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Ashland Inc. Reports Preliminary Operating Income of $152 Million for Fiscal Third Quarter

Published on 2009-07-28. Author : SpecialChem

COVINGTON, Ky. -- Ashland Inc. announced preliminary results for the quarter ended June 30, 2009, the third 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 June 2009 quarter were as follows: sales and operating revenues of $2,037 million; operating income of $152 million; and net income of $50 million, or 66 cents per share. Income from continuing operations amounted to $51 million after taxes, or 68 cents per share, in the June 2009 quarter. Unadjusted earnings before interest, taxes, depreciation and amortization were $240 million, and cash flows from operating activities from continuing operations were $355 million.

Key items affecting the June 2009 quarter were as follows:

  • severance and accelerated depreciation charges of $16 million pretax [14 cents earnings per share (EPS) impact], primarily related to cost-reduction programs;
  • a noncash charge of $10 million pretax (9 cents EPS impact) from accelerated debt-issuance-cost amortization related to the retirement of Ashland's bridge loan, affecting Ashland's interest expense; and
  • an unfavorable $8 million tax judgment in a foreign jurisdiction (10 cents EPS impact).

Earnings in the June 2009 quarter also were significantly affected by an unfavorable adjustment to income tax expense related to a projected shift to more U.S.-sourced earnings for the year. The combination of the aforementioned foreign tax judgment and earnings shift resulted in a 44-percent effective tax rate for the June 2009 quarter. The effective tax rate for the June quarter reflects an adjustment to achieve an annualized effective tax rate of 27 percent excluding discrete items.

Adjusted Pro Forma Results

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 June 2009 quarter versus the June 2008 quarter would have been as follows:

  • pro forma sales and operating revenue declined 28 percent from $2,814 million to $2,037 million;
  • adjusted pro forma operating income increased 11 percent from $151 million to $168 million; and
  • adjusted pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) increased 9 percent from $227 million to $248 million.

Performance Summary

Commenting on Ashland's adjusted pro forma third-quarter results, Chairman and Chief Executive Officer James J. O'Brien said, "Our performance during the June 2009 quarter continued to demonstrate our ability to generate cash during a difficult demand environment. We increased overall EBITDA by 9 percent versus the prior-year quarter, in spite of volume declines in all of our businesses except Ashland Consumer Markets (Valvoline), which saw an uptick. The EBITDA improvement was achieved both through strong gross-profit performance and reduced selling, general and administrative expenses. Our results benefited from all-time-record quarterly EBITDA from Consumer Markets and reduced overall expenses of $87 million in the quarter, both from integration and other cost-reduction initiatives."

O'Brien continued, "Our annualized run-rate cost savings now stand at $287 million through the June 2009 quarter, exceeding our previously announced $265 million fiscal 2009 target by $22 million, which was achieved three months sooner than we had announced.

"We made considerable progress in the June quarter towards our goals of generating cash and reducing debt. We generated $355 million of cash flows from operating activities and reduced gross debt by $269 million. This reduced our total debt to less than $2 billion. In addition, we issued $650 million of 9 1/8% Senior Notes and used the proceeds, along with available liquidity, to retire our $750 million bridge loan. Also during the quarter, we signed a definitive agreement to sell our Drew Marine business. We expect net aftertax proceeds of approximately $105 million from the transaction, which is anticipated to close before the end of the fiscal year. We expect to use the proceeds from this divestiture to further reduce our debt."

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 $233 million in the June 2009 quarter, a 23-percent decline versus the year-ago quarter, and metric tons sold declined 27 percent. These results continue to reflect the worldwide decline in the construction market. Overall volume declines ranged from 11 percent in Asia Pacific to 36 percent in North America. Gross profit as a percent of sales was 27.6 percent, 210 basis points below the June 2008 quarter. The decision to reduce inventory by manufacturing at below-replacement levels negatively impacted gross profit by $7 million, or 3 percent of sales. However, this decision enabled Functional Ingredients to generate $23 million of cash from the reduced inventories. In total, Functional Ingredients' EBITDA in the June 2009 quarter declined 26 percent versus the prior June quarter, to $50 million, and represented 21.5 percent of sales. Both the $50 million of EBITDA and 21.5 percent of sales are slight improvements over the March quarter.

Ashland Hercules Water Technologies' sales and operating revenue declined 21 percent to $436 million for the June 2009 quarter as compared with the same year-ago quarter, primarily driven by a 17-percent volume decline. At 34.7 percent, gross profit as a percent of sales improved by 200 basis points over the June 2008 quarter. Selling, general and administrative (SG&A) expenses declined by $32 million, or 21 percent. EBITDA of $56 million was slightly ahead of the prior-year quarter and represented 12.8 percent of sales, a 290-basis-point improvement. Sequentially, EBITDA increased 47 percent over the March quarter results, while EBITDA as a percent of sales improved by 400 basis points.

Ashland Performance Materials' sales and operating revenue of $256 million declined 40 percent versus the same prior-year quarter, and volume per day declined 22 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 and volume decreased 46 percent and 36 percent, respectively, due to continued significant weakness in demand in all key geographies in both the transportation and construction markets. These volume reductions reflect slight sequential improvement. This was generally consistent with the overall composites and castings markets. Disciplined price management and savings from idled plant capacity drove a 280-basis-point improvement in gross profit percentage versus the June 2008 quarter. A 23-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 33 percent to $20 million in the June 2009 quarter versus the prior-year June quarter, but improved 70 basis points to 7.8 percent of sales.

Ashland Consumer Markets' sales and operating revenue was $441 million, a 3-percent increase over the June 2008 quarter. Lubricant volume increased by 4 percent, primarily due to increases in volumes sold through the Do-It-Yourself market channel. Same-store sales at Valvoline Instant Oil Change increased 6 percent versus the prior year. Gross profit improved to 37.5 percent of sales in the June 2009 quarter, driven by a combination of pricing actions that began in 2008, lower raw materials costs in the quarter, cost-savings initiatives and a continued shift in mix toward sales of premium brands. SG&A expenses declined 5 percent, further contributing to Consumer Markets' record quarterly performance. As a result, Consumer Markets' quarterly EBITDA nearly tripled versus the prior June quarter to $103 million. For the June 2009 quarter, EBITDA represented 23.4 percent of sales as compared with 8.2 percent in the prior-year quarter.

Ashland Distribution's sales and operating revenue for the June 2009 quarter declined 39 percent to $698 million. Volume decreased 26 percent versus the prior-year quarter, generally in line with the year-over-year trends in the March quarter. Gross profit as a percent of sales improved to 10.1 percent versus 7.8 percent in the June 2008 quarter. SG&A expenses were 4 percent below the prior-year quarter. Margin improvements and SG&A expense reductions were not enough to offset the impact of volume reductions. As a result, EBITDA of $13 million for the June 2009 quarter represented a decline of 50 percent as compared with the prior-year quarter and was 1.9 percent of sales.

For the June 2009 quarter, EBITDA of $6 million was recorded for Unallocated and Other, as compared with $13 million of EBITDA in the same prior-year quarter.

Outlook

Commenting on Ashland's outlook, O'Brien said, "Our short-term focus continues to be on generating cash and paying down debt. It appears that demand could remain flat for the foreseeable future due to global macroeconomic dynamics. We will continue to manage our pricing, reduce our costs, and apply the cash we generate to reduce debt from our current 2.4 times debt-to-EBITDA level to our targeted ratio of 2.0 times. We continue to resize our businesses to match current economic conditions and to create a leverageable cost structure that will support increased profitability and growth when the economy improves."

Source: Ashland


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