Ashland Inc. earnings per share rise 15 percent

Covington, Ky. – Ashland Inc. (NYSE:ASH) today announced preliminary* net income for the quarter ended March 31, 2007, the second quarter of its fiscal year, of $49 million, or 77 cents per share. In the prior-year quarter, net income was also $49 million; however, earnings per share were 67 cents, due to the then-higher shares outstanding. Net income in the March 2007 quarter benefited from $18 million, or 28 cents per share, of income from discontinued operations, a result of the improved credit quality of Ashland’s insurance receivable from Equitas Ltd., which provides a significant portion of Ashland’s coverage for asbestos claims. Also in the March 2007 quarter, net income was reduced by an after-tax charge of $15 million, or 24 cents per share, for costs associated with Ashland’s previously disclosed voluntary severance offer (VSO).

Operating income for the March 2007 quarter totaled $41 million, or $66 million when adjusted for the $25 million pre-tax charge related to the VSO. Operating income for the March 2006 quarter was $49 million, or $61 million when excluding the $12 million of Ashland Paving And Construction, Inc. (APAC) costs that were retained within continuing operations following the sale of APAC in August 2006. The majority of corporate costs previously allocated to APAC have been eliminated, with further cost reductions to be achieved under the VSO through the remainder of the year. Ashland believes the use of these adjusted operating incomes are appropriate to enhance understanding of its current and future performance.

Net interest and other financing income for both the March 2007 and 2006 quarters amounted to $9 million. Income taxes for the March 2007 quarter of $15 million compare with $5 million in the prior-year quarter. The effective tax rate was 32.9 percent for the 2007 quarter versus 9.9 percent for the March 2006 quarter. The primary factors in the low effective tax rate in the 2006 quarter were R&D tax credits and a favorable adjustment to tax contingency reserves. For the balance of fiscal 2007, Ashland estimates an effective tax rate of 28 percent.

“Operating income for the March 2007 quarter was driven by the continuing recovery at Valvoline and improved performance from Ashland Water Technologies, which had recorded a loss a year ago,” said James J. O’Brien, chairman and chief executive officer. “These improvements more than offset weaker results from Ashland Performance Materials and Ashland Distribution.”

Performance Materials’ operating income of $22.7 million compares with $27.2 million for the March 2006 quarter, a 17-percent decline. Performance Materials’ decline in income versus the prior year is largely due to a physical inventory adjustment and higher expenses associated with international growth initiatives. In addition, margin compression resulting from continued weakness in the key North American automotive, residential housing and marine markets also contributed to Performance Materials’ lower earnings. Sales and operating revenues of $376 million increased 8 percent, and volume increased 4 percent, both as compared with the March 2006 quarter. Both revenue and volume growth were aided by the acquisition of Northwest Coatings and the purchase of the third-party ownership interests in a Japanese joint venture.

Distribution’s operating income declined to $20.1 million for the March 2007 quarter as compared with a record $30.4 million in the same prior-year quarter, which benefited from the post-hurricane market environment. Gross profit as a percent of sales declined to 9.0 percent from 9.6 percent in the prior-year quarter. The soft North American automotive and construction markets, as well as the termination of Ashland’s North American plastics supply contract with Dow Chemical on March 1, unfavorably affected performance for the quarter. Sales and operating revenues decreased 2 percent from $1,029 million in the March 2006 quarter to $1,008 million in the 2007 quarter, and volume declined 2 percent as well.

Valvoline achieved second-quarter operating income of $22.4 million as compared with $2.0 million in the year-ago quarter. Sales and operating revenues of $382 million increased 8 percent over the March 2006 quarter. While lubricant volume declined 5 percent, essentially all of this was from private-label business, which carries a lower margin. Nonetheless, continued improvement in lubricant margins drove results for the quarter, as relatively stable base oil costs, coupled with the full effect of Valvoline’s previous pricing actions, enabled Valvoline to recover its increased costs from the marketplace. Margins as a percent of sales, however, remain below historical levels.

Water Technologies reported operating income of $6.2 million for the March 2007 quarter as compared with a loss of $1.0 million in the prior-year quarter. The improvement is largely the result of increased margins and earnings from both the industrial and marine water-treatment businesses. The Environmental and Process Solutions (E&PS) business acquired last May also contributed to earnings growth, but to a lesser extent. Sales and operating revenues increased from $100 million in the March 2006 quarter to $190 million for the 2007 quarter, essentially reflecting the addition of the E&PS business.

Commenting on the outlook for the remainder of fiscal 2007, O’Brien said, “Valvoline achieved record operating income for the first half of 2007 and should continue to benefit from stronger margins resulting from stable base oil costs and better supply. We expect a continuation of Valvoline’s recent strong results. Looking at the Water Technologies business, we are encouraged by the progress we’ve seen in the first two quarters of fiscal 2007. We continue our work to redesign the business model and expect that this work will set the stage for further improvement as we approach the next fiscal year.
“Performance Materials’ results in 2007 will be impacted by weakness in the North American automotive, marine and residential housing markets, as well as tightness in the supply of a few key raw materials. That said, the June quarter is traditionally the strongest quarter for Performance Materials, and as such, results are likely to improve over the March 2007 quarter due to that seasonality.

“Distribution’s third-quarter performance will likely continue to be affected by weakness in North American industrial output. While Distribution also traditionally benefits from seasonality, results will reflect a full quarter’s impact from the discontinuance of the Dow North American plastics supply agreement. We expect this impact to be $4 million to $5 million per quarter as we transition to other suppliers. We have already announced a number of new suppliers and are working to grow volume and acquire new customers. In the long term, we feel our supplier base will be stronger, and the financial effects will diminish over time.”

Concluding his comments, O’Brien said, “As we look forward to the third fiscal quarter, the strength of Valvoline should more than offset the anticipated weakness from Performance Materials and Distribution relative to the prior year. Overall, we expect our businesses to produce operating income that exceeds the prior year’s quarter.”