Ashland Inc. reports preliminary Q4 results: 91 cents EPS from continuing operations; adjusted EPS of $1.05 excluding key items

COVINGTON, Ky., Oct. 26 /PRNewswire-FirstCall/ -- Ashland Inc. (NYSE: ASH) today announced preliminary(1) results for the quarter ended Sept. 30, 2010, the fourth quarter of its 2010 fiscal year.

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Quarterly Highlights

Fiscal Fourth-Quarter GAAP(2) Results

For its 2010 fourth quarter, Ashland reported sales of $2,382 million, operating income of $106 million, income from continuing operations of $72 million (91 cents per share) and net income of $76 million (96 cents per share). Net income included income from discontinued operations of $4 million aftertax (5 cents per share). Cash flows provided by operating activities from continuing operations amounted to $220 million.

Adjusted Results

Adjusting for the impact of key items in both the current and prior-year quarters, Ashland's results for the September 2010 quarter as compared with the September 2009 quarter were as follows:

• sales increased 13 percent to $2,382 million;
• adjusted operating income was $129 million versus $142 million in the prior year;
• adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $201 million versus $224 million a year ago; and
• adjusted EPS from continuing operations grew 9 percent to $1.05.

Key Items

In total, three key items had a net unfavorable EPS impact on continuing operations of 14 cents in the September 2010 quarter:

• a $15 million (19 cents negative EPS impact) aftertax expense for severance and accelerated depreciation related to capacity reductions at Ashland Performance Materials;
• a $4 million (5 cents negative EPS impact) aftertax charge for environmental remediation assessments related to Ashland Distribution; and
• an $8 million (10 cents positive EPS impact) aftertax benefit from favorable tax adjustments related to previous acquisitions and divestitures.

In the year-ago quarter, four key items combined for a net favorable impact on earnings of 34 cents per share. Refer to Table 5 of the accompanying financial statements for details of key items in both periods.

Results also included noncash intangible amortization expense of $17 million pretax in the September 2010 quarter and $22 million pretax in the 2009 September quarter. Amounts in both periods primarily reflect the addition of intangible assets from the Hercules acquisition.

Performance Summary

Commenting on Ashland's annual results, Chairman and Chief Executive Officer James J. O'Brien said, "Ashland delivered strong results for our fiscal 2010, with Ashland Consumer Markets, which is our Valvoline business, achieving another record year and all of our commercial units contributing to our earnings growth. Free cash flow of $276 million for the fiscal year was particularly strong in light of the buildup of working capital to support our business growth."

Continuing, O'Brien commented on Ashland's adjusted results for the September 2010 quarter, "It was a very challenging quarter. Despite double-digit sales growth, raw-material cost pressures continued to temper margins. All of our commercial units did achieve year-over-year volume and sales increases, on a comparable basis, and despite the challenges, Ashland generated just over $200 million of EBITDA in the quarter.

"Ashland Aqualon Functional Ingredients, Ashland Hercules Water Technologies and Ashland Consumer Markets continued to experience raw-material cost pressures, resulting in significant margin compression in the September quarter. Ashland Performance Materials and Ashland Distribution delivered solid quarters, benefiting from a relatively stable cost environment that enabled previous pricing actions to recover margins.

"While we have been successful in both maintaining SG&A and increasing volumes and sales, this was not enough to offset temporary gross margin compression during the quarter. Our businesses continue to implement price increases, where appropriate, to offset raw material inflation, but as we've said before, it can take, on average, three to four months to fully recover costs. Once raw materials stabilize, our pricing actions should enable margin recovery, as demonstrated by Performance Materials and Distribution in the September quarter."

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 basis and EBITDA is reconciled to operating income in Table 7 of this news release.

Functional Ingredients recorded sales of $239 million in the September 2010 quarter. Excluding amounts associated with the Pinova business divested in January 2010, sales improved 11 percent over the September 2009 quarter and increased 5 percent sequentially, with various key products remaining in a sold-out position. Excluding Pinova, volumes increased 15 percent over the prior-year quarter and 3 percent sequentially. Gross profit as a percent of sales was 28.7 percent in the September 2010 quarter versus 35.6 percent in the September 2009 quarter. The decline in gross profit margin largely reflects a combination of raw material inflation and higher freight costs as a result of more expedited shipments due to capacity constraints. This margin compression is expected to be temporary as pricing actions continue to be implemented and new capacity comes online. Improvements in selling, general and administrative and research and development (SG&A) expenses were not enough to offset margin compression. In total, Functional Ingredients' EBITDA in the September 2010 quarter decreased 23 percent versus the prior September quarter, to $43 million, and was 26 percent below the immediately prior quarter. EBITDA for the September 2010 quarter equaled 18.0 percent of sales as compared with 23.6 percent in the prior September quarter and 25.6 percent in the June 2010 quarter.

Water Technologies' sales were $462 million in the September 2010 quarter. Excluding the Drew Marine business sold in August 2009, sales grew 4 percent over the year-ago quarter and 7 percent sequentially. Gross profit as a percent of sales of 31.7 percent was 500 basis points below the year-ago quarter and 200 points below the June quarter. These declines reflect persistent inflation in raw material costs and higher freight costs in the September 2010 quarter. In total, Water Technologies' EBITDA of $40 million was 39 percent below the prior-year quarter and down 17 percent sequentially. EBITDA amounted to 8.7 percent of sales in the September 2010 quarter, as compared with 14.2 percent in the prior-year quarter and 11.1 percent in the June 2010 quarter.

Performance Materials achieved sales growth of 32 percent over the year-ago September quarter, to $353 million. Excluding the results of Ara Quimica, the former Brazilian composites joint venture, of which Ashland acquired its partner's 50-percent interest in April, sales still increased 26 percent over the prior-year quarter. On this same basis, volume per day increased 20 percent over the September 2009 quarter. Volume growth was broad-based across all regions and markets, with the Casting Solutions business posting the largest gains. Sequentially, sales declined just 1 percent and volume declined 4 percent, reflecting the seasonality of some of Performance Materials' end markets. Sales declined less than volume, benefiting from previous pricing actions. At 17.6 percent, which excludes key items, gross profit as a percent of sales was 10 basis points above the year-ago quarter and 90 points above the June 2010 quarter, as raw material costs largely stabilized. Through the end of the September quarter, Performance Materials recovered approximately 80 percent to 85 percent of cost increases through its pricing actions. In total, EBITDA of $26 million more than doubled over the September 2009 quarter and was an 8-percent increase sequentially. EBITDA as a percent of sales was 7.4 percent, 290 basis points above the year-ago quarter and a 70-point increase sequentially.

Consumer Markets' sales of $462 million increased 12 percent over the year-ago September quarter, and total lubricant volume increased by 4 percent. Sales growth was strongest in the Do-It-Yourself and international market channels at 16 percent and 14 percent, respectively, over the September 2009 quarter. Valvoline Instant Oil Change also contributed to sales growth, with same-store sales increasing 10 percent. Sequentially, sales were flat, while lubricant volume declined 4 percent, as price increases offset the seasonal decline in volume. Gross profit as a percent of sales declined to 28.9 percent in the September 2010 quarter versus 35.5 percent in the year-ago quarter and 32.4 percent in the June 2010 quarter. While Consumer Markets has raised prices to recover increased raw material costs, the lag in implementation led to the temporary margin compression. Consumer Markets' previously announced price increases began to offset higher base-oil costs as the September quarter came to an end, and gross margins in the month of October are running at approximately 31 percent to 32 percent. SG&A expenses rose 2 percent over the year-ago quarter and 4 percent sequentially. In total, Consumer Markets' September 2010 quarter EBITDA was $61 million, a decline of 23 percent from the year-ago quarter and 26 percent sequentially, and the EBITDA margin was 13.2 percent.

Ashland Distribution's sales for the September 2010 quarter increased 18 percent over the year-ago quarter, to $911 million, but were down 1 percent sequentially. Volume per day increased 3 percent over the September 2009 quarter and was roughly flat with the June 2010 quarter, due to typical seasonality in a number of end markets. Gross profit as a percent of sales of 9.4 percent in the September 2010 quarter increased 60 basis points over the prior-year quarter and 40 basis points sequentially, reflecting continued pricing management. SG&A expenses rose 2 percent versus the prior-year quarter, but declined 4 percent sequentially. In total, EBITDA for the September 2010 quarter more than doubled over the prior-year quarter, to $30 million, and grew 25 percent sequentially. The EBITDA margin of 3.3 percent reflected a 170-basis-point increase over the year-ago quarter and was up 70 points sequentially.

After excluding key items, Ashland's effective tax rate for the September 2010 quarter was 22 percent, reflecting the net favorable effect of a number of small, discrete tax items. It is important to note that events in any given quarter can cause significant fluctuation in the effective tax rate for that quarter.

Outlook

Commenting on Ashland's outlook, O'Brien said, "Each of our commercial units continues to take steps to improve their positions both strategically and financially. The completion of our Nanjing, China, expansion should help relieve Functional Ingredients' capacity constraints and enable us to capture strong growth and customer demand in China and the surrounding Asia Pacific region. Functional Ingredients' previously announced price increases of 5 percent to 8 percent should lead to margin levels more consistent with historical norms. Water Technologies is taking aggressive pricing actions to recover margins, with its most recent price increase of 5 percent to 15 percent announced last week, covering its North American product lines. Performance Materials remains highly leveraged to a returning economy and is focused on maintaining cost reductions achieved, while seeking growth in higher margin markets. Consumer Markets has completed two consecutive outstanding years and should continue to drive this new level of performance. Distribution remains focused on quality volume improvement, and the 3.3 percent EBITDA margin achieved in the September quarter represents good progress toward our midcycle target of 4 percent for this business.

"Over the past two years, we have reconstructed Ashland on a cost-effective and strong cash-generating base that is highly leverageable to an economic recovery. As we go into 2011, we are well-positioned as a world-class specialty chemicals company, with a strong balance sheet and ample liquidity to implement our growth strategies. We expect to build upon our successes from 2010 and achieve further progress in fiscal 2011."

Conference Call Webcast

Today at 9 a.m. EDT, Ashland will provide a live webcast of its fourth-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.

Use of Non-GAAP Measures

This news release includes certain non-GAAP measures. Such measurements are not prepared in accordance with GAAP and should not be construed as an alternative to reported results determined in accordance with GAAP. Management believes the use of such non-GAAP measures assists investors in understanding the ongoing 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 Tables 5, 6 and 7 of the financial statements provided below.

About Ashland

In more than 100 countries, the people of Ashland Inc. (NYSE: ASH) provide the specialty chemicals, technologies and insights to help customers create new and improved products for today and sustainable solutions for tomorrow. Our chemistry is used every day in applications from automotive, food and beverages, personal care products, pharmaceuticals, and paper and tissue to durable goods and infrastructure, including building and construction, energy and water treatment. Visit www.ashland.com to see the innovations we offer through our five commercial units – Ashland Aqualon Functional Ingredients, Ashland Hercules Water Technologies, Ashland Performance Materials, Ashland Consumer Markets (Valvoline) and Ashland Distribution.

Forward-Looking Statements

This news release 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 forward-looking statements are based upon a number of assumptions, including those mentioned within this news release. Performance estimates are also based upon internal forecasts and analyses of current and future market conditions and trends (including the ability to recover raw-material cost increases through price increases); management plans and strategies; operating efficiencies and economic conditions; and legal proceedings and claims (including environmental and asbestos matters). Other risks and uncertainties include those that are described in filings made by Ashland with the Securities and Exchange Commission, including its most recent Forms 10-K and 10-Q, which are available on Ashland's website at http://investor.ashland.com or at www.sec.gov. Ashland believes its expectations are reasonable, but cannot assure they will be achieved. Forward-looking information may prove to be inaccurate, and actual results may differ significantly from those anticipated. Ashland is not obligated to subsequently update or revise the forward-looking statements made in this news release.

(1) Preliminary Results

Financial results are preliminary until Ashland's annual report on Form 10-K is filed with the U.S. Securities and Exchange Commission.

(2) Generally accepted accounting principles (U.S.)

SOURCE Ashland Inc.