Ashland Inc. reports fiscal fourth quarter preliminary income of 79 cents per share from continuing operations

COVINGTON, Ky., Oct. 30 /PRNewswire-FirstCall/ -- Ashland Inc. today announced preliminary* income from continuing operations of $56 million, or 79 cents per share, for the quarter ended Sept. 30, 2006, the fourth quarter of its fiscal year. Net income for the quarter was $200 million, or $2.82 per share.

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"I'm generally pleased with our September quarter results," said James J. O'Brien, chairman and chief executive officer. "While there are many items that impacted our results, our businesses performed well with the exception of Valvoline." (See page 5 of financial information for details of the impact of each of these significant items on operating income for each of the businesses.)

"During the fourth quarter, Ashland Distribution and Ashland Performance Materials delivered strong results, with improvements in revenues and operating income," said O'Brien. "I'm also pleased to report that Ashland Water Technologies posted significantly improved results. Valvoline, however, recorded an operating loss due to continued margin compression and charges for asset impairments and severance costs."

Ashland sold Ashland Paving And Construction, Inc. (APAC), during the quarter for $1.3 billion and now expects net proceeds after taxes and fees to be $1.23 billion. The company is returning those net proceeds to shareholders through a special dividend of $10.20 per share that was paid to shareholders on Oct. 25, 2006, and an ongoing stock buyback program. According to generally accepted accounting principles, APAC is now a discontinued operation, and Ashland's prior-period results reflect this presentation.

"The sale of APAC represents an important strategic step in our transformation into a diversified chemical company," O'Brien continued. "It also enabled us to return value to shareholders in the form of the special dividend paid last week and the share buyback underway. More important, we are in a strong financial position and sharply focused on our growth, both organically and through acquisitions."

Performance Materials increased its operating income to $17.8 million for the September 2006 quarter, 19 percent above the year-ago quarter's income of $15.0 million. Operating income for the 2006 quarter included charges of $7.1 million for environmental remediation and severance costs, partially offset by $2.7 million of income from favorable insurance settlements. In comparison, the prior-year quarter included charges for environmental remediation and asset impairments of $1.5 million. Lower overall selling, general and administrative expenses accounted for the increased earnings during the 2006 quarter. Sales and operating revenues were $358 million for the September 2006 quarter, 5 percent above the September 2005 quarter, while unit volume was unchanged.

Distribution continued its strong operating performance during the September 2006 quarter with record earnings of $25.6 million, up 33 percent over the year-ago quarter. Operating income for the 2006 quarter was unfavorably impacted by environmental remediation expense and severance costs totaling $10.7 million, partially offset by $3.5 million of income from insurance settlements. Expenses for environmental remediation and asset impairments totaled $2.2 million in the September 2005 quarter. As compared with the year-ago quarter, sales and operating revenues increased 5 percent to $1,024 million for the September 2006 quarter, while volume declined 3 percent. Revenue growth was driven by higher selling prices as Distribution was able to pass through cost increases to the marketplace. Higher unit margins, coupled with excellent cost controls, drove income growth.

Valvoline recorded an operating loss of $14.6 million for the September 2006 quarter as compared with operating income of $10.3 million in the year- ago quarter. Valvoline's sales and operating revenues increased 12 percent over the September 2005 quarter to $379 million, as price increases began to take effect in the marketplace. Valvoline's results for the 2006 quarter included charges of $4.4 million for asset impairments, primarily related to the closing of 33 Valvoline Instant Oil Change(R) stores, and $1.7 million for severance costs. The 2005 quarter included charges of $1.2 million for severance costs and environmental remediation. Volumes declined 7 percent versus the year-ago quarter. Valvoline's performance for the quarter reflected lower margins, as persistent high costs for base lube oil, additives and packaging were not fully offset by price increases in the marketplace.

Water Technologies reported operating income of $4.9 million for the September 2006 quarter as compared with $2.0 million for the prior-year quarter. Operating income for the September 2006 quarter includes charges of $6.1 million for severance costs and $2.0 million for environmental remediation and income of $0.9 million from insurance settlements. The 2005 quarter included $0.3 million in environmental charges. Sales and operating revenues increased from $105 million in the September 2005 quarter to $191 million for the 2006 quarter. Both operating income and revenues benefited from a full quarter of activity from the Environmental and Process Solutions business acquired from Degussa AG at the end of May. Operating income also reflects significantly improved performance from Ashland's other water businesses.

Unallocated and Other for the September 2006 quarter includes $7.5 million in expenses for July and August previously allocated to APAC, $6.3 million in environmental remediation expense and income of $10.8 million from insurance settlements. Generally accepted accounting principles require that corporate costs previously allocated to APAC continue to be included in results of continuing operations rather than be reported with APAC in discontinued operations.

During the September 2006 quarter, the company favorably resolved certain open tax issues and reevaluated other open tax matters, which resulted in a tax benefit for the quarter. Taxes contributed $13 million to income in the quarter as compared with $63 million in the prior-year quarter, which also benefited from favorable adjustments. In addition, net interest income was $19 million in the September 2006 quarter as compared with $7 million in the prior-year quarter.

Commenting on the outlook for fiscal 2007, O'Brien concluded, "Performance Materials should benefit from continued global economic growth. Although facing softness in the U.S. residential construction and transportation markets, several specialty applications continue to expand, and the electrical, power and infrastructure markets remain strong. Distribution's performance will be largely determined by the growth of the North American economy. We're encouraged by recent developments in Valvoline's marketplace. While there is still work to do, our price increases, recent reductions in the cost of base lube oil and our cost-cutting efforts are beginning to take hold. As a result, we expect Valvoline to return to profitability for the December quarter. We expect Water Technologies to produce a solid year in 2007, benefiting from its business model redesign, cost reductions and the addition of the Environmental and Process Solutions business."

Today at 4 p.m. (EST), Ashland will provide a live webcast of its fourth- quarter presentation to securities analysts. The webcast will be accessible through Ashland's website, http://www.ashland.com/. Following the live event, an archived version of the webcast will be available for 12 months at http://www.ashland.com/investors.

Ashland Inc. , a diversified, global chemical company, provides quality products, services and solutions to customers in more than 100 countries. A FORTUNE 500 company, it operates through four wholly owned divisions: Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies. To learn more about Ashland, visit http://www.ashland.com/.

FORTUNE 500 is a registered trademark of Time Inc. * Preliminary Results

Financial results are preliminary until the Company's Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission.

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, with respect to Ashland's operating performance. These estimates are based upon a number of assumptions, including those mentioned within this news release. Such estimates are also 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). Although Ashland believes its expectations are based on reasonable assumptions, it cannot assure the expectations reflected herein will be achieved. This forward-looking information may prove to be inaccurate and actual results may differ significantly from those anticipated if one or more of the underlying assumptions or expectations proves to be inaccurate or is unrealized or if other unexpected conditions or events occur. Other factors and risks affecting Ashland are contained in Ashland's Form 10-K, as amended, for the fiscal year ended Sept. 30, 2005. Ashland undertakes no obligation to subsequently update or revise the forward-looking statements made in this news release to reflect events or circumstances after the date of this release.

Ashland Inc. and Consolidated Subsidiaries STATEMENTS OF CONSOLIDATED INCOME (In millions except per share data - preliminary and unaudited) Three months ended Year ended September 30 September 30 2006 2005 2006 2005 REVENUES Sales and operating revenues $1,908 $1,712 $7,233 $6,731 Equity income 4 1 11 525 Other income 13 1 33 39 1,925 1,714 7,277 7,295 COSTS AND EXPENSES Cost of sales and operating expenses 1,612 1,415 6,030 5,545 Selling, general and administrative expenses 285 278 1,077 1,079 1,897 1,693 7,107 6,624 OPERATING INCOME 28 21 170 671 (Loss) gain on the MAP Transaction (a) (4) (10) (5) 1,284 Loss on early retirement of debt - - - (145) Net interest and other financing income (costs) 19 7 47 (82) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 43 18 212 1,728 Income tax benefit (expense) 13 63 (29) 230 INCOME FROM CONTINUING OPERATIONS 56 81 183 1,958 Income from discontinued operations (net of income taxes) (b) 144 30 224 46 NET INCOME $200 $111 $407 $2,004 DILUTED EARNINGS PER SHARE Income from continuing operations $0.79 $1.08 $2.53 $26.23 Income from discontinued operations 2.03 0.40 3.11 0.62 Net income $2.82 $1.48 $5.64 $26.85 AVERAGE COMMON SHARES AND ASSUMED CONVERSIONS 71 75 72 75 SALES AND OPERATING REVENUES Performance Materials (c) $358 $341 $1,425 $1,369 Distribution 1,024 972 4,070 3,810 Valvoline 379 339 1,409 1,326 Water Technologies (c) 191 105 502 394 Intersegment sales (44) (45) (173) (168) $1,908 $1,712 $7,233 $6,731 OPERATING INCOME Performance Materials (c) $18 $15 $112 $88 Distribution 26 19 120 99 Valvoline (15) 10 (21) 59 Water Technologies (c) 5 2 14 11 Refining and Marketing (d) - - - 486 Unallocated and other (e) (6) (25) (55) (72) $28 $21 $170 $671 (a) "MAP Transaction" refers to the June 30, 2005 transfer of Ashland's 38% interest in Marathon Ashland Petroleum LLC (MAP), Ashland's maleic anhydride business and 60 Valvoline Instant Oil Change centers in Michigan and northwest Ohio to Marathon Oil Corporation in a transaction valued at approximately $3.7 billion. (b) Ashland sold APAC to Oldcastle Materials, Inc. in August 2006 for approximately $1.3 billion, recording an after-tax gain on sale of discontinued operations of $110 million. After-tax operating results of APAC (excluding previously allocated corporate costs - see note (e) below) are reflected in discontinued operations, with prior periods restated. (c) In June 2006, Ashland redefined its reporting segments as it continues to evolve into a diversified chemical company. Performance Materials and Water Technologies, formerly combined under Ashland Specialty Chemical, have now been separately disclosed. Prior periods have been conformed to the current period presentation. (d) Includes Ashland's equity income from MAP, amortization related to Ashland's excess investment in MAP and other activities associated with refining and marketing through June 30, 2005. (e) Includes corporate costs previously allocated to APAC of $8 million and $13 million for the three months ended September 30, 2006 and 2005, respectively, and $41 million and $45 million for the years ended September 30, 2006 and 2005, respectively. Ashland Inc. and Consolidated Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In millions - preliminary and unaudited) September 30 2006 2005 ASSETS Current assets Cash and cash equivalents $1,820 $985 Available-for-sale securities 349 403 Accounts receivable 1,401 1,242 Inventories 532 439 Deferred income taxes 93 104 Other current assets 55 22 Current assets of discontinued operations - 562 4,250 3,757 Investments and other assets Goodwill and other intangibles 310 235 Asbestos insurance receivable (noncurrent portion) 444 370 Deferred income taxes 186 228 Other noncurrent assets 450 419 Noncurrent assets of discontinued operations - 976 1,390 2,228 Property, plant and equipment Cost 2,007 1,830 Accumulated depreciation and amortization (1,057) (1,000) 950 830 $6,590 $6,815 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $12 $12 Dividends payable 674 - Trade and other payables 1,302 1,239 Income taxes 53 13 Current liabilities of discontinued operations - 281 2,041 1,545 Noncurrent liabilities Long-term debt (less current portion) 70 82 Employee benefit obligations 313 358 Reserves of captive insurance companies 175 182 Asbestos litigation reserve (noncurrent portion) 585 521 Other long-term liabilities and deferred credits 310 309 Noncurrent liabilities of discontinued operations - 79 1,453 1,531 Stockholders' equity 3,096 3,739 $6,590 $6,815 Ashland Inc. and Consolidated Subsidiaries STATEMENTS OF CONSOLIDATED CASH FLOWS (In millions - preliminary and unaudited) Year ended September 30 2006 2005 CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS Net Income $407 $2,004 Results from discontinued operations (net of income taxes) (224) (46) Adjustments to reconcile income from continuing operations to cash flows from operating activities Depreciation and amortization 111 100 Deferred income taxes (1) (500) Equity income from affiliates (11) (525) Distributions from equity affiliates 5 279 Loss (gain) on the MAP Transaction 5 (1,284) Loss on early retirement of debt - 145 Change in operating assets and liabilities (a) (141) (232) Other items (3) (5) 148 (64) CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS Proceeds from issuance of common stock 18 115 Excess tax benefits related to share-based payments 6 20 Repayment of long-term debt (13) (1,552) Repurchase of common stock (405) (100) Decrease in short-term debt - (40) Cash dividends paid (78) (79) (472) (1,636) CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS Additions to property, plant and equipment (175) (180) Purchase of operations - net of cash acquired (183) (135) Proceeds from sale of operations (b) - 3,303 Purchases of available-for-sale securities (824) (402) Proceeds from sales and maturities of available-for-sale securities 876 1 Purchase of accounts receivable - (150) Collections of accounts receivable purchased - 150 Other - net 20 9 (286) 2,596 CASH (USED) PROVIDED BY CONTINUING OPERATIONS (610) 896 Cash provided (used) by discontinued operations Operating cash flows 197 53 Investing cash flows 1,248 (207) INCREASE IN CASH AND CASH EQUIVALENTS $835 $742 DEPRECIATION AND AMORTIZATION Performance Materials (c) $31 $31 Distribution 21 18 Valvoline 28 27 Water Technologies (c) 17 13 Unallocated and other 14 11 $111 $100 ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT Performance Materials (c) $58 $45 Distribution 36 26 Valvoline 38 66 Water Technologies (c) 23 19 Unallocated and other 20 24 $175 $180 (a) Excludes changes resulting from operations acquired or sold. (b) Amount for 2005 includes cash proceeds (net of expenses) of $3,290 million from the MAP Transaction. (c) In June 2006, Ashland redefined its reporting segments as it continues to evolve into a diversified chemical company. Performance Materials and Water Technologies, formerly combined under Ashland Specialty Chemical, have now been separately disclosed. Prior periods have been conformed to the current period presentation. Ashland Inc. and Consolidated Subsidiaries OPERATING INFORMATION BY INDUSTRY SEGMENT (In millions - preliminary and unaudited) Three months ended Year ended September 30 September 30 2006 2005 2006 2005 PERFORMANCE MATERIALS (a) (b) Sales per shipping day $5.7 $5.3 $5.7 $5.4 Pounds sold per shipping day 4.9 4.9 4.9 5.4 Gross profit as a percent of sales 20.3% 21.3% 22.5% 20.4% DISTRIBUTION (a) Sales per shipping day $16.3 $15.2 $16.2 $15.1 Pounds sold per shipping day 18.6 19.1 18.9 19.2 Gross profit as a percent of sales 8.8% 9.3% 9.5% 9.7% VALVOLINE (a) Lubricant sales (gallons) 41.1 44.0 168.7 175.4 Premium lubricants (percent of U.S. branded volumes) 22.3% 23.1% 23.1% 23.4% Gross profit as a percent of sales 16.0% 25.4% 19.9% 26.6% WATER TECHNOLOGIES (a) (b) Sales per shipping day $3.0 $1.6 $2.0 $1.6 Gross profit as a percent of sales 38.4% 47.2% 43.7% 47.8% (a) Sales are defined as sales and operating revenues. Gross profit is defined as sales and operating revenues, less cost of sales and operating expenses. (a) In June 2006, Ashland redefined its reporting segments as it continues to evolve into a diversified chemical company. Performance Materials and Water Technologies, formerly combined under Ashland Specialty Chemical, have now been separately disclosed. Prior periods have been conformed to the current period presentation. Ashland Inc. and Consolidated Subsidiaries COMPONENTS OF OPERATING INCOME (In millions) Three Months Ended September 30, 2006 Water Unallo- Per- Tech- cated formance Distri- Valvo- nolo- & Materials bution line gies Other Total OPERATING INCOME Environmental remediation expense $(6.7) $(8.7) $0.3 $(2.0) $(6.3) $(23.4) Severance costs (0.4) (2.0) (1.7) (6.1) (0.4) (10.6) Insurance settlements 2.7 3.5 - 0.9 10.8 17.9 Asset impairments - - (4.4) (0.1) - (4.5) Corporate costs previously charged to APAC - - - - (7.5) (7.5) All other operating income 22.2 32.8 (8.8) 12.2 (2.1) 56.3 $17.8 $25.6 $(14.6) $4.9 $(5.5) $28.2 Three Months Ended September 30, 2005 Water Unallo- Per- Tech- cated formance Distri- Valvo- nolo- & Materials bution line gies Other Total OPERATING INCOME Environmental remediation expense $(1.0) $(1.4) $(0.1) $(0.3) $(0.1) $(2.9) Severance costs - - (1.1) - - (1.1) Insurance settlements - - - - (13.2) (13.2) Asset impairments (0.5) (0.8) - - - (1.3) Corporate costs previously charged to APAC - - - - (13.0) (13.0) All other operating income 16.5 21.5 11.5 2.3 1.5 53.3 $15.0 $19.3 $10.3 $2.0 $(24.8) $21.8