COVINGTON, Ky., July 24 /PRNewswire-FirstCall/ -- Ashland Inc. (NYSE: ASH) today announced preliminary(1) net income for the quarter ended June 30, 2008, the third quarter of its fiscal year, of $72 million, or $1.13 per share. In the prior-year June quarter, net income was $100 million, or $1.58 per share.

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Income from continuing operations totaled $66 million, or $1.03 per share, in the June 2008 quarter as compared with $86 million, or $1.35 per share, in the same prior-year quarter. Income from discontinued operations for both the 2008 and 2007 periods included net favorable adjustments to asbestos reserves and related insurance receivables of $6 million and $16 million, respectively, resulting from Ashland's ongoing assessment of these matters. Total income from discontinued operations amounted to 10 cents per share in the June 2008 quarter and 23 cents per share in the prior June quarter.

Operating income for the June 2008 quarter totaled $87 million. Operating income for the June 2007 quarter totaled $91 million, which included unusually large favorable adjustments to pension and other benefit costs of $11 million and environmental reserves of $7 million.

Earnings before interest, taxes, depreciation and amortization(2) (EBITDA) totaled $121 million in the June 2008 quarter as compared with $117 million in the same prior-year quarter, an increase of 3 percent.

Business Summary

Commenting on Ashland's third-quarter results, Chairman and Chief Executive Officer James J. O'Brien said, 'We are encouraged by our overall performance in the third quarter, given the difficult economic environment, both from a demand and raw material cost perspective. Ashland Distribution increased its operating income by 70 percent over the June 2007 quarter and achieved its third straight quarter of improving results. Ashland Water Technologies more than doubled its operating income as compared with the same prior-year quarter, although earnings were enhanced by several items, which we do not expect will repeat. Ashland Performance Materials experienced a significant decline in its operating income, particularly hampered by weak margins in the Composite Polymers business unit. Valvoline's earnings declined 6 percent versus the year-ago quarter, but improved over the March 2008 quarter, as the traditionally strong summer driving season got under way.'

Business Performance

Performance Materials' operating income of $18.8 million compares with $33.3 million for the June 2007 quarter, a 44-percent decline. Sales and operating revenues of $425 million increased 6 percent, but volume per day declined 4 percent, both as compared with the June 2007 quarter. Excluding the effect of the transfer of certain sales from Performance Materials to Water Technologies and the impact of currency translation, revenue would have increased 1 percent. Gross profit as a percentage of sales declined from 21.9 percent in the June 2007 quarter to 17.5 percent in the 2008 quarter. The margin decline is largely due to increased raw material costs in all of Performance Materials' business units.

Distribution's operating income increased 70 percent to $19.7 million for the June 2008 quarter as compared with $11.6 million in the same prior-year quarter. Volume per day declined 5 percent, while sales and operating revenues increased 12 percent versus the prior-year quarter to $1,151 million. Average unit selling price increased by 14 percent. Gross profit as a percent of sales increased by 0.7 percentage point to 7.8 percent from 7.1 percent in the prior-year quarter, and gross profit per pound increased from 5.8 cents to 7.2 cents and improved by 0.2 cent from the March 2008 quarter.

Valvoline's third-quarter operating income of $26.1 million compares with $27.9 million in the year-ago quarter, a 6-percent decline. Sales and operating revenues of $428 million increased 5 percent over the June 2007 quarter, largely due to price increases. Valvoline's total lubricant volume increased 1 percent, primarily from the Do-It-For-Me installer channel and international sales, partially offset by reduced volumes in the Do-It-Yourself channel. Gross profit as a percent of sales declined 1.2 percentage points versus the 2007 June quarter, primarily a result of the lag in timing of price increases to customers relative to base oil and additive cost increases received by Valvoline.

Water Technologies reported operating income of $12.5 million for the June 2008 quarter as compared with $6.0 million in the prior-year quarter. Operating income in the quarter benefited by $5 million from the completion of certain large sales contracts and from favorable adjustments to estimated liabilities. Sales and operating revenues of $244 million increased 21 percent over the 2007 June quarter. Excluding the effect of currency translation and the impact of the transfer of certain sales from Performance Materials, revenues increased by 9 percent. Gross profit as a percent of sales decreased by 1.0 percentage point versus the year-ago quarter and is essentially even with the March 2008 quarter. The margin decrease primarily reflects continued increases in hydrocarbon and derivative materials costs.

Other Items

For the 2008 third quarter, Unallocated and Other amounted to $9.7 million of income as compared with $11.9 million in the same prior-year quarter. For 2008, the amount includes lower incentive compensation and support costs, while in 2007, Unallocated and Other included $14 million of income related to net adjustments to environmental and benefit accruals.

Net interest and other financing income was $5 million in the June 2008 quarter as compared with $9 million in the same prior-year quarter, primarily as a result of lower interest rates on Ashland's cash and securities. The effective tax rate for the third quarter was 29 percent in 2008 and 15 percent in 2007, both of which included the net favorable effect of adjustments to the estimated annual tax expense. The 15-percent effective tax rate in the year- ago third quarter also reflected favorable developments with respect to settlements of certain tax matters.

Outlook

Commenting on the outlook for the remainder of fiscal 2008, O'Brien said, 'Performance Materials' results will continue to be affected by the soft North American construction and transportation markets. In addition, raw material costs continue to increase, and we have only been able to recover approximately 80 percent of these increases thus far. We have announced price increases for July and August, but do not expect to fully recover the raw materials increases until the end of the September quarter. As a result of these factors and the normal seasonality of the business, we expect Performance Materials' operating income to be down significantly versus the June 2008 quarter.

'Valvoline expects to feel the full impact of recent, significant base-oil and additive cost increases in the fourth quarter. We have announced price increases for this business that should fully offset these cost increases and expect to recover the entire amount by the end of the quarter, similar to Performance Materials. However, the implementation time lag will likely lead to significantly reduced, but positive, earnings for Valvoline in the September quarter as compared with the prior year.

'Our Water Technologies business continues to work on pricing and reducing its selling, general and administrative expenses. Our price increases announced in June should fully offset previously announced raw material increases. While operating income in the current quarter included the favorable effects of certain items not expected to repeat going forward, we do expect to continue to build on our positive pricing momentum and cost reductions.

'Distribution's fourth-quarter performance will continue to be affected by weakness in North American industrial output. That said, we expect to significantly improve our results versus the weak fourth quarter last year, although it is unlikely that we will achieve another sequential quarterly increase, due primarily to seasonality. We are encouraged by Distribution's results for the June quarter, considering the difficult market conditions, and it has demonstrated its ability to quickly recover product cost increases. We recognize that there is more to do and continue to focus on improving this business' margins and reducing working capital requirements.

'We are significantly ahead of plan in achieving our run-rate annualized cost savings of $40 million by year-end fiscal 2009. Through the June quarter, we have achieved run-rate savings of $22 million, primarily in our Water Technologies and Performance Materials businesses. We expect to have run-rate savings well in excess of $40 million by the beginning of the December quarter.

'Our internal benchmark of operating-segment trade working capital to sales decreased by nearly 0.5 percent of annualized sales in the June quarter, excluding the impact of working capital added through acquisitions. We are pleased with our progress and expect to achieve further reductions in the working capital requirements of our businesses.'

Concluding his comments, O'Brien said, 'While the economic environment continues to present a challenge, we have announced a number of strategic moves that enable us to strengthen our profile as a specialty chemicals company.