Ashland Inc. reports preliminary net income of 65 cents per share
for fiscal second quarter
COVINGTON, Ky. – Ashland Inc. (NYSE: ASH) today announced preliminary(1) results for the quarter ended March 31, 2009, the second quarter of its 2009 fiscal year. On Nov. 13, 2008, Ashland completed the acquisition of Hercules Incorporated, which significantly impacted Ashland’s reported results. Ashland’s results for the March 2009 quarter were as follows: sales and operating revenues of $1,990 million; operating income of $112 million; and net income of $48 million, or 65 cents per share. Unadjusted earnings before interest, taxes, depreciation and amortization(2) were $205 million.
Key items affecting the March 2009 quarter were an unfavorable inventory fair value adjustment of $16 million pretax related to purchase accounting for the Hercules acquisition [14 cents earnings per share (EPS) impact] and severance, asset impairment and accelerated depreciation charges of $11 million pretax (10 cents EPS impact), partially offset by a currency gain on an intracompany loan of $5 million pretax (4 cents EPS impact). (Refer to Table 5 for the details of these key items.)
Adjusted Pro Forma Results(3)
Ashland believes the use of adjusted pro forma results enhances understanding of its current and future performance by providing more comparable results period to period. Thus, adjusting for the impact of key items in both the current and prior year and including Hercules’ results as if the acquisition had been completed on Oct. 1, 2007, Ashland’s results for the March 2009 quarter versus the March 2008 quarter would have been as follows:
| · | pro forma sales and operating revenue declined 24 percent from $2,617 million to $1,990 million; |
| · | adjusted pro forma operating income increased 25 percent from $107 million to $134 million; and |
| · | adjusted pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) increased 16 percent from $191 million to $221 million. |
Performance Summary
Commenting on Ashland’s adjusted pro forma second-quarter results, Chairman and Chief Executive Officer James J. O’Brien said, “We are encouraged by Ashland’s results for the March 2009 quarter in light of the significantly depressed demand environment. While volumes declined for all of our businesses anywhere from 10 percent to 40 percent versus the March 2008 quarter, improved gross profit percentage and reduced expenses, both from integration and other cost-reduction initiatives, drove the 16-percent increase in EBITDA.
“Our businesses successfully managed pricing in concert with significantly declining raw materials costs and also idled capacity, enabling Ashland to improve gross profit percentage by 480 basis points versus the prior-year quarter. We’ve achieved nearly $60 million of the $130 million annual run-rate savings projected from the integration of Hercules. In total, during the March quarter, we realized $60 million of savings from integration and cost-reduction initiatives, including roughly $40 million of SG&A reductions, as well as one-time benefits from our furlough program. Our annualized run-rate savings now stand at $217 million through the March 2009 quarter, reflecting significant progress toward our previously announced $265 million target.
“Consumer Markets achieved record quarterly earnings, while Ashland Distribution significantly improved EBITDA. EBITDA declines in our specialty chemicals businesses were generally in line with lower volume and continued to reflect the global economic downturn, particularly in the construction and transportation markets.”
Reinforcing the company’s near-term priority, O’Brien said, “Our primary objective as an organization is to generate cash and pay down debt. In the March quarter, we generated $220 million of cash flows from operating activities and paid down $206 million of debt, reducing our debt by more than 8 percent.”
Debt Covenant Status
Commenting on the status of Ashland’s debt covenants, O’Brien said, “We continue to be significantly favorable to our financial covenant requirements and expanded the cushions during the quarter. Our consolidated debt-to-EBITDA ratio was 2.8 times at March 31, 2009 – or 25-percent better than the covenant threshold. In addition, our fixed-charge coverage ratio was 2.4 times, nearly twice the minimum threshold. Ashland’s net worth stood at $3.5 billion, 16 percent above the minimum required by our debt covenants.”
Business Performance
In order to aid understanding of Ashland’s ongoing business performance, the results of Ashland’s business segments are presented on an adjusted pro forma basis as described under the heading “Adjusted Pro Forma Results” and reconciled to GAAP in footnote 3 of this news release.
Ashland Aqualon Functional Ingredients recorded sales and operating revenue of $223 million in the March 2009 quarter, a 13-percent decline versus the year-ago quarter, and volume per day declined 5 percent. Gross profit as a percent of sales declined 180 basis points to 29.6 percent. These results included a significant one-time sales transaction. Excluding the effects of this transaction, volume and sales were down 22 percent and 19 percent, respectively, and gross profit percentage was 31.2 percent. These results primarily reflect the worldwide decline in the construction market. Volume declines ranged from 21 percent in Asia Pacific to 30 percent in Europe. New products (i.e., those introduced in the past five years) represented 17 percent of sales in the quarter. In total, Functional Ingredients’ EBITDA in the March quarter declined 18 percent versus the prior March quarter, to $47 million, and represented 21.1 percent of sales, both of which closely approximated December 2008 quarterly results.
Ashland Hercules Water Technologies’ sales and operating revenue declined 17 percent to $433 million for the March 2009 quarter as compared with the same year-ago quarter. This primarily reflects a 15-percent volume decline, with little variation in the performance of North America, Europe and Asia. Gross profit as a percent of sales stood at 32.6 percent, 90 basis points below the March 2008 quarter. SG&A expenses declined by $27 million, or 17 percent. EBITDA declined 12 percent to $38 million in the quarter and represented 8.8 percent of sales, a 50 basis-point improvement.
Ashland Performance Materials’ sales and operating revenue of $259 million declined 35 percent versus the same prior-year quarter, and volume per day declined 23 percent. Both revenue and volume comparisons were affected by the acquisition of a line of business from Air Products in 2008. Excluding this effect, revenue decreased 41 percent, and volume decreased 37 percent, due to significant weakness in demand in all key geographies in both the transportation and construction markets. This was generally consistent with the overall composites and castings markets. Total gross profit versus the prior-year quarter declined as a result of the lower volume. Disciplined price management and savings from idling plant capacity drove improvements in gross profit percentage versus both the March 2008 and December 2008 quarters. A 21-percent reduction in SG&A expenses reflects the benefits of actions taken in this and prior quarters to reduce costs. Despite these improvements, EBITDA declined 26 percent to $23 million in the March 2009 quarter versus the prior-year March quarter, but improved 110 basis points to 8.9 percent of sales.
Ashland Consumer Markets’ sales and operating revenue was $407 million, a 1-percent increase over the March 2008 quarter, as average selling prices were above the year-ago quarter. Lubricant volume decreased by 10 percent, primarily due to declines in private-label sales volumes, which moderated as the quarter progressed. Raw material cost decreases, along with cost savings initiatives, strengthened gross margins. SG&A expenses declined 12 percent, further contributing to the record performance in the quarter. As a result, Consumer Markets generated quarterly EBITDA of $75 million, more than double the $34 million of EBITDA generated in the year-ago quarter. For the March 2009 quarter, EBITDA represented 18.4 percent of sales as compared with 8.5 percent in the prior-year quarter.
Ashland Distribution’s sales and operating revenue for the March 2009 quarter declined 35 percent to $698 million. Volume decreased 24 percent versus the prior-year quarter, with similar percentage declines in both the chemicals and plastics lines of business. Gross profit as a percent of sales improved to 12.8 percent versus 7.7 percent in the March 2008 quarter, more than offsetting the impact of volume declines. Margin benefited from a $7 million increase in quantity LIFO credit versus the March 2008 quarter. SG&A expenses were 17 percent below the prior-year quarter. EBITDA for the March 2009 quarter nearly doubled to $38 million and represented 5.4 percent of sales.
For the March 2009 quarter, no EBITDA was recorded for Unallocated and Other, as compared with $5 million of EBITDA in the same prior-year quarter.
Outlook
Commenting on Ashland’s outlook, O’Brien said, “Our focus continues to be on generating cash and paying down debt. It appears that demand could remain flat for the remainder of the year due to global macroeconomic dynamics. We expect to navigate this economic downturn and create value for our stakeholders by effectively managing our pricing, aggressively reducing our costs, and applying the cash we generate to reducing debt. We continue to resize our businesses to match current economic conditions and to better position the company for improved profitability and growth when the economy turns.”
Conference Call Webcast
Today at 9 a.m. (EDT), Ashland will provide a live webcast of its second-quarter conference call with securities analysts. The webcast will be accessible through Ashland’s website, www.ashland.com. Following the live event, an archived version of the webcast will be available for 12 months at http://investor.ashland.com.
Ashland Inc. (NYSE: ASH) provides specialty chemical products, services and solutions for many of the world’s most essential needs and industries. Serving customers in more than 100 countries, it operates through five commercial units: Ashland Aqualon Functional Ingredients, Ashland Hercules Water Technologies, Ashland Performance Materials, Ashland Consumer Markets (Valvoline) and Ashland Distribution. To learn more about Ashland, visit www.ashland.com.
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(1) Preliminary Results
Financial results are preliminary until Ashland’s quarterly report on Form 10-Q is filed with the U.S. Securities and Exchange Commission.
(2) Regulation G – Unadjusted EBITDA
The information presented in this news release regarding unadjusted earnings before interest, taxes, depreciation, and amortization (unadjusted EBITDA) does not conform to generally accepted accounting principles (GAAP) and should not be construed as an alternative to the reported results determined in accordance with GAAP. Management has included this non-GAAP information to assist in understanding the operating performance of the company and its operating segments. The non-GAAP information provided may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results in the table provided below.
| (in millions) | | | Q2 2009 | | | | Q2 2008 | |
| Operating income | | $ | 112 | | | $ | 52 | |
| Add: | | | | | | | | |
| Depreciation and amortization | | | 93 | | | | 37 | |
| Unadjusted EBITDA | | $ | 205 | | | $ | 89 | |
(3) Regulation G – Adjusted Pro Forma Results
The information presented in this news release regarding adjusted pro forma results does not conform to generally accepted accounting principles (GAAP) and should not be construed as an alternative to the reported results determined in accordance with GAAP. Management has included this non-GAAP information to assist in understanding the operating performance of the company and its segments. The non-GAAP information provided may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results in the tables provided below.
The unaudited adjusted pro forma results are presented for informational purposes only and do not reflect future events that may occur or any operating efficiencies or inefficiencies that may result from the acquisition of Hercules Incorporated. Certain significant and identifiable cost allocation, reporting and accounting policy differences have been reflected in these adjusted pro forma results. However, these adjusted pro forma results do not purport to identify all these differences. Therefore, the unaudited adjusted pro forma results are not necessarily indicative of results that would have been achieved had the businesses been combined during the period presented or the results that Ashland will experience in the future. In addition, the preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions can be significantly different depending on changes to conform to Ashland policy.
