industries.
The majority of the business for which APAC competes is obtained by
competitive bidding. There are a substantial number of competitors in the
markets in which APAC operates and, as a result, all of APAC's goods and
services are marketed under highly competitive conditions. Factors which
influence APAC's competitiveness are price, reputation for quality, the
availability of aggregate materials, the geographic location of plants and
aggregate materials, machinery and equipment, knowledge of local market
conditions and estimating abilities.
Each of Ashland Distribution's lines of business (chemicals, plastics,
ingredients, composites, and environmental services), competes with
national, regional and local companies throughout North America. The
plastics distribution business also competes in Europe. Competition within
each line of business is based primarily on price and reliability of
supply.
Ashland Specialty Chemical's businesses compete globally in selected
niche markets, largely on the basis of technology and service. The number
of competitors in the specialty chemical business varies from product to
product, and it is not practical to identify such competitors because of
the broad range of products and markets served by those products. However,
many of Ashland Specialty Chemical's businesses hold proprietary
technology, and Ashland believes it has a leading or strong market position
in most of its specialty chemical products.
Valvoline competes in the highly competitive lubricants business
principally through premium products and services, distribution capability,
a focused "master" brand strategy, advertising and sales promotion. Some of
the major brands of motor oils and lubricants Valvoline competes with
internationally are Havoline(R), Castrol(R), Pennzoil(R) and Quaker
State(R). The highly competitive consumer products car care business is
primarily composed of maintenance chemicals, appearance products and tire
cleaners. Valvoline competes primarily in this market through specific
product performance benefits, distribution capability and advertising and
sales promotion. In the highly competitive "fast oil change" business,
Valvoline competes with other leading independent fast lube chains on a
national, regional or local basis as well as automobile dealers and service
stations. Important competitive factors for Valvoline in the "fast oil
change" market include Valvoline's brand recognition; increasing market
presence through VIOC and Valvoline Express Care outlets; as well as
quality of service, speed, location, convenience and sales promotion.
MAP competes with a large number of companies to acquire crude oil for
refinery processing and in the distribution and marketing of a full array
of petroleum products. MAP believes it ranks among the top ten U.S.
petroleum companies on the basis of crude oil refining capacity as of
September 30, 2004. MAP competes in four
10
distinct markets for the sale of refined products - wholesale, spot,
branded and retail distribution. MAP believes it competes with
approximately 40 companies in the wholesale distribution of petroleum
products to private brand marketers and large commercial and industrial
consumers; approximately 80 companies in the sale of petroleum products in
the spot market; approximately 10 refiner/marketers in the supply of
branded petroleum products to dealers and jobbers; and approximately 600
petroleum product retailers in the retail sale of petroleum products. MAP
also competes in the convenience store industry through SSA's retail
outlets and in the travel center industry through its ownership in PTC. The
retail outlets offer consumers gasoline, diesel fuel (at selected
locations) and a variety of food, merchandise, cigarettes, candy and
beverages.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K 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. Words such as "anticipates,"
"believes," "estimates," "expects," "is likely," "predicts," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. Although Ashland believes that its expectations
are based on reasonable assumptions, it cannot assure that the expectations
contained in such statements will be achieved. Important factors that could
cause actual results to differ materially from those contained in such
statements are discussed under "Risks and Uncertainties" in Note A of
"Notes to Consolidated Financial Statements" in this annual report on Form
10-K. For a discussion of other factors and risks affecting Ashland's
revenues and operations see "Item 1. Business - Miscellaneous - Marketing
Conditions" below.
MARKETING CONDITIONS
Domestic and international political, legislative, regulatory and
legal changes may adversely affect Ashland's results of operations.
Political actions may include changes in the policies of the Organization
of Petroleum Exporting Countries or other developments involving or
affecting oil-producing countries, including terrorist activities, military
conflict, embargoes, internal instability or actions or reactions of the
U.S. government in anticipation of, or in response to, such actions.
Profitability of MAP depends largely on the margin between the cost of
crude oil and other feedstocks refined and the selling prices of refined
products. MAP is a purchaser of crude oil in order to satisfy its refinery
throughput requirements. As a result, MAP's overall profitability could be
adversely affected by increases in crude oil and other feedstock prices
that are not recovered in the market place through higher prices. Reference
should be made to the Refining and Marketing section of the Management's
Discussion and Analysis section in this annual report on Form 10-K for a
discussion of the impact of crude oil costs on MAP's operating performance.
While Ashland maintains reserves for anticipated liabilities and carries
various levels of insurance, Ashland could be affected by civil, criminal,
regulatory or administrative proceedings and claims relating to asbestos,
environmental remediation and other matters. Additional information
concerning Ashland's asbestos-related litigation and environmental
remediation may be found in Note M of "Notes to Consolidated Financial
Statements" in this annual report on Form 10-K.
Ashland's operations are subject to various U.S. and foreign laws and
regulations relating to environmental protection and worker health and
safety. These laws and regulations regulate discharge of pollutants into
the air and water, the management and disposal of hazardous substances, and
the cleanup of contaminated properties. The costs of complying with these
laws and regulations can be substantial and may increase as applicable
requirements become more stringent and new rules are implemented. If
violation of these laws and regulations occur, Ashland may be forced to pay
substantial fines, to complete additional costly projects, or to modify or
curtail its operations to limit contaminant emissions.
The profitability of Ashland's businesses is particularly susceptible
to downturns in the economy, particularly downturns in the segments of the
U.S. economy related to the purchase and sale of durable goods, including
housing, construction, automotive, and marine. Both overall demand for
Ashland's products and services and its profit margins may decline as a
direct result of an economic recession, inflation, changes in the prices of
hydrocarbons and other raw materials (e.g., crude oil and petroleum and
chemical products), consumer confidence, interest rates or governmental
fiscal policies. Ashland's profitability may also experience significant
changes as a result of variations in sales, changes in product mix or
pricing competition.
In addition, changes in climate and weather can significantly affect
the performance of several of Ashland's operations. Extreme variations from
normal climatic conditions could have a significant effect on the operating
results of APAC's construction operations. In particular, unfavorable
weather conditions will delay the completion
11
of construction projects and may require the use of additional resources.
Additionally, most of the refined products sold by MAP and Valvoline are
seasonal in nature, and thus demand for those products may decline due to
significant changes in prevailing climate and weather conditions such as
floods, frozen rivers or hurricanes. Adverse weather conditions that impair
driving conditions, such as winter storms, can also result in reduced
retail sales of gasoline.
ITEM 2. PROPERTIES
Ashland's corporate headquarters, which is leased, is located in
Covington, Kentucky. Principal offices of other major operations are
located in Atlanta, Georgia (APAC); Dublin, Ohio (Ashland Distribution and
Ashland Specialty Chemical); Boonton, New Jersey (Ashland Specialty
Chemical); Lexington, Kentucky (Valvoline); and Russell, Kentucky
(Administrative Services). All of these offices are leased, except for the
Russell office and two buildings in Dublin, Ohio, which are owned.
Principal manufacturing, marketing and other materially important physical
properties of Ashland and its subsidiaries are described under the
appropriate segment under "Item 1" in this annual report on Form 10-K.
Additional information concerning certain leases may be found in Note F of
"Notes to Consolidated Financial Statements" in this annual report on Form
10-K.
ITEM 3. 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 6% of the
50,500 active lawsuits pending as of September 30, 2004. In these active
lawsuits, less than 0.2% 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;
approximately 3% of the active lawsuits involve claims between $10 million
and $15 million; and less than 0.02% 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 "Management's Discussion and Analysis -
Application of Critical Accounting Policies - Asbestos-related litigation"
and Note M of "Notes to Consolidated Financial Statements" in this annual
report on Form 10-K.
U.S. Department of Justice Antitrust Division Investigation - In
November 2003, Ashland received a subpoena from the USDOJ relating to a
foundry resins grand jury investigation. Ashland is providing responsive
records to the subpoena. As is frequently the case when such investigations
are in progress, a number of civil actions have since been filed in
multiple jurisdictions, most of which are seeking class action status for
classes of customers of foundry resins. These cases have been consolidated
for pretrial purposes in the United States District Court, Southern
District of Ohio. Ashland will vigorously defend the actions.
Environmental Proceedings - (1) 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
12
"potentially responsible party" ("PRP"). As of September 30, 2004, Ashland
had been named a PRP at 93 waste treatment or disposal sites. These sites
are currently subject to ongoing investigation and remedial activities,
overseen by 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 M of
"Notes to Consolidated Financial Statements" in this annual report on Form
10-K.
(2) On May 13, 2002, Ashland entered into a plea agreement with the
U.S. Attorney's Office for the District of Minnesota and the U.S.
Department of Justice regarding a May 16, 1997, sewer fire at the St. Paul
Park, Minnesota refinery, which is now owned by MAP. As part of the plea
agreement, Ashland entered guilty pleas to two misdemeanors, paid a $3.5
million fine related to violations of the CAA, paid $3.55 million as
restitution to the employees injured in the fire, and paid $200,000 as
restitution to the responding rescue units. Ashland also agreed to complete
certain upgrades to the St. Paul Park refinery's process sewers, junction
boxes and drains to meet standards established by Subpart QQQ of the New
Source Performance Standards of the CAA (the "Refinery Upgrades"). The
Refinery Upgrades are expected to be completed on or before the end of
calendar 2004.
In addition, as part of the plea agreement, Ashland entered into a
deferred prosecution agreement, wherein prosecution of a separate count of
the indictment charging Ashland with violating Subpart QQQ was deferred for
four years. The deferred prosecution agreement provides that if Ashland
satisfies the terms and conditions of the plea agreement and completes the
Refinery Upgrades, the deferred prosecution agreement will terminate and
the United States will dismiss that count with prejudice. Ashland believes
that it has satisfied these terms and conditions and has filed a motion
with the court requesting that the deferred count be dismissed.
As part of its sentence, Ashland was placed on probation for five
years. The primary condition of probation is an obligation not to commit
future federal, state, or local crimes. If Ashland were to commit such a
crime, it would be subject not only to prosecution for that new violation,
but the government could also seek to revoke Ashland's probation. The
probation office has retained an independent environmental consultant to
review and monitor Ashland's compliance with applicable environmental
requirements and the terms and conditions of probation. The court also
included other customary terms and restrictions of probation in its
probation order.
(3) Pursuant to a 1988 RCRA Administrative Consent Order ("Consent
Order"), Ashland is remediating soil and groundwater at a former chemical
distribution facility site in Lansing, Michigan. The USEPA has asserted
that Ashland has not complied with certain provisions of the Consent Order
relating to interim remedial measures at the site. Although Ashland
disputed this assertion, Ashland and the USEPA agreed to resolve the
dispute prior to USEPA's filing of a formal enforcement action. Ashland has
paid a $650,000 penalty, and has signed a Consent Agreement and Final Order
("CAFO") that reflects an agreement between the parties as to what will
constitute future compliance with the disputed provisions of the original
Consent Order. Ashland is continuing to work with the USEPA to design and
implement a final remedy at the site. Once the final remedy is implemented,
the CAFO will expire.
(4) In 1990, contamination of groundwater at Ashland's former Canton,
Ohio, refinery (now owned and operated by MAP) was first identified and
reported to Ohio's Environmental Protection Agency ("OEPA"). Since that
time, Ashland has voluntarily conducted investigation and remediation
activities and regularly communicated with OEPA regarding this matter.
Ashland and the state of Ohio have exchanged Consent Order drafts and have
met to negotiate the terms of such an order. The state filed a complaint in
February 2004, but simultaneously expressed an interest in continuing
Consent Order settlement discussions. Following the filing of the
complaint, Ashland, OEPA and Ohio's Office of the Attorney General have
continued to work to finalize a Consent Order. The state has advised that
it will assess a penalty as part of the overall settlement and has made an
initial request for $650,000.
Shareholder Derivative Litigation - On August 16, 2002, Central
Laborers' Pension Fund, derivatively as a shareholder of Ashland,
instituted an action in the Circuit Court of Kentucky in Kenton County
against Ashland's then-serving Board of Directors. On motion of Ashland and
the other defendants, the case was removed to the United States District
Court, Eastern District of Kentucky, Covington Division. The case has been
remanded to the state court. Ashland has filed a Motion to Dismiss the
Complaint. The action is purportedly filed on behalf of Ashland and asserts
the following causes of action against the Directors: breach of fiduciary
duty, abuse of control, gross mismanagement, and waste of corporate assets.
The suit also names Paul W. Chellgren, the then-serving Chief Executive
Officer and Chairman of the Board, and James R. Boyd, former Senior Vice
President and Group
13
Operating Officer, as individual defendants, and it seeks to recover an
unstated sum from them individually alleging unjust enrichment from various
transactions completed during their tenure with Ashland. The suit further
seeks an unspecified sum from Mr. Chellgren individually based upon alleged
usurpation of corporate opportunities. The suit also names J. Marvin Quin,
Ashland's Chief Financial Officer, as well as three former employees of
Ashland's wholly-owned subsidiary, APAC, as individual defendants and
alleges that they participated in the preparation and filing of false
financial statements during fiscal years 1999 - 2001. The suit further
names Ernst & Young LLP ("E&Y"), as a defendant, alleging professional
accounting malpractice and negligence in the conduct of its audit of
Ashland's 1999 and 2000 financial statements, respectively, as well as
alleging that E&Y aided and abetted the individual defendants in their
alleged breach of duties. The complaint seeks to recover, jointly and
severally, from defendants an unstated sum of compensatory and punitive
damages. The complaint seeks equitable and/or injunctive relief to avoid
continuing harm from alleged ongoing illegal acts, and seeks a disgorgement
of defendants' alleged insider-trading gains, in addition to the reasonable
cost and expenses incurred in bringing the complaint, including attorneys'
and experts' fees.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September
30, 2004.
ITEM X. EXECUTIVE OFFICERS OF ASHLAND
The following is a list of Ashland's executive officers, their ages
and their positions and offices during the last five years (listed
alphabetically after the Chief Executive Officer as to members of Ashland's
Executive Committee and other executive officers).
JAMES J. O'BRIEN (age 50) is Chairman of the Board, Chief Executive
Officer and Director of Ashland, and has served in such capacities since
2002. During the past five years, he has also served as President, Chief
Operating Officer, Senior Vice President and Group Operating Officer of
Ashland, and as President of Valvoline.
GARY A. CAPPELINE (age 55) is Senior Vice President of Ashland and
President and Chief Operating Officer, Chemical Sector, and has served in
such capacities since 2003. During the past five years, he has also served
as Group Operating Officer of Ashland and President of Ashland Specialty
Chemical, as a chemical industry partner at Bear Stearns Merchant Bank, as
President of AlliedSignal Specialty Chemicals and as Group Vice President,
Pigments and Additives of Engelhard Corp.
DAVID J. D'ANTONI (age 59) was Senior Vice President of Ashland, and
served in such capacity since 1988. During the past five years, he has also
served as Group Operating Officer of Ashland, and President of Ashland
Paving And Construction, Inc. Mr. D'Antoni retired from Ashland on
September 30, 2004.
DAVID L. HAUSRATH (age 52) is Senior Vice President, General Counsel
and Secretary of Ashland and has served in such capacities since 2004, 1999
and 2004, respectively. During the past five years, he has also served as
Vice President of Ashland.
GARRY M. HIGDEM (age 51) is Senior Vice President of Ashland;
President and Chief Operating Officer, Transportation Construction Sector;
and President, Ashland Paving And Construction, Inc., and has served in
such capacities since 2004. During the past five years, he has also served
as Vice President for Granite Construction Incorporated, Heavy Construction
Division.
J. MARVIN QUIN (age 57) is Senior Vice President and Chief Financial
Officer of Ashland and has served in such capacities since 1992.
LAMAR M. CHAMBERS (age 49) is Vice President and Controller of Ashland
and has served in such capacities since 2004. During the past five years,
he has also served as Regional Vice President and Senior Vice President,
Finance & Administration of Ashland Paving And Construction, Inc., and
Auditor of Ashland.
14
SUSAN B. ESLER (age 43) is Vice President Human Resources of Ashland
and has served in such capacity since 2004. During the past five years, she
has also served as Vice President Human Resources Programs & Services,
Director of Corporate Human Resources and Manager of Executive Compensation
of Ashland.
SAMUEL J. MITCHELL (age 43) is Vice President of Ashland and President
of Valvoline and has served in such capacities since 2002. During the past
five years, he has also served as Vice President - Retail Business, Vice
President of Marketing and Director of Marketing -Valvoline.
FRANK L. WATERS (age 43) is Vice President of Ashland and President of
Ashland Distribution and has served in such capacities since 2002. During
the past five years, he has also served as Vice President of Ashland
Plastics - Europe.
Each executive officer is elected by the Board of Directors of Ashland
to a term of one year, or until a successor is duly elected, at the annual
meeting of the Board of Directors, except in those instances where the
officer is elected other than at an annual meeting of the Board of
Directors, in which case his or her tenure will expire at the next annual
meeting of the Board of Directors unless the officer is re-elected.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
There is hereby incorporated by reference the information appearing in
Note P of "Notes to Consolidated Financial Statements" in this annual
report on Form 10-K.
At September 30, 2004, there were approximately 15,900 holders of
record of Ashland's Common Stock. Ashland Common Stock is listed on the New
York and Chicago stock exchanges (ticker symbol ASH) and has trading
privileges on the Boston, Cincinnati, Pacific and Philadelphia stock
exchanges.
ITEM 6. SELECTED FINANCIAL DATA
See Five-Year Selected Financial Information on page F-28.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages M-1 through M-13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Quantitative and Qualitative Disclosures about Market Risk on page
M-13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial schedule of
Ashland presented in this annual report on Form 10-K are listed in the
index on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
ITEM 9A. CONTROLS AND PROCEDURES
(a) As of September 30, 2004, 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) There were no significant changes in Ashland's internal control
over financial reporting, or in other factors, that occurred
during the fiscal quarter ended September 30, 2004, that have
materially affected, or are reasonably likely to materially
affect, Ashland's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear
under the caption "Election of Directors" and the information regarding
Section 16 beneficial ownership reporting compliance in Ashland's
definitive Proxy Statement for its January 27, 2005, Annual Meeting of
Shareholders, which will be filed with the SEC within 120 days after
September 30, 2004, ("Proxy Statement"). See also the list of Ashland's
executive officers and related information under "Executive Officers of
Ashland" in Part 1 - Item X in this annual report on Form 10-K.
There is hereby incorporated by reference the information to appear
under the caption "Audit Committee Report" regarding Ashland's audit
committee financial experts, as defined under Item 401 of Regulation S-K of
the Securities Exchange Act of 1934, as amended, in Ashland's Proxy
Statement.
There is hereby incorporated by reference the information to appear
under the caption "Corporpate Governance - Shareholder Nominations of
Directors" in Ashland's Proxy Statement.
Ashland has adopted a Code of Business Conduct (the "Code"). The Code
applies to Ashland's directors, all employees of Ashland and its subsidiary
companies, including the principal executive officer, principal financial
officer, principal accounting officer and persons performing similar
functions ("Key Personnel"). The Code is posted on Ashland's website.
Ashland will satisfy any disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, any provision of the Code with
respect to its Key Personnel or directors by disclosing the nature of such
amendment or waiver on its website or in a current report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear
under the captions "Executive Compensation," "Compensation of Directors"
and "Corporate Governance - Personnel and Compensation Committee Interlocks
and Insider Participation" in Ashland's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
There is hereby incorporated by reference the information to appear
under the captions "Ashland Common Stock Ownership of Directors and Certain
Officers of Ashland" and "Ashland Common Stock Ownership of Certain
Beneficial Owners" in Ashland's Proxy Statement.
The following table summarizes the equity compensation plans under
which Ashland Common Stock may be issued as of September 30, 2004. Except
as disclosed in the narrative to the table, all plans were approved by
shareholders of Ashland.
16
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ------------------------ --------------------- -------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders.............. 4,925,043 40.73 1,922,675 (2)
Equity compensation plans
not approved by security holders
(1)........................... 240,160 32.94 0
---------- ------- ------------
Total................. 5,165,203 40.37 1,922,675
========== ======= ============
(1) The Ashland Inc. Stock Option Plan for Employees of Joint Ventures is
the only equity compensation plan of Ashland not approved by Ashland's
shareholders. This plan was approved by Ashland's Board of Directors
on September 17, 1998, and is specifically designed to grant stock
options to employees of joint ventures in which Ashland has an
interest. There are currently no shares reserved for future issuance
under this plan. The Board of Directors authorizes the issuance of the
shares at the time the stock options are granted. A recipient of such
stock options will have the right to purchase Ashland Common Stock at
a price and on terms specified by the Personnel and Compensation
Committee of Ashland's Board of Directors. The stock options listed in
the table above have been granted to certain MAP employees and were
registered with the SEC.
(2) Includes 458,746 shares available for issuance under the Deferred
Compensation Plan for Employees, and 365,527 shares available for
issuance under the Deferred Compensation Plan for Non-Employee
Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
There is hereby incorporated by reference the information with respect
to principal accountant fees and services to appear under the captions
"Ratification of Auditors" and "Audit Committee Report" in Ashland's Proxy
Statement.
Ashland has been made aware that, in connection with certain income
tax compliance services, affiliates of E&Y held employment tax related
funds of a de minimis amount and made payment of such funds to the
applicable tax authority in respect of expatriot and foreign employees of
subsidiaries of Ashland in Taiwan and China. These actions by affiliates of
E&Y have been discontinued. Custody of the assets of an audit client is not
permitted under the auditor independence rules in Regulation S-X of the
SEC. The Audit Committee and E&Y have considered the impact that the
holding and paying of these funds may have had on E&Y's independence with
respect to Ashland and have concluded that there has been no impairment of
E&Y's independence. In making this determination, the Audit Committee
considered the de minimis amount of funds involved, the ministerial nature
of the actions, and that the subsidiaries involved were immaterial to the
consolidated financial statements of Ashland.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented in this annual report on Form 10-K are listed in the
index on page F-1.
17
(3) Exhibits
2.1* - Master Agreement dated as of March 18, 2004, among
Ashland Inc., ATB Holdings Inc., EXM LLC, New EXM
Inc., Marathon Oil Corporation, Marathon Oil Company,
Marathon Domestic LLC and Marathon Ashland Petroleum
LLC (filed as Exhibit 2.1 to Ashland's Form 8-K/A
dated March 18, 2004, and filed November 5, 2004, and
incorporated herein by reference).
2.2* - Tax Matters Agreement dated March 18, 2004, among
Ashland Inc., ATB Holdings Inc., EXM LLC, New EXM
Inc., Marathon Oil Corporation, Marathon Oil Company,
Marathon Domestic LLC and Marathon Ashland Petroleum
LLC (filed as Exhibit 2.2 to Ashland's Form 8-K/A
dated March 18, 2004, and filed November 5, 2004, and
incorporated herein by reference).
2.3* - Assignment and Assumption Agreement (VIOC Centers)
dated as of March 18, 2004, between Ashland Inc. and
ATB Holdings Inc. (filed as Exhibit 2.3 to Ashland's
Form 8-K/A dated March 18, 2004, and filed November 5,
2004, and incorporated herein by reference).
2.4* - Assignment and Assumption Agreement (Maleic
Business) dated as of March 18, 2004, between Ashland
Inc. and ATB Holdings Inc. (filed as Exhibit 2.4 to
Ashland's Form 8-K/A dated March 18, 2004, and filed
November 5, 2004, and incorporated herein by
reference).
2.5* - Amendment No. 2 dated as of March 18, 2004, to the
Amended and Restated Limited Liability Company
Agreement dated as of December 31, 1998, of Marathon
Ashland Petroleum LLC, by and between Ashland Inc. and
Marathon Oil Company (filed as Exhibit 2.5 to
Ashland's Form 8-K/A dated March 18, 2004, and filed
November 5, 2004, and incorporated herein by
reference).
3.1 - Third Restated Articles of Incorporation of Ashland
(filed as Exhibit 3(i) to Ashland's Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein
by reference).
3.2 - By-laws of Ashland, effective as of November 15,
2002 (filed as Exhibit 3.2 to Ashland's annual report
on Form 10-K for the fiscal year ended September 30,
2002, and incorporated herein by reference).
4.1 - Ashland agrees to provide the SEC, upon request,
copies of instruments defining the rights of holders
of long-term debt of Ashland and all of its
subsidiaries for which consolidated or unconsolidated
financial statements are required to be filed with the
SEC.
4.2 - Indenture, dated as of August 15, 1989, as amended
and restated as of August 15, 1990, between Ashland
and Citibank, N.A., as Trustee (filed as Exhibit 4.2
to Ashland's annual report on Form 10-K for the fiscal
year ended September 30, 2001, and incorporated herein
by reference).
4.3 - Indenture, dated as of September 7, 2001, between
Ashland and U.S. Bank National Association, as Trustee
(filed as Exhibit 4.3 to Ashland's annual report on
Form 10-K for the fiscal year ended September 30,
2001, and incorporated herein by reference).
4.4 - Rights Agreement, dated as of May 16, 1996, between
Ashland Inc. and the Rights Agent, together with Form
of Right Certificate (filed as Exhibit 4.4 to
Ashland's annual report on Form 10-K for the fiscal
year ended September 30, 2001, and incorporated herein
by reference).
4.5 - Amendment No. 1 dated as of March 18, 2004, to
Rights Agreement dated as of May 16, 1996, between
Ashland Inc. and Rights Agent (filed as Exhibit 4 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
The following Exhibits 10.1 through 10.16 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 - Amended Stock Incentive Plan for Key Employees of Ashland
Inc. and its Subsidiaries (filed as Exhibit 10.1 to
Ashland's annual report on Form 10-K for the fiscal
year ended September 30, 1999, and incorporated herein
by reference).
18
10.2 - Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (filed as Exhibit 10.2 to Ashland's Form
10-Q for the quarter ended June 30, 2003, and
incorporated herein by reference).
10.3 - Ashland Inc. Deferred Compensation Plan (filed as
Exhibit 10.1 to Ashland's Form 10-Q for the quarter
ended June 30, 2003, and incorporated herein by
reference).
10.4 - Eleventh Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Employees (filed as
Exhibit 10.3 to Ashland's Form 10-Q for the quarter
ended June 30, 2003, and incorporated herein by
reference).
10.5 - Ashland Inc. Salary Continuation Plan (filed as Exhibit
10.5 to Ashland's annual report on Form 10-K for the
fiscal year ended September 30, 2002, and incorporated
herein by reference).
10.6 - Form of Ashland Inc. Executive Employment Contract between
Ashland Inc. and certain executives of Ashland (filed
as Exhibit 10.6 to Ashland's annual report on Form
10-K for the fiscal year ended September 30, 2002, and
incorporated herein by reference).
10.7 - Form of employment agreement between Ashland Inc. and an
executive officer.
10.8 - Form of Indemnification Agreement between Ashland Inc.
and members of its Board of Directors (filed as
Exhibit 10.7 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2003, and
incorporated herein by reference).
10.9 - Ashland Inc. Nonqualified Excess Benefit Pension
Plan (filed as Exhibit 10.4 to Ashland's Form 10-Q
for the quarter ended June 30, 2003, and incorporated
herein by reference).
10.10 - Ashland Inc. Directors' Charitable Award Program (filed
as Exhibit 10.11 to Ashland's annual report on Form
10-K for the fiscal year ended September 30, 2002, and
incorporated herein by reference).
10.11 - Ashland Inc. 1993 Stock Incentive Plan (filed as Exhibit
10.11 to Ashland's annual report on Form 10-K for the
fiscal year ended September 30, 2000, and incorporated
herein by reference).
10.12 - Ashland Inc. 1997 Stock Incentive Plan (filed as Exhibit
10.14 to Ashland's annual report on Form 10-K for the
fiscal year ended September 30, 2002, and incorporated
herein by reference).
10.13 - Amended and Restated Ashland Inc. Incentive Plan (filed
as Exhibit 10.1 to Ashland's Form 10-Q for the quarter
ended June 30, 2004, and incorporated herein by reference).
10.14 - Form of Notice granting Stock Appreciation Rights Awards.
10.15 - Form of Notice granting Restricted Stock Awards.
10.16 - Form of Notice granting Nonqualified Stock Option Awards.
10.17 - Amended and Restated Limited Liability Company Agreement
dated as of December 31, 1998, of Marathon Ashland
Petroleum LLC by and between Ashland Inc. and Marathon
Oil Company.
10.18** - Amendment No. 1 dated as March 17, 2004, to the Amended
and Restated Limited Liability Company Agreement dated
as of December 31, 1998, of Marathon Ashland Petroleum
LLC (filed as Exhibit 10.2 to Ashland's Form 10-Q for
the quarter ended March 31, 2004, and incorporated herein
by reference).
10.19 - Put/Call Registration Rights and Standstill Agreement,
dated as of January 1, 1998, including Amendment No. 1
thereto, dated as of December 31, 1998, among Marathon
Oil Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum LLC.
10.20 - Amendment No. 2 dated as of March 17, 2004, to the
Put/Call Registration Rights and Standstill Agreement
dated as of January 1, 1998, among Marathon Oil
Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum LLC (filed as Exhibit 10.1 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
19
10.21 - Three-Year, $250 Million Revolving Credit Agreement dated
as of April 2, 2004
10.22 - 364-Day, $100 Million Revolving Credit Agreement dated
as of April 2, 2004
11 - Computation of Earnings Per Share (appearing on page F-9
of this annual report on Form 10-K).
12 - Computation of Ratio of Earnings to Fixed Charges.
21 - List of Subsidiaries.
23.1 - Consent of Independent Registered Public Accounting Firm.
24 - Power of Attorney, including resolutions of the Board of
Directors.
31.1 - Certification of James J. O'Brien, Chief Executive Officer
of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of J. Marvin Quin, Chief Financial Officer
of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 - Certification 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.
99.1 - Consent of Tillinghast-Towers Perrin.
99.2 - Consent of Hamilton, Rabinovitz & Alschuler, Inc.
*Ashland agrees to supplement this filing and furnish a copy of any
omitted schedule to the United States Securities and Exchange
Commission upon request.
**Portions of this document have received confidential treatment.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ASHLAND INC.
(Registrant)
By:
/s/ J. Marvin Quin
---------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer
Date: December 14, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant, in the capacities indicated, on December 14, 2004.
Signatures Capacity
---------- ---------
/S/ JAMES J. O'BRIEN Chairman of the Board,
-------------------------------------------- Chief Executive Officer
JAMES J. O'BRIEN and Director
/S/ J. MARVIN QUIN Senior Vice President and
-------------------------------------------- Chief Financial Officer
J. MARVIN QUIN
/S/ LAMAR M. CHAMBERS Vice President, Controller
-------------------------------------------- and Principal Accounting
LAMAR M. CHAMBERS Officer
* Director
--------------------------------------------
ERNEST H. DREW
* Director
--------------------------------------------
ROGER W. HALE
* Director
--------------------------------------------
BERNADINE P. HEALY
* Director
--------------------------------------------
ERNEST H. DREW
* Director
--------------------------------------------
MANNIE L. JACKSON
* Director
--------------------------------------------
KATHLEEN LIGOCKI
* Director
--------------------------------------------
PATRICK F. NOONAN
* Director
--------------------------------------------
JANE C. PFEIFFER
* Director
--------------------------------------------
WILLIAM L. ROUSE, JR.
* Director
--------------------------------------------
GEORGE A. SCHAEFER, JR.
* Director
--------------------------------------------
THEODORE M. SOLSO
* Director
--------------------------------------------
MICHAEL J. WARD
*By: /s/ David L. Hausrath
David L. Hausrath
Attorney-in-Fact
Date: December 14, 2004
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows revenues, operating income and operating
information by industry segment for each of the last three years ended
September 30.
(In millions) 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
SALES AND OPERATING REVENUES
APAC $ 2,525 $ 2,400 $ 2,652
Ashland Distribution 3,199 2,811 2,541
Ashland Specialty Chemical 1,386 1,212 1,130
Valvoline 1,297 1,235 1,152
Intersegment sales (106) (92) (85)
---------- ---------- ----------
$ 8,301 $ 7,566 $ 7,390
========== ========== ==========
OPERATING INCOME
APAC $ 111 $ (42) $ 122
Ashland Distribution 78 32 1
Ashland Specialty Chemical 87 31 70
Valvoline 105 87 77
Refining and Marketing (1) 383 263 143
Corporate (102) (105) (92)
---------- ---------- ----------
$ 662 $ 266 $ 321
========== ========== ==========
OPERATING INFORMATION
APAC
Construction backlog at September 30 (millions) (2) $ 1,746 $ 1,745 $ 1,691
Net construction job revenues (millions) (3) $ 1,433 $ 1,361 $ 1,527
Hot-mix asphalt production (million tons) 33.4 32.5 36.7
Aggregate production (million tons) 29.6 28.7 31.0
Ready-mix concrete production (million cubic yards) 1.7 2.0 2.1
Ashland Distribution (4)
Sales per shipping day (millions) $ 12.6 $ 11.2 $ 10.1
Gross profit as a percent of sales 9.6% 9.9% 9.7%
Ashland Specialty Chemical (4)
Sales per shipping day (millions) $ 5.4 $ 4.8 $ 4.5
Gross profit as a percent of sales 27.9% 29.9% 32.9%
Valvoline
Lubricant sales (million gallons) 191.6 193.5 199.0
Premium lubricants (percent of U.S. branded volumes) 21.5% 18.5% 16.1%
Refining and Marketing (5)
Refinery runs (thousand barrels per day)
Crude oil refined 920 900 930
Other charge and blend stocks 167 133 151
Refined product yields (thousand barrels per day)
Gasoline 600 554 594
Distillates 291 278 293
Asphalt 74 71 73
Other 135 131 127
---------- ---------- ----------
Total 1,100 1,034 1,087
Refined product sales (thousand barrels per day) (6) 1,385 1,345 1,321
Refining and wholesale marketing margin (per barrel) (7) $ 3.11 $ 2.59 $ 1.82
Speedway SuperAmerica (SSA)
Retail outlets at September 30 1,685 1,791 2,063
Gasoline and distillate sales (million gallons) 3,165 3,423 3,622
Gross margin - gasoline and distillates (per gallon) $ .1167 $ .1191 $ .1040
Merchandise sales (millions) (8) $ 2,301 $ 2,281 $ 2,381
Merchandise margin (as a percent of sales) 24.4% 24.5% 24.2%
(1) Includes Ashland's equity income from Marathon Ashland Petroleum LLC
(MAP), amortization related to Ashland's excess investment in MAP, and
other activities associated with refining and marketing.
(2) Includes APAC's proportionate share of the backlog of unconsolidated
joint ventures.
(3) Total construction job revenues, less subcontract costs.
(4) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
(5) Amounts represent 100% of MAP's operations, in which Ashland owns a
38% interest.
(6) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(7) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(8) Effective January 1, 2003, SSA adopted EITF 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received
from a Vendor," which requires rebates from vendors to be recorded as
reductions to cost of sales. Rebates from vendors recorded in SSA
merchandise sales for periods prior to January 1, 2003 have not been
restated and included $46 million in 2003 and $170 million in 2002.
M-1
RESULTS OF OPERATIONS
Ashland's net income amounted to $378 million in 2004, $75 million in
2003 and $117 million in 2002. Income from continuing operations (which
excludes discontinued operations and the cumulative effect of accounting
changes) amounted to $398 million in 2004, $94 million in 2003 and $115
million in 2002. Ashland's results from discontinued operations, consisting
of charges associated with estimated future asbestos liabilities less
probable insurance recoveries, as well as net income from the discontinued
operations of its Electronic Chemicals business, along with the cumulative
effect of accounting changes adopted in 2002 and 2003, accounted for the
difference in net income and income from continuing operations.
Chemical Sector (consisting of Ashland Distribution, Ashland Specialty
Chemical and Valvoline) operating income totaled $270 million in 2004,
compared to $150 million in 2003 and $148 million in 2002. Ashland
Distribution, Ashland Specialty Chemical and Valvoline all showed
significant improvement in 2004, reflecting a combined 12% increase in
sales and operating revenues and an improved cost structure. In the
Transportation Construction Sector, Ashland Paving And Construction (APAC)
recorded operating income of $111 million in 2004, compared to a loss of
$42 million in 2003 and income of $122 million in 2002. APAC's improvement
in 2004 reflected a reduced cost structure and more normal weather for the
overall year. Refining and Marketing operating income was $383 million in
2004, compared to $263 million in 2003 and $143 million in 2002, reflecting
higher refining margins year-over-year and increased refinery throughput in
2004 compared with 2003. An analysis of operating income by industry
segment follows.
APAC
Operating income from APAC totaled $111 million in 2004, compared with
an operating loss of $42 million in 2003. Higher margins on construction
work, driven primarily by reduced operating costs, was the primary
contributor to the earnings improvement. Income also increased from the
sale of hot-mix asphalt and aggregates, reflecting improved pricing and
margins as well as slightly higher sales volumes in both areas. Operating
efficiency increased as a result of broad-based business improvement
programs implemented over the last three years, and somewhat better weather
conditions for 2004 overall, compared with the record levels of rainfall
experienced in 2003. APAC reversed into income $5 million of a job loss
reserve established in 2003 related to a large highway construction project
in Virginia. Also contributing to 2004 earnings, APAC sold a significant
portion of its ready-mix concrete operations in the June quarter, realizing
proceeds net of selling expenses of $38 million and a pretax gain of $9
million. Costs related to Project PASS, APAC's process redesign initiative
completed during 2004, amounted to $10 million in 2004, compared with $20
million in 2003. As of September 30, 2004, APAC's construction backlog,
which consists of contracts awarded and funded but not yet performed, was
$1.75 billion, essentially even with the year-end record set in 2003.
During 2003, APAC reported an operating loss of $42 million, compared
to income of $122 million in 2002. In many of the states in which APAC
operates, rainfall during 2003 was among the highest levels on record in
the past 109 years as measured by the National Climatic Data Center. In
addition to hampering the overall level of construction activity, the
weather conditions resulted in significant levels of rework and created
significant inefficiencies in completing the construction work that APAC
performed. Earnings from construction jobs were down significantly,
reflecting an 11% decrease in net construction job revenues (total
construction job revenues less subcontract costs) and a related increase in
overhead costs not allocated to individual jobs. As a result of
weather-related cost increases and construction delays, APAC established
reserves for job losses on several projects, including $14 million related
to a large highway construction project in Virginia. Margins of the asphalt
plants were also down due to an 11% decrease in production and
significantly higher costs for liquid asphalt and fuel. In addition, APAC
recognized an impairment charge of $9 million associated with non-strategic
businesses identified for sale. Costs associated with Project PASS, APAC's
process redesign initiative, amounted to $20 million in 2003, compared to
$17 million in 2002.
ASHLAND DISTRIBUTION
Ashland Distribution generated record operating income of $78 million
in 2004, compared with $32 million in 2003. Sales increased 14% compared
with 2003, due to a 7% increase in unit volumes and a 7% increase in
selling prices. Gross profit as a percent of sales declined slightly, from
9.9% to 9.6%, attributable primarily to lower margins within the chemicals
product category. Selling, general and administrative expenses were reduced
10%, reflecting cost-cutting and efficiency improvements achieved through
Ashland's Top-Quartile Cost Structure (TQCS) program that began in 2003.
Income in 2004 increased from all regions, both domestically and in Europe.
M-2
Operating income from Ashland Distribution amounted to $32 million in
2003, compared to $1 million in 2002. Overall sales were up 11% (of which
5% came from higher volumes), despite a continuing sluggish industrial
production environment. Reported results for 2003 included $6 million of
gains from property sales and litigation settlements, as well as a charge
of $5 million for staff reductions under the TQCS program. Results of
Ashland Distribution for 2002 included income of $7 million from the
settlement of the sorbate antitrust litigation.
ASHLAND SPECIALTY CHEMICAL
Operating income from Ashland Specialty Chemical increased to $87
million in 2004, compared to $31 million in 2003. Sales from the thermoset
resins businesses (Casting Solutions, Composite Polymers and Specialty
Polymers & Adhesives) increased 17%, reflecting an 11% increase in unit
sales volumes and a 6% increase in selling prices. The increase in sales
was partially offset by a decline in gross profit percentage due to the
inability to fully recover persistently rising raw materials costs. The
water technologies businesses (Drew Industrial and Drew Marine) achieved
higher income as a result of a 7% increase in revenues. Ashland Specialty
Chemical's selling, general and administrative expenses were reduced in
2004, reflecting cost reductions achieved through Ashland's TQCS program.
Adding to income in 2004, a parcel of land and fixed assets in Plaquemine,
Louisiana were sold for net proceeds of $9 million, resulting in a pretax
gain of $6 million. Results for 2003 included an impairment charge of $10
million for a maleic anhydride production facility, as well as a charge of
$5 million for staff reductions under the TQCS program.
Ashland Specialty Chemical's operating income amounted to $31 million
in 2003, compared to $70 million in 2002. Although overall sales were up
7%, the individual businesses reported mixed results. Earnings from most of
the thermoset resins businesses were down, reflecting raw material cost
increases that were not completely recovered in the marketplace. Results
from Castings Solutions and Drew Industrial were up, reflecting sales
increases of 11% and 8%, combined with more stable margins. In spite of
higher sales, operating income from Drew Marine was down largely due to the
effects of the weakening U.S. dollar on margins. Sales of Drew Marine are
principally denominated in U.S. dollars, while most of its costs are
denominated in foreign currencies. In addition, the earnings of Ashland
Specialty Chemical for 2003 included an impairment charge of $10 million
for a maleic anhydride production facility, as well as a charge of $5
million for staff reductions under the TQCS program.
VALVOLINE
Valvoline generated record operating income of $105 million in 2004,
compared with $87 million in 2003. Lubricant sales volumes decreased 1%
from 2003, but unit sales of higher-margin premium lubricants (MaxLife,
Durablend and SynPower) increased 15%. Valvoline Instant Oil Change (VIOC)
reported its third year of record earnings due in part to a 3% increase in
non-oil change revenues and a 2% increase in premium oil changes,
contributing to a 6% increase in the average sale per customer visit.
Valvoline's international operations posted record operating income, mostly
due to a 6% increase in lubricant sales volumes and strengthening foreign
currencies. At September 30, 2004, VIOC operated 360 company-owned service
centers, compared to 357 centers in 2003 and 363 centers in 2002. The VIOC
franchising program continues to expand, with 397 centers open at September
30, 2004, compared to 372 centers in 2003 and 335 centers in 2002. VIOC's
future growth will continue to focus principally on expanding the number of
franchised rather than company-owned centers.
Operating income from Valvoline amounted to $87 million in 2003,
compared to $77 million in 2002. Branded lubricant volume was up slightly,
but the mix improved considerably with higher margin premium lubricants
accounting for 18.5% of the total in 2003, compared to 16.1% in 2002.
Significant improvements were also achieved from international operations,
VIOC and automotive system fluids. Valvoline International had better
volumes and margins in Europe and Australia, and their improved operating
results were further enhanced by strengthening foreign currency translation
rates. VIOC's increased earnings reflected a growing number of oil changes
using premium lubricants and increased revenues from transmission, cooling,
fuel and air quality system services. Valvoline also sold its remaining
inventory of R-12 refrigerant at a small profit.
REFINING AND MARKETING
Operating income from Refining and Marketing, which consists primarily
of equity income from Ashland's 38% ownership interest in MAP, amounted to
$383 million in 2004, compared to $263 million in 2003. In 2004, MAP
achieved its second highest level of earnings for the twelve months ended
September. Equity income from MAP's refining and marketing operations
increased $127 million, reflecting an increase of 52 cents per barrel in
its refining and wholesale marketing margin. MAP's refineries processed
approximately 1.1 million barrels per day of crude oil and other feedstocks
during 2004, an increase of 5% from 2003. Equity income from MAP's retail
operations
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(Speedway SuperAmerica and a 50% interest in the Pilot Travel Centers
joint venture) declined $6 million due to an $8 million gain on the sale of
Speedway SuperAmerica's southern stores in 2003.
On March 19, 2004, Ashland announced the signing of an agreement under
which it would transfer its 38% interest in MAP and two wholly-owned
businesses to Marathon in a transaction structured to be generally tax free
and valued at approximately $3.0 billion (the "MAP Transaction"). The two
other businesses are Ashland's maleic anhydride business and 61 VIOC
centers. The transaction is subject to several previously disclosed
conditions, including approval by Ashland's shareholders, consent from
Ashland's public debt holders and receipt of a favorable private letter
ruling from the Internal Revenue Service (IRS) with respect to the tax
treatment. Ashland has filed registration statements and proxy materials
with the Securities and Exchange Commission (SEC) and is responding to
comments. In addition, Ashland submitted a request to the IRS for a private
letter ruling on the tax-free status of the proposed transaction. Ashland
continues to discuss the complex tax issues related to this transaction
with the IRS. Ashland has not resolved all issues with the IRS and is
exploring alternatives for the resolution of these issues. At this time,
Ashland cannot predict whether the requested rulings will be received. If
the requested rulings are not received, the transaction would have to be
modified or terminated. In any event, Ashland does not believe that a
transaction will close earlier than March 2005.
Operating income from Refining and Marketing was $263 million in 2003,
compared to $143 million in 2002. Equity income from MAP's refining and
wholesale marketing operations was up $92 million, principally reflecting
an increase of 77 cents a barrel in its refining and wholesale marketing
margin and higher operating expenses. Equity income from MAP's retail
operations increased by $20 million, reflecting a gain of $8 million on the
sale of Speedway SuperAmerica's southern stores and higher product and
merchandise margins for Pilot Travel Centers.
CORPORATE
Corporate expenses were $102 million in 2004, $105 million in 2003 and
$92 million in 2002. The reduction in expense reflects an increase in 2004
of $16 million related to performance-based employee incentive plans, which
was more than offset by the inclusion in 2003 of $19 million in severance
and other transition costs related to Ashland's TQCS and other cost
reduction programs. The increase in 2003 compared to 2002 reflects the
expense in 2003 for severance and other transition costs related to
Ashland's TQCS and other cost reduction programs, increased incentive and
deferred compensation costs and $6 million related to the expensing of
employee stock options. Those increases were partially offset by lower
ongoing administrative costs in 2003, as well as additional reserves that
were included in 2002 costs.
NET INTEREST AND OTHER FINANCIAL COSTS
The following table summarizes the components of net interest and
other financial costs.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
NET INTEREST AND OTHER FINANCIAL COSTS
Interest expense $ 114 $ 123 $ 135
Expenses on sales of accounts receivable 3 3 4
Other financial costs 3 3 3
Interest income (6) (1) (4)
----------- ----------- -----------
$ 114 $ 128 $ 138
=========== =========== ===========
Ashland's long-term debt declined from $1.9 billion at October 1, 2001
to $1.5 billion at the end of fiscal 2004, accounting for a reduction in
interest expense of $12 million in 2003 and an additional $9 million in
2004. Interest income increased $5 million in 2004, with most of that
increase due to the recognition of interest income associated with income
tax refunds claimed for prior years.
INCOME TAXES
Ashland's income tax expense for 2004 included $48 million in tax
benefits related to prior years. During the year, Ashland reached
resolution with the Internal Revenue Service on several open tax matters
from prior years, resulting in a tax benefit of $33 million as a result of
the reduction of amounts previously provided as contingent tax liabilities.
In addition, Ashland recognized federal income tax benefits associated with
a claim for additional research and development tax credits valued at $15
million. Excluding these two items, Ashland's adjusted effective tax rate
was 36.0% in 2004, compared to 31.9% in 2003. The overall effective rate
was lower in 2003 than in 2004
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due to Ashland's lower level of earnings in 2003 and the resulting larger
relative portion of those earnings derived from income taxed at less than
full U.S. statutory rates.
Ashland's overall effective income tax rate declined from 37.2% in
2002 to 31.9% in 2003. Recurring nontaxable income, such as equity income
from foreign operations, had a larger effect on the effective rate in 2003
due to the reduced level of earnings. In addition, the changed investment
climate resulted in nontaxable income being realized under life insurance
policies during 2003, compared to 2002 when nondeductible losses were
incurred. These life insurance policies are the underlying investments
behind Ashland's deferred compensation programs.
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGES
Results of Ashland's discontinued operations are summarized below. See
Note N of Notes to Consolidated Financial Statements for additional
information.
(In millions) 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NET OF TAX)
Reserves for asbestos-related litigation (net of insurance recoveries) $ (18) $ (109) $ -
Electronic Chemicals
Results of operations - 14 13
Gain on sale of operations (3) 81 -
Resolution of tax contingency issues 1 - -
----------- ---------- ----------
$ (20) $ (14) $ 13
=========== ========== ==========
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, a former subsidiary. During the quarter ended
December 31, 2002, Ashland increased its reserve for asbestos claims by
$390 million to cover litigation defense and claim settlement costs
expected to be paid through December 2012. Because insurance provides
reimbursements for most of these costs and coverage-in-place agreements
exist with the insurance companies that provide substantially all of the
coverage being accessed, the increase in the asbestos reserve was offset in
part by probable insurance recoveries valued at $235 million. The resulting
$155 million pretax charge to income, net of deferred income tax benefits
of $60 million, was reflected as an after-tax loss from discontinued
operations of $95 million in the Statement of Consolidated Income for the
three months ended December 31, 2002. Additional reserves have been
provided since then to reflect updates in the estimate of potential
payments for litigation defense and claim settlement costs.
During 2003, Ashland sold the net assets of its Electronic Chemicals
business and certain related subsidiaries for $300 million. Due to the
sale, the results of operations of those businesses, as well as the gain on
the sale, were shown in discontinued operations.
During 2004, Ashland reached resolution with the Internal Revenue
Service on several open tax matters from prior years, as described
previously in the discussion of income taxes. In addition to amounts
reported in income from continuing operations, favorable resolution was
also reached on matters associated with previously discontinued businesses,
resulting in a $1 million tax benefit from the associated reduction in
contingent tax liabilities previously recorded.
As discussed in Note A to the Consolidated Financial Statements,
Ashland adopted certain pronouncements of the FASB during the last three
years. As of July 1, 2003, Ashland consolidated a lessor entity in its
financial statements under FIN 46, and doing so resulted in an after-tax
charge of $5 million to adjust the depreciation included in the cumulative
lease payments to conform to Ashland's depreciation methods. Ashland also
adopted FAS 142 in 2002 and recognized an impairment loss of $11 million
after income taxes to write off the goodwill of Ashland Distribution.
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity,
amounted to $209 million in 2004, $242 million in 2003 and $168 million in
2002. Such amounts include cash distributions from MAP of $146 million in
2004, $197 million in 2003 and $196 million in 2002. During 2004, Ashland
paid income taxes of $84 million,
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compared with $24 million in 2003 and $158 million in 2002. Ashland also
contributed $137 million to its qualified pension plans in 2004, compared
with $61 million in 2003 and $103 million in 2002. Cash flows from
operations during 2004 were supplemented by $108 million in proceeds from
the issuance of common stock resulting from stock option exercises, as well
as $48 million from the sale of certain APAC operations. Over the last
three years, cash flows from operations approximately equaled Ashland's
capital requirements for net property additions and dividends, despite the
fact that cash distributions from MAP have been suspended since December
31, 2003, pending closure of the MAP Transaction. Ashland's share of MAP's
undistributed cash on September 30, 2004 was $203 million.
Ashland's financial position has enabled it to obtain capital for its
financing needs and to maintain investment grade ratings on its senior debt
of Baa2 from Moody's and BBB from Standard & Poor's (S&P). In August 2003,
S&P revised its outlook on Ashland to negative from stable, and lowered
Ashland's commercial paper rating to A-3 from A-2. In March 2004, following
the announcement of the pending MAP Transaction, S&P affirmed its long-term
debt rating and placed Ashland's A-3 commercial paper rating on credit
watch with positive implications. Conversely, in March 2004, Moody's
lowered Ashland's commercial paper rating to P-3 from P-2. These actions
materially restrict, and could at times eliminate, the availability of the
commercial paper market to Ashland. Ashland has two revolving credit
agreements providing for up to $350 million in borrowings. Although Ashland
borrowed $175 million under these agreements to repay commercial paper
shortly after the S&P downgrade in 2003, the revolving credit agreements
were not used during 2004. In the June 2004 quarter, Ashland executed an
additional $200 million revolving credit agreement which expires March 31,
2005. Ashland has utilized this facility to fund currently maturing
long-term debt and certain lease payments, and had $40 million outstanding
under this facility at September 30, 2004. While the revolving credit
agreements contain covenants limiting new borrowings based on Ashland's
stockholders' equity, these agreements would have permitted an additional
$2.4 billion of borrowings at September 30, 2004. Additional permissible
borrowings are increased (decreased) by 150% of any increase (decrease) in
stockholders' equity.
At September 30, 2004, working capital (excluding debt due within one
year) amounted to $926 million, compared to $703 million at the end of
2003. 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 $95 million at September 30, 2004, and $78 million at
September 30, 2003. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 84% of current liabilities at September 30, 2004,
compared to 92% at the end of 2003. Essentially all of this decrease was
due to a $337 million increase in debt due within one year.
CAPITAL RESOURCES
Property additions amounted to $500 million during the last three
years and are summarized in the Information by Industry Segment on page
F-27. Property additions in 2004 included a $33 million buyout of an
operating lease for a portion of the buildings on Ashland's Dublin, Ohio
campus. For the past three years, APAC accounted for 45% of Ashland's
capital expenditures, while Ashland Specialty Chemical accounted for an
additional 25%. Capital used for acquisitions (including assumed debt)
amounted to $27 million during the last three years, of which $20 million
was invested in APAC, $4 million in Ashland Specialty Chemical and $3
million in Valvoline. A summary of the capital employed in Ashland's
operations follows. The increase in capital employed in Refining and
Marketing in 2004 is attributed to the terms of the pending MAP
Transaction, under which MAP suspended quarterly cash distributions to
Ashland and Marathon after December 31, 2003 until the closing of the
transaction. The reduction in capital employed in Ashland Specialty
Chemical in 2003 resulted principally from the sale of the Electronic
Chemicals business.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
CAPITAL EMPLOYED
APAC $ 959 $ 1,014 $ 1,039
Ashland Distribution 449 418 459
Ashland Specialty Chemical 490 438 610
Valvoline 388 399 343
Refining and Marketing 2,053 1,866 1,818
Long-term borrowings provided cash flows of $55 million during the
last three years, the proceeds from which were used in part to retire $456
million of long-term debt. Debt retirements included scheduled maturities,
as well as prepayments or refundings to reduce interest costs. Cash flows
were supplemented as necessary by the issuance of short-term notes,
commercial paper and borrowings under the revolving credit agreements.
M-6
During 2004, Ashland reduced its total debt by $66 million to $1.5
billion. Stockholders' equity increased by $453 million during 2004 to $2.7
billion. Increases resulting from $378 million of net income, $132 million
from issuance of common shares under stock incentive and other plans, and
$33 million of translation gains associated with foreign operations were
partially offset by cash dividends of $77 million and a $13 million
increase in the minimum pension liability. Debt as a percent of capital
employed was reduced from 41.7% at the end of 2003 to 36.4% at September
30, 2004.
At September 30, 2004, Ashland's debt included $69 million of
floating-rate obligations, and the interest rates on an additional $183
million of fixed-rate, medium-term notes were effectively converted to
floating rates through interest rate swap agreements. In addition,
Ashland's costs under its sale of receivables program and various operating
leases are based on the floating-rate interest costs on $187 million of
third-party debt underlying those transactions. As a result, Ashland was
exposed to short-term interest rate fluctuations on $439 million of debt
obligations at September 30, 2004.
During 2005, Ashland expects capital expenditures of approximately
$280 million, excluding any buyouts of current leases, compared with $210
million in 2004. Most of the increase is planned for APAC and Valvoline.
Improvements in APAC's equipment management processes and a sizable lease
program during the past two years has allowed a reduction in capital
expenditures during that period. Valvoline's increase reflects capital
spending on various organic growth and efficiency improvement projects. In
2004, Ashland initiated a multi-year SAP enterprise resource planning (ERP)
project that is expected to be implemented world-wide across Ashland's
Chemical Sector to achieve increased efficiency and effectiveness in supply
chain, financial, and environmental, health and safety processes. Capital
costs for this project through 2007 are expected to total in the range of
$90 to $100 million, of which approximately $25 million is expected to be
spent in 2005. Ashland's capital requirements in 2005 for property
additions and dividends will be met from internally generated funds.
Scheduled debt repayments of $439 million will be met either through
proceeds from the pending MAP Transaction or, if that transaction should
not close, partially from short-term investments and partially from
refundings.
The following table aggregates Ashland's commitments to make future
payments under existing contracts at September 30, 2004. Contractual cash
obligations for which the ultimate settlement amounts are not fixed and
determinable have been excluded.
2006- 2008- Later
(In millions) Total 2005 2007 2009 Years
-------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
Short-term and long-term debt (1) $ 2,151 $ 544 $ 341 $ 499 $ 767
Operating lease obligations 257 47 76 51 83
Purchase obligations
Construction subcontracts 570 513 57 - -
Construction materials 387 319 66 1 1
Other raw materials 173 75 88 10 -
Property, plant and equipment 6 6 - - -
Employee benefit obligations (2) 401 104 62 65 170
---------- ----------- ----------- ---------- ----------
Total contractual obligations $ 3,945 $ 1,608 $ 690 $ 626 $ 1,021
========== =========== =========== ========== ==========
(1) Includes principal and interest payments. Capitalized lease
obligations are not significant and are included in long-term debt.
(2) Includes estimated funding of Ashland's qualified U.S. and non-U.S.
pension plans for 2005, as well as projected benefit payments through
2014 under Ashland's nonqualified pension plans and other
postretirement benefit plans. See Note O of Notes to Consolidated
Financial Statements for additional information.
OFF-BALANCE SHEET ARRANGEMENTS
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation and off-road construction equipment, warehouses and
storage facilities, and other equipment, facilities and properties under
leasing agreements that expire at various dates. Under various operating
leases, Ashland has guaranteed the residual value of the underlying
property. If Ashland had canceled those leases at September 30, 2004, its
maximum obligations under the residual value guarantees would have amounted
to $98 million. Ashland does not expect to incur any significant charge to
earnings under these guarantees, $24 million of which relates to real
estate. These
M-7
lease agreements are with unrelated third party lessors and Ashland has no
additional contractual or other commitments to any parties to the leases.
Ashland has also guaranteed 38% of MAP's payments for certain crude
oil purchases, up to a maximum guarantee of $95 million. At September 30,
2004, Ashland's contingent liability under this guarantee amounted to the
full $95 million. Ashland has not made and does not expect to make any
payments under this guarantee.
During 2000, Ashland entered into a five-year agreement to sell, on an
ongoing basis with limited recourse, up to a $200 million undivided
interest in a designated pool of accounts receivable. Under the terms of
the agreement, new receivables are added to the pool and collections reduce
the pool. Since inception, interests totaling $150 million have been sold
on a continuous basis, except for a period between April 29 and September
7, 2003, when the full $200 million capacity was utilized. Ashland retains
a credit interest in these receivables and addresses its risk of loss on
this retained interest in its allowance for doubtful accounts. Receivables
sold exclude defaulted accounts or concentrations over certain limits with
any one customer.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of Ashland's 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, reserves and associated receivables for
asbestos litigation and environmental remediation, and income recognized
under construction contracts. 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 other assumptions or conditions.
Management has reviewed the estimates affecting these items with the Audit
Committee of Ashland's Board of Directors.
LONG-LIVED ASSETS
The cost of plant and equipment is depreciated by the straight-line
method over the estimated useful lives of the assets. Useful lives are
based on historical experience and are adjusted when changes in planned
use, technological advances or other factors show that a different life
would be more appropriate. Such costs are periodically reviewed for
recoverability when impairment indicators are present. Such indicators
include, among other factors, operating losses, unused capacity, market
value declines and technological obsolescence. Recorded values of property,
plant and equipment that are not expected to be recovered through
undiscounted future net cash flows are written down to current fair value,
which generally is determined from estimated discounted future net cash
flows (assets held for use) or net realizable value (assets held for sale).
During 2003, Ashland recognized an impairment charge of $10 million for a
maleic anhydride production facility that is shut down and not likely to
reopen based on internal analyses. Although circumstances can change
considerably over time, Ashland is not aware of any impairment indicators
that would necessitate periodic reviews on any significant asset within
property, plant and equipment at September 30, 2004.
Intangible assets with indefinite lives are subject to annual
impairment tests. Such tests are completed separately with respect to the
goodwill of each of Ashland's reporting units, which generally are
synonymous with its industry segments. However, the individual operating
divisions of Ashland Specialty Chemical are also considered reporting units
under FAS 142. Since market prices of Ashland's reporting units are not
readily available, management makes various estimates and assumptions in
determining the estimated fair values of those units. Fair values are based
principally on EBITDA (earnings before interest, taxes, depreciation and
amortization) multiples of peer group companies for each of these reporting
units. Ashland recognized impairment charges of $9 million in 2003 and $2
million in 2004 for goodwill associated with non-strategic businesses of
APAC identified for sale. The most recent annual impairment tests indicated
that the fair values of each of Ashland's reporting units with significant
goodwill were in excess of their carrying values, with the large majority
of those units exceeding carrying value by more than 20%. Despite that
excess, however, impairment charges could still be required if a
divestiture decision were made with respect to a particular business
included in one of the reporting units.
EMPLOYEE BENEFIT OBLIGATIONS
Ashland and its subsidiaries sponsor contributory and noncontributory
qualified and non-qualified defined benefit pension plans that cover
substantially all employees in the United States and in a number of other
countries. Benefits under these plans generally are based on employee's
years of service and compensation during the years immediately preceding
their retirement. In addition, the companies also sponsor unfunded
postretirement benefit
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plans, which provide health care and life insurance benefits for eligible
employees who retire or are disabled. Retiree contributions to Ashland's
health care plans are adjusted periodically, and the plans contain other
cost-sharing features, such as deductibles and coinsurance. Life insurance
plans generally are noncontributory.
The principal assumptions used to determine Ashland's pension and
other postretirement benefit costs are the discount rate, the rate of
compensation increase and the expected long-term rate of return on plan
assets. Because Ashland's retiree health care plans contain various caps
that limit Ashland's contributions and because medical inflation is
expected to continue at a rate in excess of these caps for the immediate
future, no assumption is needed with respect to future inflation in medical
costs.
The discount rates used to determine the present value of future
pension payments, healthcare costs and life insurance benefits are based on
the yields on high-quality, fixed-income investments (such as Moody's
Aa-rated corporate bonds), as adjusted for the longer duration of Ashland's
pension and other postretirement benefit obligations. The present value of
Ashland's future obligations under the pension and postretirement plans
were determined using discount rates of 6.0% at September 30, 2004, and
6.25% at September 30, 2003. Ashland's expense under these plans is
determined using the discount rate as of the beginning of the fiscal year,
which amounted to 6.25% for 2004, 6.75% for 2003, 7.25% for 2002, and will
be 6.0% for 2005.
The rate of compensation increase assumptions are 4.5% for 2004 and
5.0% for 2003 and 2002. The long-term expected rate of return on assets is
assumed to be 8.5% in 2004 and 9.0% in 2003 and 2002. The return on plan
assets is subject to wide year-to-year variances. For 2004, the pension
plan assets generated an actual return of 11.8%, compared to 19.1% in 2003
and losses of 6.7% in 2002. However, the expected return on plan assets is
designed to be a long-term assumption, and actual returns will be subject
to considerable year-to-year variances. Ashland has generated compounded
annual investment returns of 5.3% and 9.3% on its pension plan assets over
the last five-year and ten-year periods. Shown below are the estimated
increases in pension and postretirement expense that would have resulted
from a 1% change in each of the assumptions for each of the last three
years.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
INCREASE IN PENSIONS COSTS FROM
Decrease in the discount rate $ 21 $ 20 $ 21
Increase in the salary adjustment rate 9 9 10
Decrease in the expected return on plan assets 7 6 5
INCREASE IN OTHER POSTRETIREMENT COSTS FROM
Decrease in the discount rate 2 2 4
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.
During the December 2002 quarter, Ashland increased its reserve for
asbestos claims by $390 million to cover the litigation defense and claim
settlement costs for probable and reasonably estimable future payments
related to existing open claims, as well as an estimate of those that may
be filed in the future. Prior to December 31, 2002, the asbestos reserve
was based on the estimated costs that would be incurred to settle existing
open claims. A range of estimates of future asbestos claims and related
costs using various assumptions was developed with the assistance of
Hamilton, Rabinovitz & Alschuler, Inc. (HR&A). The methodology used by HR&A
to project future asbestos costs was based largely on Ashland's recent
experience, including claim-filing and settlement rates, disease mix, open
claims, and litigation defense and claim settlement costs. Ashland's claim
experience was compared to the results of previously conducted
epidemiological studies estimating the number of people likely to develop
asbestos-related diseases. Those studies were undertaken in connection with
national analyses of the population expected to have been exposed to
asbestos. Using that information, HR&A estimated 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 recorded the amount it believed
to be the best estimate, which represented the expected payments for
litigation defense and claim settlement costs during the next ten years.
Subsequent updates to this estimate have been made, with the assistance of
HR&A, based on a combination of a number of factors including the actual
volume of new claims, recent settlement costs, changes in the mix of
alleged disease,
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enacted legislative changes and other developments impacting Ashland's
estimate of future payments. Ashland's reserve for asbestos claims on an
undiscounted basis amounted to $618 million at September 30, 2004.
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 that assumes a run-out
of claims through 2055. 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. The total future litigation defense and
claim settlement costs on an undiscounted basis has been estimated within a
reasonably possible range of $400 million to $2.0 billion, depending on the
number of years those costs extend and other combinations of assumptions
selected. Ashland's reserve represents between 10 and 29 years of future
costs, depending on the model selected. 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 retained the services of Tillinghast-Towers Perrin to assist
management in the estimation of reasonably possible 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 is a
disagreement with these companies over the timing of recoveries. The
resolution of this disagreement could have a material effect on the value
of insurance recoveries from those companies. In estimating the value of
future recoveries, Ashland has 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. Ashland will continue to apply this methodology until such time
as the disagreement is resolved. On July 21, 2004, Ashland filed a demand
for arbitration to resolve the dispute concerning the interpretation of
this agreement.
At September 30, 2004, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers amounted to
$435 million, of which $54 million relates to costs previously paid. About
35% of the estimated receivables from insurance companies at September 30,
2004, are expected to be due from Equitas and other London companies. Of
the remainder, approximately 90% is expected to come from companies or
groups that are rated A or higher by A. M. Best.
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
September 30, 2004, such locations included 93 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, approximately 130 current and former
operating facilities (including certain operating facilities conveyed to
MAP) and about 1,220 service station properties. Ashland's reserves for
environmental remediation amounted to $152 million at September 30, 2004.
Such amounts 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.
M-10
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods, changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as environmental remediation
continues. Environmental remediation expense amounted to $2 million in
2004, $22 million in 2003 and $30 million in 2002.
No individual remediation location is material to Ashland, as its
largest reserve for any site is less than 10% of the remediation reserve.
As a result, Ashland's exposure to adverse developments with respect to any
individual site is not expected to be material, and these sites are in
various stages of ongoing remediation. Although environmental remediation
could have a material effect on results of operations if a series of
adverse developments occurs in a particular quarter or fiscal year, Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.
CONSTRUCTION CONTRACTS
Income related to construction contracts generally is recognized by
the units-of-production method, which is a variation of the
percentage-of-completion method. Construction jobs by their very nature are
subject to numerous risks that could create variances from expectations.
Such risks include changes in raw material and other costs, adverse weather
conditions and the performance of subcontractors and other entities. Income
is only certain after a job is completed, and the extent of completion can
be difficult to assess in certain circumstances.
The extent of completion for each production phase is determined by
reference to material quantities, labor hours, subcontract costs or other
factors that are believed to be most indicative of the progress made under
each phase of a project. Revenues earned are computed by reference to the
contract or detailed analyses of revenues and expenses by production phase
that supported the related construction contract or bid proposal. These
detailed analyses also serve as early indicators as to whether a
construction contract may ultimately be completed at a loss. Any
anticipated losses on such contracts are charged against operations as soon
as such losses are determined to be probable and estimable. In 2003,
reserves of $14 million were established for job losses related to a large
highway construction project in Virginia, reflecting weather-related cost
increases and construction delays resulting from record levels of rainfall.
In 2004, $5 million of that reserve, which was the amount that had been
provided for potential liquidated damages, was reversed into income when it
was determined that those damages would not apply.
Assumptions concerning the extent of completion can have a significant
effect on the income recognized on an individual construction project in
any period. However, the effects of individual assumptions on APAC's
reported results are mitigated to some extent by the significant number of
jobs in various stages of completion at any point in time.
OUTLOOK
Ashland's focus in 2005 will be to support long-term growth in
earnings and shareholder value through increased efficiency, effective
capital management and expansion in existing and adjacent markets. Earnings
performance will be driven largely by the strength of the U.S. and world
economies, in combination with Ashland's continuing efforts to gain greater
operational efficiency.
The Top-Quartile Cost Structure (TQCS) program initiated in 2003 has
yielded selling, general and administrative (SG&A) cost reductions in every
segment, evidenced by a reduction in total SG&A expense of $85 million in
2004. In 2005, this program's focus will transition from cost reductions
within the individual business segments to gains in process efficiency and
effectiveness across the segments.
Ashland is currently in the design phase of a multi-year SAP ERP
system that is scheduled to be implemented globally over the next three
years across Ashland's Chemical Sector. This project focuses on supply
chain, financial, and environmental, health and safety processes. It is
expected to provide an integrated system that streamlines and standardizes
these key processes on an end-to-end basis, with the foundational objective
being to deliver exemplary performance for Ashland's customers.
Positively impacting APAC, federal highway funding for the 14 states
in which APAC operates increased 22% in 2004 compared to 2003. An even
larger appropriation for fiscal year 2005 is pending in Congress. APAC
should also benefit from additional savings as a result of its multi-year
Project PASS business redesign initiative that focused on greater leverage
of purchasing power, improved equipment management and more efficient
administrative support. At September 30, 2004, construction backlog
amounted to $1.7 billion, essentially the same
M-11
as the previous year-end record set in 2003. Earnings are also expected to
benefit from 0.5% higher estimated margin on new construction contracts
awarded in 2004, compared with that of 2003. APAC will pursue organic
earnings growth through emphasizing large construction jobs and expanding
existing capabilities in the areas of concrete paving, bridge work and
milling.
Ashland Distribution's strong earnings performance is expected to
continue in 2005, with a focus on increasing sales volumes through greater
customer satisfaction from the delivery of on-time, accurate and complete
orders and overall reductions in the level of rework in the order-to-cash
process. Ashland Specialty Chemical should build on its successes achieved
in 2004 in the area of manufacturing expense reduction and quality
improvements through the application of Six Sigma principles, as well as
drive revenue growth through various new product initiatives. Building on
successes in 2004, Valvoline expects to further increase the share of its
lubricants product mix represented by premium brands, reflecting a strategy
of product innovation, while also driving growth in its Valvoline Instant
Oil Change business through preventative maintenance service. Ashland
expects to continue its growth outside the U.S. in areas where market
position or the external market dynamics offer attractive opportunities for
profitable growth.
Ashland was successful in 2004 in largely recovering raw material cost
increases through higher selling prices in most segments. However, Ashland
Specialty Chemical did experience a reduction in gross margin in 2004 due
to its inability to fully recover those higher costs. The ability to
recover any cost increases that may be experienced in 2005 will be an
important determinant of Ashland's earnings.
Ashland does not believe that the proposed MAP Transaction will close
earlier than March 2005. If certain rulings concerning the proposed
transaction are not received from the IRS, the transaction would have to be
modified or terminated. Forward petroleum markets currently suggest that
2005 should be another strong year for MAP and for Ashland's Refining and
Marketing segment during the period Ashland holds its interest in MAP.
Refining margins are, however, subject to considerable change as actual and
perceived supply and demand factors change.
Ashland's sales and operating revenues are normally subject to
seasonal variations. Although APAC normally enjoys a relatively long
construction season, most of its operating income is generated during the
construction period of May through October. In addition, MAP experiences
demand increases for gasoline during the summer driving season, for propane
and distillate during the winter heating season and for asphalt during the
construction season. The following table compares operating income by
quarter for the three years ended September 30, 2004 (amounts for each
quarter do not necessarily total to results for the year due to rounding).
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING INCOME (LOSS)
December 31 $ 92 $ 32 $ 96
March 31 10 (24) (3)
June 30 292 138 132
September 30 268 119 96
EFFECTS OF INFLATION AND CHANGING PRICES
Ashland's financial statements are prepared on the historical cost
method of accounting and, as a result, do not reflect changes in the
purchasing power of the U.S. dollar. Although annual inflation rates have
been low in recent years, Ashland's results are still affected by the
cumulative inflationary trend from prior years.
Certain of the industries in which Ashland and MAP operate are
capital-intensive, and replacement costs for their plant and equipment
generally would exceed their historical costs. Accordingly, depreciation,
depletion and amortization expense would be greater if it were based on
current replacement costs. However, since replacement facilities would
reflect technological improvements and changes in business strategies, such
facilities would be expected to be more productive than existing
facilities, mitigating part of the increased expense.
Ashland uses the LIFO method to value a substantial portion of its
inventories to provide a better matching of revenues with current costs.
However, LIFO values such inventories below their replacement costs.
Monetary assets (such as cash, cash equivalents and accounts
receivable) lose purchasing power as a result of inflation, while monetary
liabilities (such as accounts payable and indebtedness) result in a gain,
because they can be settled with dollars of diminished purchasing power.
Ashland's monetary liabilities exceed its monetary assets, which results in
net purchasing power gains and provides a hedge against the effects of
future inflation.
M-12
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis 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
expectations about the MAP Transaction. Although Ashland believes its
expectations are based on reasonable assumptions, it cannot assure the
expectations reflected herein will be achieved. These forward-looking
statements are 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) and are subject to a number
of risks, uncertainties, and assumptions that could cause actual results to
differ materially from those described in the forward-looking statements.
The risks, uncertainties, and assumptions include the possibility that
Ashland will be unable to fully realize the benefits anticipated from the
MAP Transaction; the possibility of failing to receive a favorable ruling
from the Internal Revenue Service; the possibility that Ashland fails to
obtain the approval of its shareholders; the possibility that the
transaction may not close or that Ashland may be required to modify some
aspect of the transaction to obtain regulatory approvals. Other factors and
risks affecting Ashland are contained in Risks and Uncertainties in Note A
to the Consolidated Financial Statements and in Item 1 of this annual
report on Form 10-K. Ashland undertakes no obligation to subsequently
update or revise these forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland selectively uses unleveraged interest rate swap agreements to
obtain greater access to the lower borrowing costs normally available on
floating-rate debt, while minimizing refunding risk through the issuance of
long-term, fixed-rate debt. At September 30, 2004, Ashland held interest
rate swaps that effectively converted the interest rates on $183 million of
fixed-rate, medium-term notes to floating rates based upon three-month
LIBOR. The swaps have been designated as fair value hedges, and since the
critical terms of the debt instruments and the swaps match, the hedges are
assumed to be perfectly effective, with the changes in fair value of the
debt and swaps offsetting.
Ashland regularly uses commodity-based and foreign currency derivative
instruments to manage its exposure to price fluctuations associated with
the purchase of natural gas, diesel fuel and gasoline, as well as certain
transactions denominated in foreign currencies. In addition, Ashland
opportunistically enters into petroleum crackspread futures to economically
hedge its refining and marketing earnings. Changes in the fair value of all
derivatives are recognized immediately in income unless the derivative
qualifies as a hedge of future cash flows or certain foreign currency
exposures. Ashland has designated a limited portion of its foreign currency
derivatives as qualifying for hedge accounting treatment, but their impact
on the consolidated financial statements is not significant. The potential
loss from a hypothetical 10% adverse change in commodity prices or foreign
currency rates on Ashland's open commodity-based and foreign currency
derivative instruments at September 30, 2004, would not significantly
affect Ashland's consolidated financial position, results of operations,
cash flows or liquidity.
MAP uses commodity-based derivatives and financial instrument-related
derivatives to manage its exposure to commodity price risk. MAP's
management has authorized the use of futures, forwards, swaps and
combinations of options, including written or net written options, related
to the purchase or sale of crude oil, refined products and natural gas.
Changes in the fair value of all derivatives are recognized immediately in
income.
M-13
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE
Page
-------
Report of management.................................................................................................... F-2
Report of independent registered public accounting firm................................................................. F-2
Consolidated financial statements:
Statements of consolidated income.............................................................................. F-3
Consolidated balance sheets ................................................................................... F-4
Statements of consolidated stockholders' equity................................................................ F-5
Statements of consolidated cash flows.......................................................................... F-6
Notes to consolidated financial statements..................................................................... F-7
Consolidated financial schedule:
Schedule II - Valuation and qualifying accounts................................................................ F-25
Information by industry segment.......................................................................................... F-26
Five-year selected financial information................................................................................. F-28
Schedules other than that listed above have been omitted because of
the absence of the conditions under which they are required or because the
information required is shown in the consolidated financial statements or
the notes thereto. Separate financial statements for MAP required by Rule
3-09 of Regulation S-X will be filed as an amendment to this annual report
on Form 10-K within 90 days after the end of MAP's fiscal year ending
December 31, 2004. Separate financial statements of other unconsolidated
affiliates are omitted because each company does not constitute a
significant subsidiary using the 20% tests when considered individually.
Summarized financial information for such affiliates is disclosed in Note D
of Notes to Consolidated Financial Statements.
F-1
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements
and other financial information included in this annual report on Form
10-K. Such financial statements are prepared in accordance with U.S.
generally accepted accounting principles. Accounting principles are
selected and information is reported which, using management's best
judgment and estimates, present fairly Ashland's consolidated financial
position, results of operations and cash flows. The other financial
information in this annual report on Form 10-K is consistent with the
consolidated financial statements.
Ashland's Code of Business Conduct summarizes our guiding values as
obeying the law, adhering to high ethical standards and acting as
responsible members of the communities where we operate. Compliance with
that Code forms the foundation of our internal control systems, which are
designed to provide reasonable assurance that Ashland's assets are
safeguarded and its records reflect, in all material respects, transactions
in accordance with management's authorization. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
control should not exceed the related benefits. Management believes that
adequate internal controls are maintained by the selection and training of
qualified personnel, by an appropriate division of responsibility in all
organizational arrangements, by the establishment and communication of
accounting and business policies, and by internal audits.
The Board, subject to stockholder ratification, selects and engages
the independent auditors based on the recommendation of the Audit
Committee. The Audit Committee, composed of directors who are not members
of management, reviews the adequacy of Ashland's policies, procedures and
controls, the scope of auditing and other services performed by the
independent auditors, and the scope of the internal audit function. The
Committee holds meetings with Ashland's internal auditor and independent
auditors, with and without management present, to discuss the findings of
their audits, the overall quality of Ashland's financial reporting and
their evaluation of Ashland's internal controls.
Ernst & Young, independent auditors, are engaged to audit Ashland's
consolidated financial statements. Their audit includes a review of
Ashland's internal controls to the extent they consider necessary in the
circumstances, and their report follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of
Ashland Inc. and consolidated subsidiaries as of September 30, 2004 and
2003, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 2004. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of Ashland Inc.'s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above (appearing
on pages F-3 to F-27 of this annual report on Form 10-K) present fairly, in
all material respects, the consolidated financial position of Ashland Inc.
and consolidated subsidiaries at September 30, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the financial statements, in 2003 Ashland
Inc. changed its methods of accounting for employee stock options and
variable interest entities and in 2002 Ashland Inc. changed its method of
accounting for goodwill and other intangible assets.
Ernst & Young LLP
Cincinnati, Ohio
November 3, 2004
F-2
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended September 30
(In millions except per share data) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues $ 8,301 $ 7,566 $ 7,390
Equity income - Note D 432 301 181
Other income 48 45 46
----------- ----------- -----------
8,781 7,912 7,617
COSTS AND EXPENSES
Cost of sales and operating expenses 6,948 6,390 6,115
Selling, general and administrative expenses 1,171 1,256 1,181
----------- ----------- -----------
8,119 7,646 7,296
----------- ----------- -----------
OPERATING INCOME 662 266 321
Net interest and other financial costs - Note E (114) (128) (138)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 548 138 183
Income taxes - Note J (150) (44) (68)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 398 94 115
Results from discontinued operations (net of income taxes) - Note N (20) (14) 13
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 378 80 128
Cumulative effect of accounting changes (net of income taxes) - Note A - (5) (11)
----------- ----------- -----------
NET INCOME $ 378 $ 75 $ 117
=========== =========== ===========
EARNINGS PER SHARE - NOTE A
Basic
Income from continuing operations $ 5.69 $ 1.37 $ 1.67
Results from discontinued operations (.28) (.19) .19
Cumulative effect of accounting changes - (.08) (.17)
----------- ----------- -----------
Net income $ 5.41 $ 1.10 $ 1.69
=========== =========== ===========
Diluted
Income from continuing operations $ 5.59 $ 1.37 $ 1.64
Results from discontinued operations (.28) (.19) .19
Cumulative effect of accounting changes - (.08) (.16)
----------- ----------- -----------
Net income $ 5.31 $ 1.10 $ 1.67
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-3
Ashland Inc. and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30
(In millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 243 $ 223
Accounts receivable (less allowances for doubtful accounts of
$41 million in 2004 and $35 million in 2003) 1,290 1,135
Inventories - Note A 458 441
Deferred income taxes - Note J 103 142
Other current assets 208 144
---------- ----------
2,302 2,085
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) - Note D 2,713 2,448
Goodwill - Note A 513 523
Asbestos insurance receivable (noncurrent portion) - Note M 399 399
Other noncurrent assets 319 279
---------- ----------
3,944 3,649
PROPERTY, PLANT AND EQUIPMENT
Cost
APAC 1,302 1,337
Ashland Distribution 356 357
Ashland Specialty Chemical 780 723
Valvoline 466 452
Corporate 200 178
---------- ----------
3,104 3,047
Accumulated depreciation, depletion and amortization (1,848) (1,775)
---------- ----------
1,256 1,272
---------- ----------
$ 7,502 $ 7,006
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
CURRENT LIABILITIES
Debt due within one year
Revolving credit facility $ 40 $ -
Current portion of long-term debt 399 102
Trade and other payables 1,362 1,371
Income taxes 14 11
---------- ----------
1,815 1,484
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Note E 1,109 1,512
Employee benefit obligations - Note O 428 385
Deferred income taxes - Note J 367 291
Reserves of captive insurance companies 179 168
Asbestos litigation reserve (noncurrent portion) - Note M 568 560
Other long-term liabilities and deferred credits 330 353
Commitments and contingencies - Notes F and M
---------- ----------
2,981 3,269
STOCKHOLDERS' EQUITY - Notes E, K and L
Preferred stock, no par value, 30 million shares authorized - -
Common stock, par value $1.00 per share, 300 million shares authorized
Issued - 72 million shares in 2004 and 68 million shares in 2003 72 68
Paid-in capital 478 350
Retained earnings 2,262 1,961
Accumulated other comprehensive loss (106) (126)
---------- ----------
2,706 2,253
---------- ----------
$ 7,502 $ 7,006
========== ==========
See Notes to Consolidated Financial Statements.
F-4
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 2001 $ 69 $ 363 $ 1,920 $ (126) $ 2,226
Total comprehensive income (1) 117 (68) 49
Cash dividends, $1.10 per common share (76) (76)
Issued 382,646 common shares under
stock incentive and other plans (2) 16 16
Repurchase of 1,219,600 common shares (1) (41) (42)
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2002 68 338 1,961 (194) 2,173
Total comprehensive income (1) 75 68 143
Cash dividends, $1.10 per common share (75) (75)
Issued 81,698 common shares under
stock incentive and other plans (2) 12 12
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2003 68 350 1,961 (126) 2,253
Total comprehensive income (1) 378 20 398
Cash dividends, $1.10 per common share (77) (77)
Issued 3,310,204 common shares under
stock incentive and other plans (2) 4 128 132
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2004 (3) $ 72 $ 478 $ 2,262 $ (106) $ 2,706
========== ========== ========== ========== ==========
(1) Reconciliations of net income to total comprehensive income follow.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------
Net income $ 378 $ 75 $ 117
Minimum pension liability adjustment (21) 24 (144)
Related tax benefit (expense) 8 (9) 56
Unrealized translation gains 32 53 19
Related tax benefit 1 - 1
---------- ---------- ----------
Total comprehensive income $ 398 $ 143 $ 49
========== ========== ==========
(2) Includes income tax benefits resulting from the exercise of stock
options of $16 million in 2004 and $2 million in 2002. The amount in
2003 was not significant.
(3) At September 30, 2004, the accumulated other comprehensive loss of
$106 million (after tax) was comprised of net unrealized translation
gains of $23 million and a minimum pension liability of $129 million.
See Notes to Consolidated Financial Statements.
F-5
Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended September 30
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
Income from continuing operations $ 398 $ 94 $ 115
Expense (income) not affecting cash
Depreciation, depletion and amortization 193 204 208
Deferred income taxes 125 49 (121)
Equity income from affiliates (432) (301) (181)
Distributions from equity affiliates 169 203 201
Other items 2 1 -
Change in operating assets and liabilities (1) (246) (8) (54)
----------- ----------- -----------
209 242 168
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt - - 55
Proceeds from issuance of common stock 108 2 11
Repayment of long-term debt (100) (216) (140)
Repurchase of common stock - - (42)
Increase (decrease) in short-term debt 40 (10) 10
Dividends paid (77) (75) (76)
----------- ----------- -----------
(29) (299) (182)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (210) (112) (178)
Purchase of operations - net of cash acquired (5) (5) (15)
Proceeds from sale of operations 48 7 -
Other - net 26 13 26
----------- ----------- -----------
(141) (97) (167)
----------- ----------- -----------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS 39 (154) (181)
Cash provided (used) by discontinued operations (19) 287 35
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20 133 (146)
Cash and cash equivalents - beginning of year 223 90 236
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 243 $ 223 $ 90
=========== =========== ===========
DECREASE (INCREASE) IN OPERATING ASSETS (1)
Accounts receivable $ (157) $ (79) $ 110
Inventories (14) 15 12
Deferred income taxes 2 22 17
Other current assets (64) (5) 30
Investments and other assets (15) 7 41
INCREASE (DECREASE) IN OPERATING LIABILITIES (1)
Trade and other payables (15) 115 (132)
Income taxes (19) (50) (18)
Noncurrent liabilities 36 (33) (114)
----------- ----------- -----------
CHANGE IN OPERATING ASSETS AND LIABILITIES $ (246) $ (8) $ (54)
=========== =========== ===========
(1) Excludes changes resulting from operations acquired or sold.
See Notes to Consolidated Financial Statements.
F-6
Ashland Inc. and Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ashland
and its majority owned subsidiaries. Investments in joint ventures and 20%
to 50% owned affiliates are accounted for on the equity method. In January
2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." Beginning July 1, 2003, the lessor entity in one of Ashland's
lease programs was consolidated in Ashland's financial statements under FIN
46, resulting in a pretax charge of $8 million ($5 million net of income
taxes) for the cumulative effect of this accounting change. Property, plant
and equipment increased by $27 million and long-term debt increased by $35
million as a result of the consolidation of the lessor entity. Ashland
canceled the lease and purchased the assets from the lessor in October
2003.
RISKS AND UNCERTAINTIES
The preparation of Ashland's 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, reserves and associated receivables for
asbestos litigation and environmental remediation, and income recognized
under construction contracts. 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.
Ashland's results, including those of Marathon Ashland Petroleum LLC
(MAP), are affected by domestic and international economic, political,
legislative, regulatory and legal actions, as well as weather conditions.
Economic conditions, such as recessionary trends, inflation, interest and
monetary exchange rates, and changes in the prices of crude oil, petroleum
products and petrochemicals, can have a significant effect on operations.
Political actions may include changes in the policies of the Organization
of Petroleum Exporting Countries or other developments involving or
affecting oil-producing countries, including military conflict, embargoes,
internal instability or actions or reactions of the U.S. government in
anticipation of, or in response to, such actions. While Ashland maintains
reserves for anticipated liabilities and carries various levels of
insurance, Ashland could be affected by civil, criminal, regulatory or
administrative actions, claims or proceedings relating to asbestos,
environmental remediation or other matters. In addition, climate and
weather can significantly affect Ashland's results from several of its
operations, such as APAC's construction activities and MAP's refined
product sales.
INVENTORIES
(In millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------
Chemicals and plastics $ 370 $ 333
Construction materials 71 67
Petroleum products 61 66
Other products 45 48
Supplies 6 5
Excess of replacement costs over LIFO carrying values (95) (78)
----------- -----------
$ 458 $ 441
=========== ===========
Chemicals, plastics and petroleum products with a replacement cost of
$286 million at September 30, 2004, and $279 million at September 30, 2003,
are valued using the last-in, first-out (LIFO) method. The remaining
inventories are stated generally at the lower of cost (using the first-in,
first-out [FIFO] or average cost methods) or market.
LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE ASSETS
The cost of plant and equipment is depreciated by the straight-line
method over the estimated useful lives of the assets. Such costs are
periodically reviewed for recoverability when impairment indicators are
present. Such
F-7
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (continued)
indicators include, among other factors, operating losses, unused capacity,
market value declines and technological obsolescence. Recorded values of
property, plant and equipment that are not expected to be recovered through
undiscounted future net cash flows are written down to current fair value,
which generally is determined from estimated discounted future net cash
flows (assets held for use) or net realizable value (assets held for sale).
During 2003, Ashland recognized an impairment charge of $10 million for a
maleic anhydride production facility that is shutdown and not likely to
reopen based on internal analyses.
As of October 1, 2001, Ashland adopted FASB Statement No. 142 (FAS
142), "Goodwill and Other Intangible Assets." Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
subject to annual impairment tests. As a result of the adoption of FAS 142,
it was determined the goodwill of Ashland Distribution was impaired.
Accordingly, an impairment loss of $14 million ($11 million net of income
taxes) was recorded as a cumulative effect of accounting change as of
October 1, 2001. Ashland recognized impairment charges of $9 million in
2003 and $2 million in 2004 for goodwill associated with non-strategic
businesses of APAC identified for sale.
All of Ashland's intangible assets are subject to amortization. These
intangible assets (included in other noncurrent assets) and the related
amortization expense are not material to Ashland's consolidated financial
position or results of operations.
Following is a progression of goodwill by segment for the year ended
September 30, 2004.
Ashland
Specialty
(In millions) APAC Chemical Valvoline Total
---------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2003 $ 426 $ 91 $ 6 $ 523
Goodwill assigned to sold businesses (13) - - (13)
Impairment losses (2) - - (2)
Currency translation adjustments - 5 - 5
---------- ----------- ----------- -----------
Balance at September 30, 2004 $ 411 $ 96 $ 6 $ 513
========== =========== =========== ===========
DERIVATIVE INSTRUMENTS
Ashland selectively uses unleveraged interest rate swap agreements to
obtain greater access to the lower borrowing costs normally available on
floating-rate debt, while minimizing refunding risk through the issuance of
long-term, fixed-rate debt. At September 30, 2004, Ashland held interest
rate swaps that effectively converted the interest rates on $183 million of
fixed-rate, medium-term notes to floating rates based upon three-month
LIBOR. The swaps have been designated as fair value hedges, and since the
critical terms of the debt instruments and the swaps match, the hedges are
assumed to be perfectly effective, with the changes in fair value of the
debt and swaps offsetting. Settlements of terminated swaps are amortized to
interest expense over the remaining term of the debt.
Ashland regularly uses commodity-based and foreign currency derivative
instruments to manage its exposure to price fluctuations associated with
the purchase of natural gas, diesel fuel and gasoline, as well as certain
transactions denominated in foreign currencies. In addition, Ashland
opportunistically enters into petroleum crackspread futures to economically
hedge its refining and marketing earnings. Changes in the fair value of all
derivatives are recognized immediately in income unless the derivative
qualifies as a hedge of future cash flows or certain foreign currency
exposures. Ashland has designated a limited portion of its foreign currency
derivatives as qualifying for hedge accounting treatment, but their impact
on the consolidated financial statements is not significant.
MAP uses commodity-based derivatives and financial instrument-related
derivatives to manage its exposure to commodity price risk. MAP's
management has authorized the use of futures, forwards, swaps and
combinations of options, including written or net written options, related
to the purchase or sale of crude oil, refined products and natural gas.
Changes in the fair value of all derivatives are recognized immediately in
income.
ENVIRONMENTAL COSTS
Accruals for environmental costs are recognized when it is probable a
liability has been incurred and the amount of that liability can be
reasonably estimated. Such costs are charged to expense if they relate to
the remediation of
F-8
conditions caused by past operations or are not expected to mitigate or
prevent contamination from future operations. Accruals are recorded at
undiscounted amounts based on experience, assessments and current
technology, without regard to any third-party recoveries and are regularly
adjusted as environmental assessments and remediation efforts continue.
STOCK INCENTIVE PLANS
As of October 1, 2002, Ashland began expensing employee stock options
in accordance with FASB Statement No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," and its related amendments. Ashland elected the
modified prospective method of adoption, under which compensation costs
recorded in the year ended September 30, 2003 were the same as that which
would have been recorded had the recognition provisions of FAS 123 been
applied from its original effective date. Results for prior periods were
not restated. Prior to October 1, 2002, Ashland accounted for stock options
under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," and related Interpretations, and no expense was
recorded. In 2004, Ashland began granting stock-settled stock appreciation
rights (SARs), which are expensed like stock options in accordance with FAS
123. In addition to stock options and SARs, Ashland grants nonvested stock
awards to key employees and directors, which are expensed over their
vesting period under either APB 25 or FAS 123. See Note L for the impact of
this accounting change on net income and earnings per share.
EARNINGS PER SHARE
Following is the computation of basic and diluted earnings per share
(EPS) from continuing operations.
(In millions except per share data) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
NUMERATOR
Numerator for basic and diluted EPS -
Income from continuing operations $ 398 $ 94 $ 115
=========== =========== ===========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 70 68 69
Common shares issuable upon exercise of stock options 1 1 1
----------- ----------- -----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 71 69 70
=========== =========== ===========
EPS FROM CONTINUING OPERATIONS
Basic $ 5.69 $ 1.37 $ 1.67
Diluted 5.59 1.37 1.64
OTHER
Cash equivalents include highly liquid investments maturing within
three months after purchase.
Income related to construction contracts generally is recognized by
the units-of-production method, which is a variation of the
percentage-of-completion method. Any anticipated losses on such contracts
are charged against operations as soon as such losses are determined to be
probable and estimable. Other revenues generally are recognized when
products are shipped or services are provided to customers and the sales
price is fixed or determinable and collectibility is reasonably assured.
Costs associated with revenues, including shipping and handling costs, are
recorded in cost of sales and operating expenses.
Because Ashland's products generally are sold without any extended
warranties, liabilities for product warranties are insignificant. Costs of
product warranties generally are expensed as incurred.
Advertising costs ($78 million in 2004, $77 million in 2003 and $78
million in 2002) and research and development costs ($43 million in 2004,
$36 million in 2003 and $34 million in 2002) are expensed as incurred.
Certain prior year amounts have been reclassified in the consolidated
financial statements and accompanying notes to conform to 2004
classifications.
F-9
NOTE B - INFORMATION BY INDUSTRY SEGMENT
Ashland's operations are managed along industry segments, which
include APAC, Ashland Distribution, Ashland Specialty Chemical, Valvoline,
and Refining and Marketing. Information by industry segment is shown on
pages F-26 and F-27.
The APAC group of companies performs contract construction work, such
as paving, repairing and resurfacing highways, streets, airports,
residential and commercial developments, sidewalks, and driveways; grading
and base work; and excavation and related activities in the construction of
bridges and structures, drainage facilities and underground utilities in 14
southern and midwestern states. APAC also produces and sells construction
materials, such as hot-mix asphalt, crushed stone and other aggregate and
ready-mix concrete.
Ashland Distribution distributes chemicals, plastics, composites and
fine ingredients in North America and plastics in Europe, and provides
environmental services throughout North America.
Ashland Specialty Chemical manufactures composites, adhesives, and
casting binder chemicals for use in the transportation and construction
industries. Ashland Specialty Chemical also manufactures water treatment
chemicals for use in the general industrial and merchant marine markets.
Valvoline is a marketer of premium-branded automotive and commercial
oils, automotive chemicals, appearance products and automotive services,
with sales in more than 100 countries. Valvoline is engaged in the "fast
oil change" business through owned and franchised service centers operating
under the Valvoline Instant Oil Change name.
The Refining and Marketing segment includes Ashland's 38% ownership
interest in Marathon Ashland Petroleum LLC (MAP) and other activities
associated with refining and marketing. MAP was formed January 1, 1998,
combining the major elements of the refining, marketing and transportation
operations of Ashland and Marathon Oil Company. MAP has seven refineries
with a combined crude oil refining capacity of 948,000 barrels per calendar
day, 84 light products and asphalt terminals in the Midwest and Southeast
United States, about 5,650 retail marketing outlets in 17 states and
significant pipeline holdings. Ashland accounts for its investment in MAP
using the equity method.
Information about Ashland's domestic and international operations
follows. Ashland has no material operations in any individual international
country.
Revenues from Property, plant
external customers and equipment
------------------------------------- ------------------------
(In millions) 2004 2003 2002 2004 2003
---------------------------------------------------------------------------------------------------------------------
United States $ 7,406 $ 6,787 $ 6,662 $ 1,105 $ 1,140
International 1,375 1,125 955 151 132
---------- ----------- ----------- ----------- -----------
$ 8,781 $ 7,912 $ 7,617 $ 1,256 $ 1,272
========== =========== =========== =========== ===========
F-10
NOTE C - RELATED PARTY TRANSACTIONS
Ashland sells chemicals and lubricants to MAP and purchases petroleum
products from MAP. Such transactions are in the ordinary course of business
at negotiated prices comparable to those of transactions with other
customers and suppliers. In addition, Ashland leases certain facilities to
MAP, and provides certain information technology and administrative
services to MAP. The following table indicates the amounts of these
transactions for each of the last three years ended September 30. Ashland's
transactions with other affiliates and related parties were not
significant.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Ashland's sales to MAP $ 21 $ 23 $ 24
Ashland's purchases from MAP 274 247 217
Ashland's costs charged to MAP 2 3 6
Ashland has entered into a revolving credit agreement providing for
short-term loans, at Ashland's discretion, to MAP at competitive rates.
Under the agreement, Ashland may loan up to $190 million to MAP. No loans
were outstanding under the agreement at September 30, 2004 and 2003.
Interest income received from MAP in all three years was not significant.
Ashland has guaranteed 38% of MAP's payments for certain crude oil
purchases, up to a maximum guarantee of $95 million. At September 30, 2004,
Ashland's contingent liability under this guarantee amounted to $95
million. Although Ashland has not made and does not expect to make any
payments under this guarantee, it has recorded the fair value of this
guarantee obligation, which is not significant.
NOTE D - UNCONSOLIDATED AFFILIATES
Ashland accounts for its investment in MAP on the equity method. Under
the agreements related to its formation, MAP was organized by Ashland and
Marathon Oil Company (Marathon) as a limited liability company for an
initial term expiring on December 31, 2022, subject to automatic ten-year
extensions unless a termination notice is given by either parent. The
parents also entered into a put/call agreement that could be exercised by
either parent at any time after December 31, 2004. Under that agreement,
Ashland will have the right to sell all of its ownership interest in MAP to
Marathon for an amount equal to 85% (90% if equity securities are used) of
the fair market value of that ownership interest, payable in cash or
Marathon debt or equity securities. Similarly, Marathon will have the right
to purchase all of Ashland's ownership interest in MAP for an amount equal
to 115% of the fair market value of that ownership interest, payable in
cash. Neither Ashland nor Marathon has the right to exercise their
respective put and call rights unless the agreement described below is
terminated.
On March 19, 2004, Ashland announced the signing of an agreement under
which it would transfer its 38% interest in MAP and two wholly-owned
businesses to Marathon in a transaction structured to be generally tax free
and valued at approximately $3.0 billion. The two other businesses are
Ashland's maleic anhydride business and 61 Valvoline Instant Oil Change
(VIOC) centers. The transaction is subject to several previously disclosed
conditions, including approval by Ashland's shareholders, consent from
Ashland's public debt holders and receipt of a favorable private letter
ruling from the Internal Revenue Service (IRS) with respect to the tax
treatment. Ashland has filed registration statements and proxy materials
with the Securities and Exchange Commission (SEC) and is responding to
comments. In addition, Ashland submitted a request to the IRS for a private
letter ruling on the tax-free status of the proposed transaction. Ashland
continues to discuss the complex tax issues related to this transaction
with the IRS. Ashland has not resolved all issues with the IRS and is
exploring alternatives for the resolution of these issues. At this time,
Ashland cannot predict whether the requested rulings will be received. If
the requested rulings are not received, the transaction would have to be
modified or terminated. In any event, Ashland does not believe that a
transaction will close earlier than March 2005.
Summarized financial information reported by MAP and other companies
accounted for on the equity method is presented in the following table,
along with a summary of the amounts recorded in Ashland's consolidated
financial statements. Since MAP is organized as a limited liability company
that has elected to be taxed as a partnership, the parents are responsible
for income taxes applicable to their share of MAP's taxable income. The net
income of MAP reflected below does not include any provision for income
taxes that will be incurred by its parents. At September 30, 2004,
Ashland's retained earnings included $378 million of undistributed earnings
from unconsolidated affiliates accounted for on the equity method.
F-11
NOTE D - UNCONSOLIDATED AFFILIATES (continued)
Other
(In millions) MAP affiliates Total
----------------------------------------------------------------------------------------------------------------------
September 30, 2004
Financial position
Current assets $ 5,265 $ 160
Current liabilities (3,436) (87)
----------- ----------
Working capital 1,829 73
Noncurrent assets 5,219 78
Noncurrent liabilities (724) (14)
----------- ----------
Stockholders' equity $ 6,324 $ 137
=========== ==========
Results of operations
Sales and operating revenues $ 40,672 $ 409
Income from operations 1,129 51
Net income 1,118 44
Amounts recorded by Ashland
Investments and advances 2,713 (1) 54 $ 2,767
Equity income 405 27 432
Distributions received 146 23 169
September 30, 2003
Financial position
Current assets $ 3,889 $ 149
Current liabilities (2,640) (82)
----------- ----------
Working capital 1,249 67
Noncurrent assets 4,946 99
Noncurrent liabilities (586) (59)
----------- ----------
Stockholders' equity $ 5,609 $ 107
=========== ==========
Results of operations
Sales and operating revenues $ 32,034 $ 336
Income from operations 810 41
Net income 795 34
Amounts recorded by Ashland
Investments and advances 2,448 47 $ 2,495
Equity income 285 16 301
Distributions received 197 6 203
September 30, 2002
Results of operations
Sales and operating revenues $ 25,063 $ 237
Income from operations 511 24
Net income 502 16
Amounts recorded by Ashland
Equity income 176 5 $ 181
Distributions received 196 5 201
(1) At September 30, 2004, Ashland's investment exceeds its equity in the
net assets of MAP by $310 million, of which $135 million represents
plant and equipment that will continue to be amortized, and $175
million represents goodwill. Straight-line amortization of the excess
investment that was charged against equity income amounted to $16
million in each of the three years ended September 30, 2004.
F-12
NOTE E - DEBT
(In millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------
Medium-term notes, due 2005-2025, interest at a weighted
average rate of 8% at September 30, 2004 (6.9% to 9.4%) $ 524 $ 578
8.80% debentures, due 2012 250 250
7.83% medium-term notes, Series J, due 2005 229 229
Pollution control and industrial revenue bonds, due
2005-2022, interest at a weighted average rate of 5.7%
at September 30, 2004 (1.7% to 7.1%) 168 176
6.86% medium-term notes, Series H, due 2009 150 150
6.625% senior notes, due 2008 150 150
Other 37 81
----------- -----------
Total long-term debt 1,508 1,614
Current portion of long-term debt (399) (102)
----------- -----------
Long-term debt (less current portion) $ 1,109 $ 1,512
=========== ===========
Aggregate maturities of long-term debt are $399 million in 2005, $62
million in 2006, $125 million in 2007, $168 million in 2008 and $211
million in 2009. Interest payments on all indebtedness amounted to $116
million in 2004, $125 million in 2003 and $138 million in 2002. The
weighted average interest rate on short-term borrowings outstanding was
2.7% at September 30, 2004. No short-term borrowings were outstanding at
September 30, 2003.
Ashland has two revolving credit agreements providing for up to $350
million in borrowings, neither of which was used during 2004. The agreement
providing for $250 million in borrowings expires on April 1, 2007. The
agreement providing for $100 million in borrowings expires on April 1,
2005. In the June 2004 quarter, Ashland executed an additional $200 million
revolving credit agreement which expires March 31, 2005. Ashland has
utilized this facility to fund currently maturing long-term debt and
certain lease payments, and had $40 million outstanding under this facility
at September 30, 2004. While the revolving credit agreements contain
covenants limiting new borrowings based on Ashland's stockholders' equity,
these agreements would have permitted an additional $2.4 billion of
borrowings at September 30, 2004. Additional permissible borrowings are
increased (decreased) by 150% of any increase (decrease) in stockholders'
equity.
NET INTEREST AND OTHER FINANCIAL COSTS
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Interest expense $ 114 $ 123 $ 135
Expenses on sales of accounts receivable (see Note G) 3 3 4
Other financial costs 3 3 3
Interest income (6) (1) (4)
----------- ----------- -----------
$ 114 $ 128 $ 138
=========== =========== ===========
NOTE F - LEASES
Ashland and its subsidiaries are lessees of office buildings, retail
outlets, transportation and off-road construction equipment, warehouses and
storage facilities, and other equipment, facilities and properties under
leasing agreements that expire at various dates. Under various operating
leases, Ashland has made guarantees with respect to the residual value of
the underlying property. If Ashland had canceled those leases at September
30, 2004, its maximum obligations under the residual value guarantees would
have amounted to $98 million. Ashland does not expect to incur any
significant charge to earnings under these guarantees, $24 million of which
relates to real estate. These lease agreements are with unrelated third
party lessors and Ashland has no additional contractual or other
commitments to any party to the leases. Capitalized lease obligations are
not significant and are included in long-term debt. Future minimum rental
payments at September 30, 2004, and rental expense under operating leases
follow.
F-13
NOTE F - LEASES (continued)
(In millions)
Future minimum rental payments Rental expense 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
2005 $ 47 Minimum rentals
2006 41 (including rentals under
2007 35 short-term leases) $ 104 $ 98 $ 103
2008 28 Contingent rentals 3 3 3
2009 23 Sublease rental income (2) (2) (2)
Later years 83 ----------- ----------- -----------
---------- $ 105 $ 99 $ 104
$ 257 =========== =========== ===========
==========
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," was issued in November 2002. Upon entering new
lease agreements with residual value guarantees after December 31, 2002,
Ashland is required to record the fair value at inception of these
guarantee obligations in accordance with FIN 45. At September 30, 2004 and
2003, the recorded value of such obligations was not significant.
NOTE G - SALE OF ACCOUNTS RECEIVABLE
On March 15, 2000, Ashland entered into a five-year agreement to sell,
on an ongoing basis with limited recourse, up to a $200 million undivided
interest in a designated pool of accounts receivable. Under the terms of
the agreement, new receivables are added to the pool and collections reduce
the pool. Since inception, interests totaling $150 million have been sold
on a continuous basis, except for a period between April 29 and September
7, 2003, when the full $200 million capacity was utilized. Ashland retains
a credit interest in these receivables and addresses its risk of loss on
this retained interest in its allowance for doubtful accounts. Receivables
sold exclude defaulted accounts or concentrations over certain limits with
any one customer. The costs of these sales are based on the buyer's
short-term borrowing rates and approximated 2.2% at September 30, 2004, and
1.5% at September 30, 2003.
NOTE H - FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
Ashland uses interest rate swaps and commodity-based and foreign
currency derivative instruments as described in Note A. Open contracts
other than interest rate swaps were not significant at September 30, 2004
and 2003.
FAIR VALUES
The carrying amounts and fair values of Ashland's significant
financial instruments at September 30, 2004 and 2003 are shown below. The
fair values of cash and cash equivalents, investments of captive insurance
companies and the revolving credit facility approximate their carrying
amounts. The fair values of long-term debt are based on quoted market
prices or, if market prices are not available, the present values of the
underlying cash flows discounted at Ashland's incremental borrowing rates.
The fair values of interest rate swaps are based on quoted market prices.
2004 2003
----------------------- ------------------------
Carrying Fair Carrying Fair
(In millions) amount value amount value
---------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 243 $ 243 $ 223 $ 223
Interest rate swaps (1) (1) 1 1
Investments of captive insurance companies (1) 13 13 13 13
Liabilities
Revolving credit facility 40 40 - -
Long-term debt (including current portion) 1,508 1,675 1,614 1,809
(1) Included in other noncurrent assets in the Consolidated Balance Sheets.
F-14
NOTE I - ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
Several small acquisitions were completed by APAC, Ashland Specialty
Chemical and Valvoline during the three years ended September 30, 2004.
These acquisitions were accounted for as purchases and did not have a
significant effect on Ashland's consolidated financial statements.
DIVESTITURES
During 2003, APAC sold the assets of its Nashville division and
certain ready-mix operations in Missouri. During 2004, APAC sold much of
its remaining ready-mix operations and certain other operations. None of
these divestitures had a significant effect on Ashland's consolidated
financial statements. See Note N for a discussion of the sale of the
Electronic Chemicals division of Ashland Specialty Chemical in 2003.
NOTE J - INCOME TAXES
A summary of the provision for income taxes related to continuing
operations follows.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Current (1)
Federal $ (6) $ (17) $ 151
State 6 (3) 22
Foreign 25 15 16
----------- ----------- -----------
25 (5) 189
Deferred 125 49 (121)
----------- ----------- -----------
$ 150 $ 44 $ 68
=========== =========== ===========
(1) Income tax payments amounted to $84 million in 2004, $24 million in
2003 and $158 million in 2002.
Deferred income taxes are provided for income and expense items
recognized in different years for tax and financial reporting purposes.
Ashland has not recorded deferred income taxes on the undistributed
earnings of certain foreign subsidiaries and foreign corporate joint
ventures. Management intends to indefinitely reinvest such earnings, which
amounted to $160 million at September 30, 2004. Because of significant
foreign tax credits, it is estimated that U.S. federal income taxes of
approximately $17 million would be incurred if those earnings were
distributed. Temporary differences that give rise to significant deferred
tax assets and liabilities follow.
(In millions) 2004 2003
---------------------------------------------------------------------------------------------------------------------
Employee benefit obligations $ 201 $ 219
Environmental, self-insurance and litigation reserves (net of receivables) 183 196
Compensation accruals 74 59
Uncollectible accounts receivable 15 18
Other items 37 61
----------- -----------
Total deferred tax assets 510 553
----------- -----------
Property, plant and equipment 182 189
Investment in unconsolidated affiliates 592 513
----------- -----------
Total deferred tax liabilities 774 702
----------- -----------
Net deferred tax liability $ 264 $ 149
=========== ===========
Ashland's income tax expense for 2004 included $48 million in tax
benefits related to prior years. During the year, Ashland reached
resolution with the Internal Revenue Service on several open tax matters
from prior years, resulting in a tax benefit of $33 million as a result of
the reduction of amounts previously provided as contingent tax liabilities.
In addition, Ashland recognized federal income tax benefits associated with
a claim for additional research and development tax credits valued at $15
million.
F-15
NOTE J - INCOME TAXES (continued)
The U.S. and foreign components of income from continuing operations
before income taxes and a reconciliation of the statutory federal income
tax with the provision for income taxes follow.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
United States $ 441 $ 60 $ 114
Foreign 107 78 69
----------- ----------- -----------
$ 548 $ 138 $ 183
=========== =========== ===========
Income taxes computed at U.S. statutory rate (35%) $ 192 $ 48 $ 64
Increase (decrease) in amount computed resulting from
Resolution of prior-year contingency issues (33) - -
Claim for prior-year research and development credits (15) - -
State income taxes 18 3 1
Net impact of foreign results - (2) 3
Business meals and entertainment 2 3 3
Deductible dividends under employee stock ownership plan (2) (2) (3)
Life insurance expense (income) (2) (2) 4
Other items (10) (4) (4)
----------- ----------- -----------
Income taxes $ 150 $ 44 $ 68
=========== =========== ===========
NOTE K - CAPITAL STOCK
Under Ashland's Shareholder Rights Plan, each common share is
accompanied by one right to purchase one-thousandth share of preferred
stock for $140. Each one-thousandth share of preferred stock will be
entitled to dividends and to vote on an equivalent basis with one common
share. The rights are neither exercisable nor separately transferable from
the common shares unless a party acquires or tenders for more than 15% of
Ashland's common stock. If any party acquires more than 15% of Ashland's
common stock or acquires Ashland in a business combination, each right
(other than those held by the acquiring party) will entitle the holder to
purchase preferred stock of Ashland or the acquiring company at a
substantial discount. The rights expire on May 16, 2006, and Ashland's
Board of Directors can amend certain provisions of the Plan or redeem the
rights at any time prior to their becoming exercisable.
At September 30, 2004, 500,000 shares of cumulative preferred stock
are reserved for potential issuance under the Shareholder Rights Plan and
7.1 million common shares are reserved for issuance under stock incentive
and deferred compensation plans.
NOTE L - STOCK INCENTIVE PLANS
Ashland has stock incentive plans under which key employees or
directors are granted stock options, stock-settled stock appreciation
rights (SARs) or nonvested stock awards. Stock options and SARs are granted
to employees at a price equal to the fair market value of the stock on the
date of grant and become exercisable over periods of one to four years.
Unexercised options and SARs lapse 10 years after the date of grant.
Nonvested stock awards entitle employees or directors to vote the shares
and to receive any dividends thereon. However, such shares are subject to
forfeiture upon termination of service before the vesting period ends.
During 2004, Ashland granted 216,900 nonvested stock awards with a weighted
average fair value of $40.87 per share. Nonvested stock awards in 2003 and
2002 were not significant.
As discussed in Note A, Ashland began expensing employee stock options
and SARs in accordance with FAS 123 in 2003. The following table
illustrates the effect on net income and earnings per share if FAS 123 had
been applied in 2002 to all outstanding and unvested awards. The fair value
per share of options or SARs granted was determined using the Black-Scholes
option pricing model with the indicated assumptions.
F-16
(In millions except per share data) 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------
Net income as reported $ 378 $ 75 $ 117
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 4 5 -
Deduct: Total stock-based employee compensation expense
determined under FAS 123 for all awards, net of related tax effects (4) (5) (4)
----------- ----------- ----------
Pro forma net income $ 378 $ 75 $ 113
=========== =========== ==========
Earnings per share:
Basic - as reported $ 5.41 $ 1.10 $ 1.69
Basic - pro forma 5.41 1.10 1.63
Diluted - as reported 5.31 1.10 1.67
Diluted - pro forma 5.31 1.10 1.61
Weighted average fair value per share of options or SARs granted 12.65 6.71 5.35
Assumptions (weighted average)
Risk-free interest rate 3.4% 3.1% 2.9%
Expected dividend yield 2.0% 3.3% 3.8%
Expected volatility 25.9% 27.3% 26.7%
Expected life (in years) 5.0 5.0 5.0
A progression of activity and various other information relative to
stock options and SARs is presented in the following table.
2004 2003 2002
-------------------------- ------------------------- --------------------------
Number Weighted Weighted Weighted
of average average average
(In thousands except common exercise price Common exercise price Common exercise price
per share data) shares per share shares per share shares per share
--------------------------------------------------------------------------------------------------------------------------
Outstanding-beginning of year (1) 7,807 $ 37.17 7,482 $ 37.28 6,735 $ 38.41
Granted 603 54.65 537 33.42 1,210 29.05
Exercised (3,100) 35.29 (103) 27.96 (413) 31.34
Canceled (145) 36.04 (109) 35.27 (50) 38.54
----------- ----------- ----------
Outstanding-end of year (1) 5,165 40.37 7,807 37.17 7,482 37.28
=========== =========== ==========
Exercisable-end of year 4,067 39.37 6,491 38.25 5,537 39.34
(1) Shares of common stock available for future grants of options or
awards amounted to 1,098,000 at September 30, 2004, and 1,860,000 at
September 30, 2003. Exercise prices per share for options and SARs
outstanding at September 30, 2004 ranged from $25.00 to $34.00 for
1,579,000 shares, from $35.88 to $43.13 for 1,829,000 shares, and
from $44.20 to $54.81 for 1,757,000 shares. The weighted average
remaining contractual life of the options and SARs was 6.0 years.
NOTE M - 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.
(In thousands) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Open claims - beginning of year 198 160 167
New claims filed 29 66 45
Claims settled (7) (7) (15)
Claims dismissed (24) (21) (37)
----------- ----------- -----------
Open claims - end of year 196 198 160
=========== =========== ===========
F-17
NOTE M - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Since October 1, 2001, Riley has been dismissed as a defendant in 73%
of the resolved claims. Amounts spent on litigation defense and claim
settlements averaged $1,655 per claim resolved in 2004, compared to $1,610
in 2003 and $723 in 2002. A progression of activity in the asbestos reserve
is presented in the following table.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Asbestos reserve - beginning of period $ 610 $ 202 $ 199
Expense incurred 59 453 41
Amounts paid (51) (45) (38)
----------- ----------- -----------
Asbestos reserve - end of period $ 618 $ 610 $ 202
=========== =========== ===========
During the December 2002 quarter, Ashland increased its reserve for
asbestos claims by $390 million to cover the litigation defense and claim
settlement costs for probable and reasonably estimable future payments
related to existing open claims, as well as an estimate of those that may
be filed in the future. Prior to December 31, 2002, the asbestos reserve
was based on the estimated costs that would be incurred to settle existing
open claims. A range of estimates of future asbestos claims and related
costs using various assumptions was developed with the assistance of
Hamilton, Rabinovitz & Alschuler, Inc. (HR&A). The methodology used by HR&A
to project future asbestos costs was based largely on Ashland's recent
experience, including claim-filing and settlement rates, disease mix, open
claims, and litigation defense and claim settlement costs. Ashland's claim
experience was compared to the results of previously conducted
epidemiological studies estimating the number of people likely to develop
asbestos-related diseases. Those studies were undertaken in connection with
national analyses of the population expected to have been exposed to
asbestos. Using that information, HR&A estimated 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 recorded the amount it believed
to be the best estimate, which represented the expected payments for
litigation defense and claim settlement costs during the next ten years.
Subsequent updates to this estimate have been made, with the assistance of
HR&A, based on a combination of a number of factors including the actual
volume of new claims, recent settlement costs, changes in the mix of
alleged disease, enacted legislative changes and other developments
impacting Ashland's estimate of future payments. Ashland's reserve for
asbestos claims on an undiscounted basis amounted to $618 million at
September 30, 2004, compared to $610 million at September 30, 2003.
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 that assumes a run-out
of claims through 2055. 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. The total future litigation defense and
claim settlement costs on an undiscounted basis has been estimated within a
reasonably possible range of $400 million to $2.0 billion, depending on the
number of years those costs extend and other combinations of assumptions
selected. Ashland's reserve represents between 10 and 29 years of future
costs, depending on the model selected. 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.
F-18
Ashland retained the services of Tillinghast-Towers Perrin to assist
management in the estimation of reasonably possible 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 is a
disagreement with these companies over the timing of recoveries. The
resolution of this disagreement could have a material effect on the value
of insurance recoveries from those companies. In estimating the value of
future recoveries, Ashland has 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. Ashland will continue to apply this methodology until such time
as the disagreement is resolved. On July 21, 2004, Ashland filed a demand
for arbitration to resolve the dispute concerning the interpretation of
this agreement.
At September 30, 2004, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers amounted to
$435 million, of which $54 million relates to costs previously paid.
Receivables from insurance companies amounted to $429 million at September
30, 2003. About 35% of the estimated receivables from insurance companies
at September 30, 2004, are expected to be due from Equitas and other London
companies. Of the remainder, approximately 90% is expected to come from
companies or groups that are rated A or higher by A. M. Best.
ENVIRONMENTAL PROCEEDINGS
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
September 30, 2004, such locations included 93 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, approximately 130 current and former
operating facilities (including certain operating facilities conveyed to
MAP) and about 1,220 service station properties. Ashland's reserves for
environmental remediation amounted to $152 million at September 30, 2004,
and $174 million at September 30, 2003. Such amounts 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.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
costs. Such uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate cleanup
methods, changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number and
financial strength of other potentially responsible parties at multiparty
sites. Ashland regularly adjusts its reserves as environmental remediation
continues. Environmental remediation expense amounted to $2 million in
2004, $22 million in 2003 and $30 million in 2002.
No individual remediation location is material to Ashland as its
largest reserve for any site is less than 10% of the remediation reserve.
As a result, Ashland's exposure to adverse developments with respect to any
individual site is not expected to be material, and these sites are in
various stages of ongoing remediation. Although environmental remediation
could have a material effect on results of operations if a series of
adverse developments occurs in a particular quarter or fiscal year, Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various claims,
lawsuits and administrative proceedings pending or threatened against
Ashland and its current and former subsidiaries. Such actions are with
respect to commercial matters, product liability, toxic tort liability, and
other environmental matters, which seek remedies or damages, some of which
are for substantial amounts. While these actions are being contested, their
outcome is not predictable.
F-19
NOTE N - DISCONTINUED OPERATIONS
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, a former subsidiary. During the quarter ended
December 31, 2002, Ashland increased its reserve for asbestos claims by
$390 million to cover litigation defense and claim settlement costs
expected to be paid through December 2012. Because insurance provides
reimbursements for most of these costs and coverage-in-place agreements
exist with the insurance companies that provide substantially all of the
coverage being accessed, the increase in the asbestos reserve was offset in
part by probable insurance recoveries valued at $235 million. The resulting
$155 million pretax charge to income, net of deferred income tax benefits
of $60 million, was reflected as an after-tax loss from discontinued
operations of $95 million in the Statement of Consolidated Income for the
three months ended December 31, 2002. Additional reserves have been
provided since then to reflect updates in the estimate of potential
payments for litigation defense and claim settlement costs. See Note M for
further discussion of Ashland's asbestos-related litigation.
On August 29, 2003, Ashland sold the net assets of its Electronic
Chemicals business and certain related subsidiaries in a transaction valued
at approximately $300 million before tax. Electronic Chemicals was a part
of Ashland Specialty Chemical, providing ultra pure chemicals and other
products and services to the worldwide semiconductor industry, with
revenues of $215 million in 2003 and $217 million in 2002. The sale
reflects Ashland's strategy to optimize its business mix and focus greater
attention on the remaining chemical and transportation construction
operations where it can achieve strategic advantage. Ashland's after-tax
proceeds were used primarily to reduce debt. During 2004, Ashland recorded
certain minor adjustments to the gain reported in 2003.
During 2004, Ashland reached resolution with the Internal Revenue
Service on several open tax matters from prior years. In addition to
amounts reported in income from continuing operations, favorable resolution
was also reached on matters associated with previously discontinued
businesses, resulting in a $1 million tax benefit from the associated
reduction in contingent tax liabilities previously recorded.
Components of amounts reflected in the income statements related to
discontinued operations are presented in the following table.
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Reserves for asbestos-related litigation $ (29) $ (178) $ -
Electronic Chemicals - 17 17
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS
Electronic Chemicals (2) 101 -
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (31) (60) 17
INCOME TAX BENEFIT (EXPENSE)
Income (loss) from discontinued operations
Reserves for asbestos-related litigation 11 69 -
Electronic Chemicals - (3) (4)
Gain (loss) on disposal of discontinued operations (1) (20) -
Resolution of tax contingency issues 1 - -
----------- ----------- -----------
RESULTS FROM DISCONTINUED OPERATIONS $ (20) $ (14) $ 13
=========== =========== ===========
F-20
NOTE O - EMPLOYEE BENEFIT PLANS
PENSION PLANS
Ashland and its subsidiaries sponsor contributory and noncontributory
qualified and non-qualified defined benefit pension plans that cover
substantially all employees in the United States and in a number of other
countries. Included in the following pension plan disclosures for the first
time in 2004 are amounts related to employees in the United Kingdom, the
Netherlands and Canada. Amounts for prior years have not been restated, as
the impact on Ashland's financial position and results of operations would
not be material.
Ashland's funding policy is to fully fund the accumulated benefit
obligations of its qualified U.S. plans with the level of contributions
being determined annually to achieve that objective over time. In addition,
Ashland has non-qualified unfunded pension plans which provide supplemental
defined benefits to those employees whose benefits under the qualified
pension plans are limited by the Employee Retirement Income Security Act of
1974 and the Internal Revenue Code. Ashland funds the costs of the
non-qualified plans as the benefits are paid. Pension obligations for
employees of non-U.S. consolidated subsidiaries are provided for by
depositing funds with trustees or by book reserves in accordance with local
practices and regulations of the respective countries.
Prior to July 1, 2003, benefits under Ashland's U.S. pension plans
generally were based on employees' years of service and compensation during
the years immediately preceding their retirement. Although certain changes
were implemented on that date, the pension benefits of employees with at
least ten years of service were not affected. As of July 1, 2003, the
pension benefits of affected employees were converted to cash balance
accounts. Such employees received an initial account balance equal to the
present value of their accrued benefits under the previous plan on that
date. Pension benefits for these employees are based on the balances in
their accounts upon retirement.
OTHER POSTRETIREMENT BENEFIT PLANS
Ashland and its subsidiaries sponsor healthcare and life insurance
plans for eligible employees who retire or are disabled. Ashland's retiree
life insurance plans are noncontributory, while Ashland shares the costs of
providing healthcare coverage with its retired employees through premiums,
deductibles and coinsurance provisions. Ashland funds its share of the
costs of the postretirement benefit plans as the benefits are paid.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. Among other
things, the Act will expand Medicare to include an outpatient prescription
drug benefit beginning in 2006, as well as provide a subsidy for sponsors
of retiree health care plans that provide a benefit that is at least
actuarially equivalent to the Medicare Act benefits. In May 2004, the
Financial Accounting Standards Board issued Staff Position No. FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." Pending
final guidance on determining actuarial equivalency, Ashland has not yet
been able to determine the impact of the Act on its postretirement benefit
plans. As a result, the accumulated postretirement benefit obligation and
net periodic postretirement benefit costs do not reflect the effects of the
Act.
On July 1, 2003, Ashland implemented changes in the way it shares the
cost of healthcare coverage with future retirees. These changes did not
affect the previous cost-sharing program for retirees or for employees
meeting certain qualifications at that date. However, Ashland did amend
that program to limit its annual per capita costs to an amount equivalent
to base year per capita costs, plus annual increases of up to 1.5% per year
for costs incurred after January 1, 2004. Under a previous amendment, base
year costs were limited to the amounts incurred in 1992, plus annual
increases of up to 4.5% per year thereafter. Premiums for retiree
healthcare coverage are equivalent to the excess of the estimated per
capita costs over the amounts borne by Ashland.
Employees who were employed on June 30, 2003, who did not meet the
required qualifications were allocated notional accounts that can only be
used to pay all or part of the premiums for retiree healthcare coverage.
Such premiums represent the full costs of providing that coverage, without
any subsidy from Ashland. Employees must meet certain requirements upon
separation in order to have access to their notional accounts. Retirees
will continue to have access to Ashland coverage after their notional
accounts are exhausted, but they will be responsible for paying the full
premiums. New hires after June 30, 2003, will have access to any retiree
health coverage that may be provided, but will have no company funds
available to help pay for such coverage.
F-21
NOTE O - EMPLOYEE BENEFIT PLANS (continued)
OBLIGATIONS AND FUNDED STATUS
Ashland uses a measurement date of September 30 for its pension and
postretirement benefit plans. Summaries of the change in benefit
obligations, plan assets, funded status of the plans, amounts recognized in
the balance sheet, and assumptions used to determine the U.S. plan benefit
obligations for 2004 and 2003 follow. Non-U.S. pension plans use
assumptions generally consistent with those of U.S. plans.
Other postretirement
Pension plans benefit plans
----------------------- ------------------------
(In millions) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at October 1 $ 1,192 (1)$ 983 $ 296 $ 361
Service cost 51 43 9 11
Interest cost 73 65 17 22
Participant contributions 1 - 11 12
Benefits paid (48) (37) (31) (33)
Plan amendments - (6) - (95)
Changes in assumptions 44 63 7 19
Foreign currency exchange rate changes 8 - - -
Other-net 9 (10) (11) (1)
---------- ---------- ----------- ----------
Benefit obligations at September 30 $ 1,330 $ 1,101 $ 298 $ 296
========== ========== =========== ==========
Change in plan assets
Value of plan assets at October 1 $ 740 (1)$ 551
Actual return on plan assets 86 99
Employer contributions 137 61
Participant contributions 1 -
Benefits paid (43) (33)
Foreign currency exchange rate changes 5 -
Other 6 2
---------- ----------
Value of plan assets at September 30 $ 932 $ 680
========== ==========
Funded status of the plans
Unfunded benefit obligation $ (398) $ (421) $ (298) $ (296)
Unrecognized net actuarial loss 422 (1) 385 77 87
Unrecognized prior service credit (2) (3) (85) (100)
---------- ---------- ----------- ----------
Net amount recognized $ 22 $ (39) $ (306) $ (309)
========== ========== =========== ==========
Amounts recognized in the balance sheet
Accrued benefit liabilities $ (191) $ (231) $ (306) $ (309)
Intangible assets 1 1 - -
Accumulated other comprehensive loss 212 191 - -
---------- ---------- ----------- ----------
Net amount recognized $ 22 $ (39) $ (306) $ (309)
========== ========== =========== ==========
U.S. plan assumptions
Discount rate 6.00% 6.25% 6.00% 6.25%
Rate of compensation increase 4.50% 4.50% - -
(1) Beginning balances have been adjusted to include $91 million of
benefit obligations, $60 million of plan assets, and $31 million of
unrecognized net actuarial loss for certain non-U.S. pension plans.
F-22
The accumulated benefit obligation for all pension plans was $1,118
million at September 30, 2004 and $909 million at September 30, 2003.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows.
2004 2003
---------------------------------- -----------------------------------
Non- Non-
Qualified qualified Qualified qualified
(In millions) plans (1) plans Total plans plans Total
---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 1,195 $ 110 $ 1,305 $ 1,002 $ 99 $ 1,101
Accumulated benefit obligation 1,000 98 1,098 819 90 909
Fair value of plan assets 908 - 908 680 - 680
(1) Includes qualified U.S. and non-U.S. pension plans.
COMPONENTS OF NET PERIODIC BENEFIT COSTS
The plan amendments in 2003 and 1992 previously discussed under other
postretirement benefit plans reduced Ashland's accrued obligations under
those plans, and the reductions are being amortized to income over future
periods. Such amortization reduced Ashland's net periodic benefit costs for
other postretirement benefits by $15 million in 2004, $10 million in 2003
and $8 million in 2002. At September 30, 2004, the remaining unrecognized
prior service credit resulting from the changes amounted to $85 million,
and will reduce future costs by $9 million in 2005, $8 million in 2006 and
approximately $8 million annually thereafter through 2014.
The following table summarizes the components of pension and other
postretirement benefit costs, and the assumptions used to determine net
periodic benefit costs for U.S. plans. Non-U.S. pension plans use
assumptions generally consistent with those of U.S. plans.
Pension benefits Other postretirement benefits
------------------------------------ -----------------------------------
(In millions) 2004 2003 2002 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------
Net periodic benefit costs
Service cost $ 51 $ 43 $ 43 $ 9 $ 11 $ 12
Interest cost 73 65 59 17 22 23
Expected return on plan assets (66) (51) (47) - - -
Amortization of prior service
cost (credit) - - 1 (15) (10) (8)
Amortization of net actuarial loss 29 30 18 5 3 2
----------- ---------- ----------- ---------- ----------- ----------
$ 87 $ 87 $ 74 $ 16 $ 26 $ 29
=========== ========== =========== ========== =========== ==========
U.S. plan assumptions
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Rate of compensation increase 4.50% 5.00% 5.00% - - -
Expected long-term rate of
return on plan assets 8.50% 9.00% 9.00% - - -
PLAN ASSETS
The expected long-term rate of return on U. S. pension plan assets for
2004 of 8.5% was based on an assumed real rate of return of 5.5% and a
projected long-term inflation rate of 3%. The basis for determining the
expected long-term rate of return is a combination of future return
assumptions for various asset classes in Ashland's investment portfolio,
historical analysis of previous returns, market indices, and a projection
of inflation.
Ashland's U. S. pension plan assets are managed by outside investment
managers, which are monitored monthly against investment return benchmarks
and Ashland's established investment strategy. Ashland's investment
strategy is designed to promote diversification to moderate volatility and
to balance the expected long-term rate of return with an acceptable risk
level. Investment managers are selected based on an analysis of, among
other things, their investment process, historical investment results,
frequency of management turnover, cost structure, and assets under
management. Assets are periodically reallocated between investment managers
to maintain an appropriate asset mix, diversification of investments and to
maximize returns.
F-23
NOTE O - EMPLOYEE BENEFIT PLANS (continued)
Ashland's investment strategy and management practices relative to
plan assets of non-U.S. plans generally are consistent with those for U.S.
plans, except in those countries where investment of plan assets is
dictated by applicable regulations.
The target allocation for 2004 by asset category and actual
allocations at September 30, 2004 and 2003 follow.
Target Actual at September 30
--------- -------------------------
(In millions) 2004 2004 2003
---------------------------------------------------------------------------------------------------------------------
Plan assets allocation
Equity securities 70% 68% 60%
Debt securities 30% 30% 36%
Other - 2% 4%
--------- --------- ---------
100% 100% 100%
========= ========= =========
CASH FLOWS
In fiscal 2005, Ashland expects to contribute $70 million to its U. S.
pension plans and $7 million to its non-U.S. pension plans. The following
benefit payments, which reflect future service, are expected to be paid in
each of the next five years and in aggregate for five years thereafter.
Other
Pension postretirement
(In millions) benefits benefits
---------------------------------------------------------------------------------------------------------------------
2005 $ 51 $ 21
2006 57 21
2007 61 22
2008 68 22
2009 70 23
2010-2014 451 122
OTHER PLANS
Certain union employees are covered under multiemployer pension plans
administered by unions. Amounts contributed to the plans by Ashland and
charged to expense amounted to $5 million annually in 2004, 2003 and 2002.
Ashland sponsors qualified savings plans to assist eligible employees
in providing for retirement or other future needs. Under such plans,
company contributions amounted to $23 million in 2004, $19 million in 2003,
and $17 million in 2002.
F-24
NOTE P - QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table presents quarterly financial information and per
share data relative to Ashland's common stock.
Quarters ended December 31 March 31 June 30 September 30
------------------- -------------------- ------------------- -------------------
(In millions except per share data) 2003 2002 2004 2003 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------------
Sales and operating revenues $ 1,936 $ 1,749 $ 1,825 $ 1,657 $ 2,206 $ 2,018 $ 2,334 $ 2,142
Operating income (loss) 92 32 10 (24) 292 138 268 119
Income (loss) from
continuing operations 39 (1) (11) (37) 167 71 203 61
Net income (loss) 34 (92) (16) (39) 161 70 200 137
Basic earnings (loss) per share
Continuing operations $ .56 $ (.02) $ (.16) $ (.54) $ 2.38 $ 1.04 $ 2.86 $ .89
Net income (loss) .49 (1.35) (.23) (.57) 2.29 1.02 2.81 2.00
Diluted earnings (loss) per share
Continuing operations $ .56 $ (.02) $ (.16) $ (.54) $ 2.35 $ 1.03 $ 2.81 $ .89
Net income (loss) .49 (1.35) (.23) (.57) 2.26 1.01 2.76 1.99
Common cash dividends per share $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275 $ .275
Market price per common share
High $ 44.55 $ 30.80 $ 52.20 $ 30.37 $ 53.35 $ 33.85 $ 56.71 $ 34.51
Low 33.19 23.60 43.73 25.91 44.25 28.66 48.40 30.27
Ashland Inc. and Consolidated Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Balance at Provisions Balance
beginning charged to Reserves Other at end
(In millions) of year earnings utilized changes of year
---------------------------------------------------------------------------------------------------------------------
Year ended September 30, 2004
Reserves deducted from asset accounts
Accounts receivable $ 35 $ 20 $ (16) $ 2 $ 41
Inventories 9 2 (1) - 10
---------------------------------------------------------------------------------------------------------------------
Year ended September 30, 2003
Reserves deducted from asset accounts
Accounts receivable $ 34 $ 18 $ (18) $ 1 $ 35
Inventories 12 2 (5) - 9
---------------------------------------------------------------------------------------------------------------------
Year ended September 30, 2002
Reserves deducted from asset accounts
Accounts receivable $ 33 $ 23 $ (23) $ 1 $ 34
Inventories 12 5 (5) - 12
---------------------------------------------------------------------------------------------------------------------
F-25
Ashland Inc. and Consolidated Subsidiaries
Information by Industry Segment
Years Ended September 30
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues
APAC $ 2,525 $ 2,400 $ 2,652
Ashland Distribution 3,199 2,811 2,541
Ashland Specialty Chemical 1,386 1,212 1,130
Valvoline 1,297 1,235 1,152
Intersegment sales (1)
Ashland Distribution (19) (21) (20)
Ashland Specialty Chemical (86) (69) (63)
Valvoline (1) (2) (2)
----------- ----------- -----------
8,301 7,566 7,390
Equity income
APAC 19 9 -
Ashland Specialty Chemical 8 7 4
Valvoline - - 1
Refining and Marketing 405 285 176
----------- ----------- -----------
432 301 181
Other income
APAC 22 - 12
Ashland Distribution 9 18 17
Ashland Specialty Chemical 16 10 4
Valvoline 4 5 6
Refining and Marketing (6) 2 2
Corporate 3 10 5
----------- ----------- -----------
48 45 46
----------- ----------- -----------
$ 8,781 $ 7,912 $ 7,617
=========== =========== ===========
Operating income
APAC $ 111 $ (42) $ 122
Ashland Distribution 78 32 1
Ashland Specialty Chemical 87 31 70
Valvoline 105 87 77
Refining and Marketing (2) 383 263 143
Corporate (102) (105) (92)
----------- ----------- -----------
$ 662 $ 266 $ 321
=========== =========== ===========
Assets
APAC $ 1,428 $ 1,481 $ 1,498
Ashland Distribution 922 856 884
Ashland Specialty Chemical 842 749 941
Valvoline 658 667 611
Refining and Marketing 2,742 2,484 2,409
Corporate (3) 910 769 379
----------- ----------- -----------
$ 7,502 $ 7,006 $ 6,722
=========== =========== ===========
F-26
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Investment in equity affiliates
APAC $ 6 $ 4 $ (2)
Ashland Specialty Chemical 40 35 30
Valvoline 7 8 9
Refining and Marketing 2,713 2,448 2,350
Corporate 1 - -
----------- ----------- -----------
$ 2,767 $ 2,495 $ 2,387
=========== =========== ===========
Expense (income) not affecting cash
Depreciation, depletion and amortization
APAC $ 95 $ 108 $ 114
Ashland Distribution 18 19 21
Ashland Specialty Chemical 41 40 38
Valvoline 27 26 24
Corporate 12 11 11
----------- ----------- -----------
193 204 208
Other noncash items (4)
APAC 20 (25) 24
Ashland Distribution 3 3 1
Ashland Specialty Chemical 8 (2) 3
Valvoline 2 4 (2)
Refining and Marketing (181) 2 (168)
Corporate 12 (30) 41
----------- ----------- -----------
(136) (48) (101)
----------- ----------- -----------
$ 57 $ 156 $ 107
=========== =========== ===========
Additions to property, plant and equipment
APAC $ 73 $ 47 $ 107
Ashland Distribution 10 5 15
Ashland Specialty Chemical 62 34 27
Valvoline 26 18 22
Corporate 39 8 7
----------- ----------- -----------
$ 210 $ 112 $ 178
=========== =========== ===========
(1) Intersegment sales are accounted for at prices that approximate market
value.
(2) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP, and other activities associated
with refining and marketing.
(3) Includes cash, cash equivalents and other unallocated assets.
(4) Includes deferred income taxes, equity income from affiliates net of
distributions, and other items not affecting cash.
F-27
Ashland Inc. and Consolidated Subsidiaries
Five-Year Selected Financial Information
Years Ended September 30
(In millions except per share data) 2004 2003 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------
Summary of operations
Revenues
Sales and operating revenues $ 8,301 $ 7,566 $ 7,390 $ 7,544 $ 7,785
Equity income 432 301 181 755 395
Other income 48 45 46 53 63
Cost and expenses
Cost of sales and operating expenses (6,948) (6,390) (6,115) (6,358) (6,517)
Selling, general and administrative expenses (1,171) (1,256) (1,181) (1,163) (1,081)
---------- ---------- ----------- ----------- -----------
Operating income 662 266 321 831 645
Net interest and other financial costs (114) (128) (138) (175) (194)
---------- ---------- ----------- ----------- -----------
Income from continuing operations
before income taxes 548 138 183 656 451
Income taxes (150) (44) (68) (266) (179)
---------- ---------- ----------- ----------- -----------
Income from continuing operations 398 94 115 390 272
Results from discontinued operations (20) (14) 13 32 (202)
---------- ---------- ----------- ----------- -----------
Income before cumulative effect
of accounting changes 378 80 128 422 70
Cumulative effect of accounting changes - (5) (11) (5) -
---------- ---------- ----------- ----------- -----------
Net income $ 378 $ 75 $ 117 $ 417 $ 70
========== ========== =========== =========== ===========
Balance sheet information
Current assets $ 2,302 $ 2,085 $ 2,071 $ 2,233 $ 2,173
Current liabilities 1,815 1,484 1,520 1,530 1,711
---------- ---------- ----------- ----------- -----------
Working capital $ 487 $ 601 $ 551 $ 703 $ 462
========== ========== =========== =========== ===========
Total assets $ 7,502 $ 7,006 $ 6,722 $ 7,128 $ 6,824
Short-term debt $ 40 $ - $ 10 $ - $ 245
Long-term debt (including current portion) 1,508 1,614 1,797 1,871 1,981
Stockholders' equity 2,706 2,253 2,173 2,226 1,965
---------- ---------- ----------- ----------- -----------
Capital employed $ 4,254 $ 3,867 $ 3,980 $ 4,097 $ 4,191
========== ========== =========== =========== ===========
Cash flow information
Cash flows from operations $ 209 $ 242 $ 168 $ 814 $ 468
Additions to property, plant and equipment 210 112 178 214 240
Cash dividends 77 75 76 76 78
Common stock information
Diluted earnings per share
Income from continuing operations $ 5.59 $ 1.37 $ 1.64 $ 5.54 $ 3.83
Net income 5.31 1.10 1.67 5.93 .98
Cash dividends per share 1.10 1.10 1.10 1.10 1.10
F-28
EXHIBIT INDEX
10.7 - Form of employment agreement between Ashland Inc. and an
executive officer.
10.14 - Form of Notice of Grant of Stock Appreciation Right (SAR) Award.
10.15 - Form of Restricted Stock Award.
10.16 - Form of Notice of Grant of Nonqualified Stock Option.
10.17 - Amended and Restated Limited Liability Company Agreement dated as
of December 31, 1998, of Marathon Ashland Petroleum LLC by and
between Ashland Inc. and Marathon Oil Company.
10.19 - Put/Call Registration Rights and Standstill Agreement, dated as of
January 1, 1998, including Amendment No. 1 thereto, dated
December 31, 1998, among Marathon Oil Company, USX Corporation,
Ashland Inc. and Marathon Ashland Petroleum LLC.
10.21 - Three-Year, $250 Million Revolving Credit Agreement dated as of
April 2, 2004
10.22 - 364-Day, $100 Million Revolving Credit Agreement dated as of
April 2, 2004
11 - Computation of Earnings Per Share (appearing on page F-9 of this
annual report on Form 10-K).
12 - Computation of Ratio of Earnings to Fixed Charges.
21 - List of Subsidiaries.
23.1 - Consent of Independent Registered Public Accounting Firm.
24 - Power of Attorney, including resolutions of the Board of Directors.
31.1 - Certification of James J. O'Brien, Chief Executive Officer of
Ashland, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 - Certification of J. Marvin Quin, Chief Financial Officer of Ashland,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 - Certification 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.
99.1 - Consent of Tillinghast-Towers Perrin.
99.2 - Consent of Hamilton, Rabinovitz & Alschuler, Inc.