Ashland Inc. Reports Operating Results (10-Q)

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May 09, 2009
Ashland Inc. (ASH, Financial) filed Quarterly Report for the period ended 2009-03-31.

Ashland Inc. is engaged in the business of providing products services and customer solutions throughout the world. Its businesses include road construction specialty chemicals lubricants car-care products chemical and plastics distribution and transportation fuels. They are market leaders in highway construction chemical and thermoplastic distribution specialty chemicals motor oil and car-care products. They also have an equity interest in petroleum refining and marketing. Ashland Inc. has a market cap of $1.91 billion; its shares were traded at around $25.95 with a P/E ratio of 13.7 and P/S ratio of 0.2. The dividend yield of Ashland Inc. stocks is 1.2%. Ashland Inc. had an annual average earning growth of 16.5% over the past 10 years.

Highlight of Business Operations:

Current Quarter – Ashland recorded net income and income from continuing operations of $48 million, or $.65 per diluted earnings per share, for the three months ended March 31, 2009 as compared to net income and income from continuing operations of $72 million, or $1.13 per diluted earnings per share, for the three months ended March 31, 2008. Operating income was $112 million for the current quarter as compared to $52 million of operating income for the prior quarter. Operating income for the current quarter as compared to the prior quarter included an additional $4 million of operating income as a result of the acquisitions of Hercules (on November 13, 2008) and Air Products (on June 30, 2008). Nonrecurring items during the current quarter impacting operating income include a $16 million charge for a purchase accounting adjustment related to the Hercules acquisition for inventory and $11 million for severance, asset impairment and accelerated depreciation charges for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs. These charges were partially offset by a currency gain on an intracompany loan of $5 million in the current quarter. The prior quarter included a $5 million charge for costs associated with the suspension of Ashland s joint venture with Cargill to manufacture bio-based propylene glycol. The prior quarter also included a one-time $23 million gain from the partial resolution of certain tax related matters with Marathon Oil Corporation related to the MAP Transaction, which was reported below operating income under the (loss) gain on the MAP Transaction caption of the Statement of Consolidated Income.

Year-to-Date – Ashland recorded a net loss of $71 million, or ($1.00) per diluted earnings per share, for the six months ended March 31, 2009 as compared to net income of $105 million, or $1.65 per diluted earnings per share, for the six months ended March 31, 2008. Loss from continuing operations for the six months ended March 31, 2009 was $71 million as compared to income from continuing operations of $110 million in the six months ended March 31, 2008. During the current period, Ashland incurred a $54 million loss related to cross-currency swaps and a $32 million loss on auction rate securities, which were both reported below operating income within the other expense caption of the Statement of Consolidated Income. In addition, Ashland incurred net interest and other financing expense of $82 million during the current period as compared to net interest and other financing income of $21 million in the prior period, with the current year expense due to interest attributable to the debt issued in conjunction with the financing of the Hercules acquisition. Income taxes were affected by the nondeductible portion of the other expense items previously identified as well as the negative effect of certain other tax items, which increased Ashland s net loss by $30 million.

Operating income for the six months ended March 31, 2009 was $105 million, an increase of $7 million compared to the $98 million in operating income earned during the six months ended March 31, 2008. The acquisition of Hercules operations reduced operating income by approximately $18 million for the six months ended March 31, 2009, primarily due to $47 million in nonrecurring purchase accounting adjustments related to inventory and in-process research and development. In addition, Ashland incurred $31 million for severance charges for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs. These key items, along with significant volume declines across all business segments, hindered operating results as compared to the prior period, but were more than offset by lower raw materials costs and the affects of pricing improvements, particularly among the Consumer Markets and Distribution segments.

Current Quarter – Revenues for the three months ended March 31, 2009 decreased $69 million, or 3%, compared to the March 2008 quarter primarily due to significant volume declines of $469 million, or 23%, as operating segments reported volume declines anywhere from 10% to 40% as a result of the global economic slowdown, particularly among the automotive, construction and recreational marine industries. Unfavorable currency exchange rates added an additional $93 million, or 5%, reduction in revenue with price and mix adding an additional $6 million reduction. These declines were offset by a $472 million, or 23%, increase in revenues related to the acquired Hercules businesses recorded during the current quarter. Revenues from the acquisition of Air Products pressure sensitive adhesive business and atmospheric emulsions business (Air Products) on June 30, 2008 contributed an additional $27 million, or 1%, in the current quarter.

Year-to-Date – Revenues for the six months ended March 31, 2009 decreased $8 million compared to the prior period. The current period included $711 million, or 18%, in additional revenues related to the acquired Hercules businesses. Significant volume declines decreased revenue by $790 million, or 20%, with unfavorable currency exchange rates decreasing revenue by $164 million, or 4%, compared to the prior period. These declines were partially offset by price and mix increases of $178 million, or 5%, across almost all operating segments as a result of successful price management throughout the current period. Revenues from the acquisition of Air Products contributed an additional $57 million, or 1%, in the current period.

Current Quarter – Cost of sales and operating expenses (cost of sales) for the March 2009 quarter decreased $194 million, or 11%, compared to the March 2008 quarter as increases related to the acquisitions of Hercules and Air Products were more than offset by declines in volume and raw material costs and a positive currency exchange impact in the current quarter as compared to the prior quarter. The acquisitions of Hercules and Air Products represented a $375 million, or 22%, increase in cost of sales for the three months ended March 31, 2009, which includes a nonrecurring charge of $16 million associated with the inventory fair value adjustment of Hercules acquired inventory, with change in product mix adding an additional $3 million. Volume declines reduced cost of sales by $368 million, or 21%, while currency exchange, due to the strengthening of the U.S. dollar, reduced cost of sales by $72 million, or 4%, as compared to the March 2008 quarter. Declining raw material costs decreased cost of sales by $132 million, or 8%, compared to the prior period. Gross profit as a percent of sales (gross profit margin) increased by 6.9 percentage points compared to the prior quarter as a result of the acquisition of higher margin businesses, the mix of revenue by operating segment and a realization of improved gross profit margins, particularly in Consumer Markets and Distribution.

Read the The complete ReportASH is in the portfolios of John Keeley of Keeley Fund Management, Charles Brandes of Brandes Investment.