Ashland Global Holdings Inc.
ASHLAND INC. (Form: 10-Q, Received: 02/05/2010 16:14:24)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

 
 

 
FORM 10-Q

 
 
 
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2009
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to ___________
 
 
Commission file number 1-32532
 
ASHLAND INC.
 
(a Kentucky corporation)
I.R.S. No. 20-0865835
 
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
 

 
 
Indicate by check  mark  whether the Registrant: (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ    No  o     
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).      Yes o     No ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.  (Check One):
 
 Large Accelerated Filer þ  Accelerated Filer o   
  Non-Accelerated Filer o   Smaller Reporting Company o
  (Do not check if a smaller reporting company.)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o     No  þ
 
At December 31, 2009, there were 78,060,533 shares of Registrant’s Common Stock outstanding.
 


 
 
 
 

PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
               
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
             
STATEMENTS OF CONSOLIDATED INCOME
             
               
   
Three months ended
   
   
December 31
   
(In millions except per share data - unaudited)
 
2009
   
2008
  (d) 
               
SALES
  $ 2,020     $ 1,966    
                   
COSTS AND EXPENSES
                 
Cost of sales  (a)
    1,534       1,641    
Selling, general and administrative expenses (a)
    334       317    
  Research and development expenses (b)     20       27    
      1,888       1,985    
EQUITY AND OTHER INCOME
    14       12    
                   
OPERATING INCOME (LOSS)
    146       (7 )  
Net interest and other financing expense
    (41 )     (28 )  
Net gain on divestitures
    -       1    
Other expenses (c)
    -       (86 )  
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    105       (120 )  
Income tax expense (benefit) - Note J
    29       (1 )  
INCOME (LOSS) FROM CONTINUING OPERATIONS
    76       (119 )  
Income from discontinued operations (net of income taxes) - Note E
    10       -    
NET INCOME (LOSS)
  $ 86     $ (119 )  
                   
BASIC EARNINGS PER SHARE - Note K
                 
Income (loss) from continuing operations
  $ .99     $ (1.73 )  
Income from discontinued operations
    .14       -    
Net income (loss)
  $ 1.13     $ (1.73 )  
                   
DILUTED EARNINGS PER SHARE - Note K
                 
Income (loss) from continuing operations
  $ .97     $ (1.73 )  
Income from discontinued operations
    .13       -    
Net income (loss)
  $ 1.10     $ (1.73 )  
                   
DIVIDENDS PAID PER COMMON SHARE
  $ .075     $ .075    
                   
                   
 
(a)
The three months ended December 31, 2009 includes $2 million within the selling, general and administrative expenses caption for restructuring charges.  The three months ended December 31, 2008 includes a $26 million severance charge within the selling, general and administrative expense caption for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs and a $21 million charge recorded within the cost of sales caption for a one-time fair value assessment of Hercules inventory as of the date of the transaction.
(b)
The three months ended December 31, 2008 includes a $10 million charge related to the valuation of the ongoing research and development projects at Hercules as of the merger date.  In accordance with applicable GAAP and SEC accounting regulations, these purchased in-process research and development costs were expensed upon acquisition.
(c)
The three months ended December 31, 2008 includes a $54 million loss on currency swaps related to the Hercules acquisition and a $32 million loss on auction rate securities.
(d)
Results from the acquired operations of Hercules are included herein as of November 14, 2008 through December 31, 2008.
 
 
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
2
 
 
 
 
 
 
                   
                   
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
                 
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
                   
   
December 31
   
September 30
   
December 31
 
(In millions - unaudited)
 
2009
   
2009
   
2008
 
                   
ASSETS
                 
                   
CURRENT ASSETS
                 
Cash and cash equivalents
  $ 406     $ 352     $ 222  
Accounts receivable (a)
    1,289       1,392       1,499  
Inventories - Note H
    593       527       688  
Deferred income taxes
    101       115       103  
Other current assets
    32       40       121  
Current assets held for sale - Note C
     46       41       88  
      2,467       2,467       2,721  
NONCURRENT ASSETS
                       
Auction rate securities - Note F
    126       170       225  
Goodwill - Note I
    2,213       2,220       2,100  
Intangibles - Note I
    1,182       1,204       1,328  
Asbestos insurance receivable (noncurrent portion) - Note O
    484       510       447  
Deferred income taxes      100       161        
Other noncurrent assets
    585       596       639  
Noncurrent assets held for sale - Note C
    60        61        91  
      4,750       4,922       4,830  
PROPERTY, PLANT AND EQUIPMENT
                       
Cost
    3,451       3,449       3,429  
Accumulated depreciation and amortization
    (1,438 )     (1,391 )     (1,238 )
      2,013       2,058       2,191  
                         
TOTAL ASSETS
  $ 9,230     $ 9,447     $ 9,742  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
                         
CURRENT LIABILITIES
                       
Short-term debt - Note G
  $ 28     $ 23     $ 246  
Current portion of long-term debt - Note G
    50       53       94  
Trade and other payables      834       944       871  
Accrued expenses and other liabilities
    439       541       505  
Current liabilities held for sale - Note C
    6         5        23  
      1,357       1,566       1,739  
NONCURRENT LIABILITIES
                       
Long-term debt (noncurrent portion) - Note G
    1,516       1,537       2,128  
Employee benefit obligations - Note L
    1,118       1,214       663  
Asbestos litigation reserve (noncurrent portion) - Note O
    906       956       807  
Deferred income taxes
    -       -       236  
Other noncurrent liabilities
    579       590       569  
      4,119       4,297       4,403  
                         
STOCKHOLDERS’ EQUITY
    3,754       3,584       3,600  
                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 9,230     $ 9,447     $ 9,742  
                         
                         
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $38 million and $31 million at December 31, 2009 and 2008, respectively, and $38 million at September 30, 2009.
 
 
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .
 
3
 
 

 
 
 
 
 
 
 
 
  ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
  STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
 
                      Accumulated         
                      other         
    Common     Paid-in     Retained     comprehensive         
 (In millions - unaudited)   stock     capital     earnings     income (loss)  (a)    Total  
                               
BALANCE AT SEPTEMBER 30, 2008
  $ 1     $ 33     $ 3,138     $ 30     $ 3,202  
Total comprehensive (loss) income (b)
                    (119 )     59       (60 )
Regular dividend, $.075 per common share
                    (6 )             (6 )
Issuance of common shares - Note M              450                       450  
Issued 169,308 common shares under stock                                         
   incentive and other plans (c)
            13                       13  
Other               1                       1  
BALANCE AT DECEMBER 31, 2008
  $ 1     $ 497     $ 3,013     $ 89     $ 3,600  
                                         
                                         
BALANCE AT SEPTEMBER 30, 2009
  $ 1     $ 521     $ 3,185     $ (123 )   $ 3,584  
Total comprehensive (loss) income (b)
                    86       (19 )     67  
Regular dividends, $.075 per common share
                    (6 )             (6 )
Issuance of common shares (d) - Note M
            100                       100  
Issued 224,677 common shares under stock
                                       
   incentive and other plans
            9                       9  
BALANCE AT DECEMBER 31, 2009
  $ 1     $ 630     $ 3,265     $ (142 )   $ 3,754  
                                         
                                                                                                                                                                                            
(a)
At December 31, 2009 and 2008, the after-tax accumulated other comprehensive income (loss) of ($142) million for 2009 and $89 million for 2008 was comprised of pension and postretirement obligations of $462 million for 2009 and $106 million for 2008 and net unrealized translation gains of $320 million for 2009 and $195 million for 2008.
(b)
Reconciliations of net income (loss) to total comprehensive income (loss) follow.
 
                                         
                                             
             
 
    Three months ended
               
December 31
 
(In millions)
                            2009         2008  
                                             
 
Net income (loss)
                          $ 86       $ (119 )
 
Pension and postretirement obligation adjustments, net of tax
                      -         1  
 
Unrealized translation (loss) gain, net of tax
                            (19 )       38  
 
Unrealized losses on investment securities, net of tax
                      -         20  
 
Total comprehensive income (loss)
                          $ 67       $ (60 )
                                             
                                             
 

(c)  
Includes $10 million from fair value of Hercules stock options converted into stock options for Ashland shares.
(d)  
Relates to the November 2009 voluntary pension plan contribution of approximately 3.0 million shares of Ashland Common Stock.
 
                                         
 
                                           
 
 
 
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
 
4
 
 
 
 
 
 
             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
           
             
   
Three months ended
 
   
December 31
 
(In millions - unaudited)
 
2009
   
2008
 
             
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
           
 Net income (loss)   86     (119 )
 Income from discontinued operations (net of income taxes)
    (10     -  
 Adjustments to reconcile income (loss) from continuing operations to cash flows from operating activities
               
Depreciation and amortization
    80       62  
Debt issuance cost amortization      6       6  
Purchased in-process research and development amortization
    -       10  
Deferred income taxes
    26       13  
Equity income from affiliates
    (6 )     (5 )
Distributions from equity affiliates
    5       2  
Gain from sale of property and equipment
    (2 )     -  
Stock based compensation expense
    4       2  
Stock contributions to qualified savings plans      9       -  
Net gain on divestitures
    -       (1 )
Inventory fair value adjustment related to Hercules acquisition
    -       21  
Loss on currency swaps related to Hercules acquisition
    -       54  
Loss on auction rate securities
    -       32  
Change in operating assets and liabilities (a)
    (163     (3 )
      35       74  
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
               
Additions to property, plant and equipment
    (21 )     (38 )
Proceeds from disposal of property, plant and equipment
    3       2  
Purchase of operations - net of cash acquired
    -       (2,082 )
Proceeds from sale of operations
    -        7  
Settlement of currency swaps related to Hercules acquisition
    -       (95 )
Proceeds from sales and maturities of available-for-sale securities
    44       18  
      26       (2,188 )
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
               
Proceeds from issuance of long-term debt
    -       2,000  
Repayment of long-term debt
    (25 )     (601 )
Proceeds from/repayments of issuance of short-term debt
    6       205  
Debt issuance/modification costs
    -       (138 )
Cash dividends paid
    (6 )     (6 )
Proceeds from exercise of stock options
    1       -  
      (24 )     1,460  
CASH PROVIDED (USED) BY CONTINUING OPERATIONS
    37       (654 )
Cash used by discontinued operations
               
Operating cash flows
    13       5  
Effect of currency exchange rate changes on cash and cash equivalents
    4       (15 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    54       (664 )
                 
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
    352       886  
                 
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 406     $ 222  
                 
                 
(a)     Excludes changes resulting from operations acquired or sold.
 
 
 
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
 
5
 

 
 
 
 




ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE A   BASIS OF PRESENTATION
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations.  In the opinion of management all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.  Results of operations for the period ended December 31, 2009, are not necessarily indicative of results to be expected for the year ending September 30, 2010.  Certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.
 
In November 2008, Ashland completed the acquisition of Hercules which changed Ashland’s reporting structure.  Ashland is composed of five reporting segments:  Ashland Aqualon Functional Ingredients (Functional Ingredients), previously Hercules’ Aqualon Group, Ashland Hercules Water Technologies (Water Technologies), which includes Hercules’ Paper Technologies and Ventures segment as well as Ashland’s legacy Water Technologies segment, Ashland Performance Materials (Performance Materials), Ashland Consumer Markets (Consumer Markets), and Ashland Distribution (Distribution).  See Notes C and P for additional information on the Hercules acquisition and reporting segment results.
 
The preparation of Ashland’s Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities as well as qualifying subsequent events.  Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and intangible assets), employee benefit obligations, income taxes, other liabilities and associated receivables for asbestos litigation, environmental remediation and asset retirement obligations.  Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.  Ashland has evaluated the period from December 31, 2009, the date of the financial statements, through February 5, 2010, the date of the issuance and filing of the financial statements, and determined that no material subsequent events have occurred that would affect the information presented in these financial statements nor require additional disclosure.
 
 
NOTE B – NEW ACCOUNTING STANDARDS
 
Changes to estimates of financial statement impacts due to the adoption of new accounting standards and new accounting standards issued during the current fiscal year are included in interim financial reporting.  A detailed listing of all new accounting policies material to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
 
In October 2009, the Financial Accounting Standards Board (FASB) issued accounting guidance related to separating consideration in multiple-deliverable revenue arrangements (ASC 605-25 Revenue Recognition – Multiple-Element Arrangements).  Under this guidance, multiple-deliverable arrangements will be accounted for separately (rather than as a combined unit) by selecting the best evidence of selling price among, vendor-specific objective evidence, third-party evidence or estimated selling price.  Additionally, this guidance eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  This guidance will become effective for Ashland on October 1, 2010.  The adoption of this guidance is not expected to have a material impact on the Condensed Consolidated Financial Statements.

6

 
 
 
 



ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE C – ACQUISITIONS AND DIVESTITURES
 
Acquisitions
 
On November 13, 2008, Ashland completed its acquisition of Hercules.  The acquisition creates a defined core for Ashland composed of three specialty chemical businesses which includes specialty additives and ingredients, paper and water technologies, and specialty resins.  The acquisition also creates a leadership position in attractive and growing renewable/sustainable chemistries.
 
The merger was recorded by Ashland using the purchase method of accounting in accordance with applicable U.S. GAAP whereby the total purchase price, including qualifying transaction-related expenses, were allocated to tangible and intangible assets and liabilities acquired based upon their respective fair values.
 
The total merger purchase price related to the Hercules acquisition was $2,594 million.  The total merger consideration for outstanding Hercules Common Stock was $2,096 million in cash and $450 million in Ashland Common Stock, the remaining value of the transaction related to cash consideration and value for restricted stock units, stock options and transaction costs.  Each share of Hercules Common Stock issued and outstanding immediately prior to the effective time of the Hercules acquisition was converted into the right to receive $18.60 in cash and 0.0930 of a share of Ashland Common Stock, subject to the payment of cash in lieu of fractional shares of Ashland Common Stock.  Ashland exchanged 10.5 million Ashland common shares for the 112.7 million shares of outstanding Hercules Common Stock on November 13, 2008.
 
The Hercules acquisition was financed in part through $2,600 million in secured financing from Bank of America Securities LLC, Scotia Capital (USA) Inc. and other lenders consisting of a $400 million revolving credit facility, a $400 million term loan A facility, an $850 million term loan B facility, a $200 million accounts receivable securitization facility and a $750 million bridge loan, which was subsequently replaced in May 2009 by $650 million senior unsecured notes and $100 million in cash generated from operations.  The total debt drawn upon the closing of the completed merger was approximately $2,300 million with the remaining cash consideration for the transaction paid from Ashland’s existing cash, which was used in part to extinguish $594 million of existing Hercules debt and to pay transaction fees associated with the financing facilities.
 
The following table summarizes the values of the assets acquired and liabilities assumed at the date of acquisition, as well as adjustments that have been made as a result of ongoing valuations.

 
7
 
 
 
 



ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE C – ACQUISITIONS AND DIVESTITURES (continued)
 
           
 
Purchase price allocation (in millions)
 
  At
November 13
2008
   
  Assets :
 
 
 
 
    Cash $ 54    
 
  Accounts receivable
  355    
    Inventory   261    
    Other current assets   57    
    Intangible assets   1,116    
    Goodwill   1,815    
    Asbestos receivable   97    
    Property, plant and equipment   1,059    
    Purchased in-process research and development   10    
    Other noncurrent assets   164    
  Liabilities :        
    Accounts payable   (232  
    Accrued expenses   (217  
    Debt  
(798
)
 
    Pension and other postretirement obligations  
(316
)
 
    Environmental     (106 )  
    Asbestos  
(459
)
 
    Deferred tax - net  
(144
)
 
    Other noncurrent liabilities  
(122
)
 
  Total purchase price
$
2,594
   
 
The purchase price allocation for the acquisition was completed during the December 2009 quarter.  Adjustments made during the current quarter primarily related to asbestos liabilities and receivables, as a result of the final assessment after completion of the review of the underlying claim files, as well as certain valuation adjustments to previously recorded purchase accounting or pre-acquisition amounts within legal, environmental and income taxes.  See Note O for more information related to the assumed asbestos liabilities.  See Note I for more information related to goodwill.
 
Purchased in-process research and development (IPR&D) represents the value assigned in a business combination to acquired research and development projects that, as of the date of the acquisition, had not established technological feasibility and had no alternative future use.  Amounts assigned to IPR&D meeting these criteria must be charged to expense as part of the allocation of the purchase price of the business combination.  Ashland recorded pretax charges totaling $10 million associated with the Hercules acquisition within the research and development expenses caption of the Statement of Consolidated Income.  The estimated values assigned to the IPR&D projects were determined based on a discounted cash flow model assigned to the following projects:
 
 
           
 
(In millions)
       
 
Functional Ingredients
Corebond
$ 2    
 
Water Technologies
Biofilm Sensor
$ 2    
 
Water Technologies
Surface Dry Strength
$ 2    
 
Functional Ingredients / Water Technologies
Other
$ 4    
             
 
 

 
8

 
 
 
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE C – ACQUISITIONS AND DIVESTITURES (continued)
 
Ashland has identified approximately $255 million of certain product trade names, within the Functional Ingredients and Water Technologies businesses, that have been designated as indefinite-lived assets.  Ashland’s designation of an indefinite life for these assets took many factors into consideration, including the current market leadership position of the brands as well as their recognition worldwide in the industry.  The remaining $861 million identified finite-lived intangible assets are being amortized over their respective estimated useful lives.  Ashland determined the useful lives of the customer relationships, developed technology and product trade names to be 10 to 24 years, 5 to 20 years and 20 years, respectively.  The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future cash flows of the combined company.  In addition, Ashland reviewed certain technological trends and also considered the relative stability in the current Hercules customer base.
 
               
         
Life
 
 
Intangible asset type (in millions)
Value
   
(years)
 
 
Customer relationships - Functional Ingredients
$ 289       10 - 24    
 
Customer relationships - Water Technologies
  240       12    
 
Developed technology - Functional Ingredients
  217       15    
 
Developed technology - Water Technologies
  60       5 - 20    
 
Product trade names - Functional Ingredients
  32       20    
  Product trade names - Functional Ingredients   104      Indefinite  
 
Product trade names - Water Technologies
  151    
Indefinite
 
 
Other
   23    
36 - 47
 
 
Total
$ 1,116            
 
 
Divestitures
 
In January 2010, Ashland sold its refined wood rosin and natural wood terpenes business, formerly known as Pinova, a business unit of Functional Ingredients, to TorQuest Partners in a transaction valued at approximately $75 million before tax, which is comprised of $60 million in cash and a $15 million promissory note from TorQuest Partners.  The Pinova business, with annual revenues of approximately $85 million a year, has approximately 200 employees along with an associated manufacturing facility located in Brunswick, Georgia.  The transaction is not expected to have a gain or loss associated with its sale.  As part of this sale agreement, TorQuest Partners has agreed to continue to manufacture certain products on behalf of Ashland.
 
 
In August 2009, Ashland sold its global marine services business known as Drew Marine, a business unit of Water Technologies, to J. F. Lehman & Co. in a transaction valued at approximately $120 million before tax, which was subsequently reduced by $4 million after giving affect to post-closing adjustments related to working capital.  Drew Marine had annual revenues of approximately $140 million a year.  The transaction resulted in a pretax gain of $56 million, which was included in the net gain on divestiture caption on the Statements of Consolidated Income for the quarter ended September 2009.  As part of this sale arrangement Ashland has agreed to continue to manufacture certain products on behalf of Drew Marine.
 
As a result of these divestitures, the assets and liabilities of these businesses, for both current and prior periods, have been reflected as assets and liabilities held for sale within the Condensed Consolidated Balance Sheets and are comprised of the following components:
 
 

9
 
 
 
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE C – ACQUISITIONS AND DIVESTITURES (continued)
 
                       
      December 31    
September 30
    December 31    
 
(In millions - unaudited)
 
2009
   
2009
   
2008
   
 
Accounts receivable
  $ 13     $ 13     $ 40    
 
Inventories
    33       28       48    
 
Current Assets
  $ 46     $ 41     $ 88    
                             
 
Property, plant and equipment, net
  $ 38     $ 39     $ 43    
  Goodwill and intangible assets     -       -       15    
  Other noncurrent assets     -       -       6    
  Noncurrent assets   $ 38     $ 39     $ 64    
                             
  Trade payables   $ 6     $ 5     $ 22    
 
Accrued expenses and other liabilities
    -       -       1    
 
Current liabilities
  $ 6     $ 5     $ 23    
 
In addition to the Drew Marine and Pinova assets, Ashland held for sale noncurrent assets of $22 million, $27 million and $22 million as of December 31, 2009 and 2008 and September 30, 2009, respectively, primarily related to corporate aircraft, non-operational properties and certain Valvoline Instant Oil Change locations.  The noncurrent assets held for sale are required to be measured at fair value on a nonrecurring basis for periods subsequent to October 1, 2009.  The fair values were based on definitive agreements of sale or other market quotes which would be considered significant unobservable market inputs (Level 3) within the fair value hierarchy.  See also Note F – Fair Value Measurements – for further information on the fair value hierarchy.
 
In December 2008, Ashland completed the sale of its indirectly held 33.5 percent ownership interest in FiberVisions Holdings, LLC (FiberVisions) to Snow Phipps Group, LLC (Snow Phipps), a New York-based private equity firm and the majority owner of FiberVisions for $7 million.  FiberVisions, a leading global producer of specialty fibers for nonwoven fabrics and textile fibers used in consumer and industrial products, was acquired by Ashland as part of the Hercules acquisition.  The sale of the company’s interest in FiberVisions generated a capital loss of approximately $220 million for tax purposes that could be used to offset capital gains.  Certain elections with respect to this capital loss have been filed and approved by the Internal Revenue Service and, therefore, this capital loss can be used to offset past or future capital gains.  The unutilized capital loss benefit was fully offset by a deferred tax asset valuation allowance because Ashland is not permitted to anticipate additional future capital gains; therefore, no tax benefit was recognized on this transaction.
 
In June 2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of understanding to form a new, global 50-50 joint venture to serve foundries and the metal casting industry.  The joint venture would combine three businesses:  Ashland’s Casting Solutions business group, the foundry-related businesses of Süd-Chemie, and Ashland-Südchemie-Kernfest GmbH (ASK), the existing European-based joint venture between Ashland and Süd-Chemie.  Ashland’s Casting Solutions and ASK businesses recorded revenues of approximately $375 million for fiscal year 2009.  The foundry-related businesses of Süd-Chemie AG to be contributed to the joint venture generated revenues of approximately $220 million for the year ended December 31, 2008.  Ashland and Süd-Chemie AG continue discussions with respect to a possible joint venture, with changes to the scope and other aspects of this project presently being considered.
 
10
 
 

 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE D – RESTRUCTURING ACTIVITIES
 
During 2008, Ashland implemented operational redesigns (2008 Program), primarily within Ashland’s Water Technologies and Performance Materials businesses, to take proactive steps to enhance profitability through streamlined operations and an improved overall cost structure of the businesses.  This program continued during 2009 and was further expanded to capture additional cost saving opportunities.
 
In conjunction with the Hercules acquisition in November 2008, Ashland announced an integration plan (Integration Plan) that targeted certain projected cost savings as part of combining joint and redundant services and facilities.  This program focused primarily on capturing operational, selling and administrative savings within the combined company.  Additionally, with the prolonged and significant deterioration of global economic demand during 2009, Ashland announced in January 2009 an additional cost reduction and organizational restructuring plan (2009 Program), which was subsequently expanded in July 2009, to further reduce Ashland’s overall cost structure.
 
In total, Ashland has achieved run-rate cost reductions in excess of $400 million related to these cost reduction initiatives.  The cumulative effect of these restructuring activities has resulted in the elimination of approximately 1,850 employee positions and eight permanent facility closings through the end of the December 2009 quarter and in total is currently expected to reduce the global workforce by over 2,000 employees, or approximately 13% by the end of 2010.  The total restructuring cost incurred under the cost-structure efficiency programs for the three months ended December 31, 2009 and 2008 was $2 million and $42 million, respectively, of which $2 million and $26 million, respectively, was classified within the selling, general and administrative expense caption.  The remaining reserve of $16 million in the December 2008 quarter related to severance associated with Hercules personnel, which qualified for purchase method of accounting in accordance with United States generally accepted accounting principles (U.S. GAAP or GAAP), and had no effect on the Statement of Consolidated Income.  Additional costs from reductions in resources or facilities may occur in future periods; which could include charges related to additional severance, plant closings, reassessed pension plan valuations or other items, although Ashland does not currently expect these to be significant.  Ashland anticipates completing these restructuring activities during 2010.
 
The following table details at December 31, 2009 and 2008, the amount of restructuring reserves related to the cost-structure efficiency and Hercules integration programs included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets and the related activity in these reserves for the three months ended December 31, 2009 and 2008. 
 
 
 
(In millions)
   
Severance
   
 
 
   Balance as of September 30, 2008 $  7    
   Restructuring reserve    42    
   Utilization (cash paid or otherwise settled)    (1 )  
   Balance at December 31, 2008 $  48    
           
   Balance as of September 30, 2009 $  38    
   Restructuring reserve    2    
   Utilization (cash paid or otherwise settled)    (9 )  
   Balance at December 31, 2009 $  31    
 
 
NOTE E – DISCONTINUED OPERATIONS 
 
Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary, and from the acquisition during 2009 of Hercules, a wholly owned subsidiary of Ashland.  Additional adjustments to the recorded litigation reserves and related

 
 
11
 

 

 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE E - DISCONTINUED OPERATIONS (continued)
 
insurance receivables continue periodically and primarily reflect updates to the estimates.  See Note O for more information related to the current period adjustment on asbestos.
 
Ashland’s divestiture of APAC during 2006 qualified as a discontinued operation.  As a result, the previous operating results, assets and liabilities related to Ashland Paving And Construction (APAC) have been reflected as discontinued operations in the Condensed Consolidated Financial Statements.  Ashland has made subsequent adjustments to the gain on the sale of APAC, primarily relating to the tax effects of the sale, during the three month period ended December 31, 2009.  Such adjustments may continue to occur in future periods and are reflected in the period they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.
 
Components of amounts reflected in the Statements of Consolidated Income related to discontinued operations are presented in the following table for the three months ended December 31, 2009 and 2008.

                   
             
 
    Three months ended
               
December 31
 
(In millions)
                            2009         2008  
  Income from discontinued operations (net of tax)                              
 
Asbestos-related litigation reserves and receivables
    $ 9       $ -  
   Income on disposal of discontinued operations (net of tax)
   APAC                             1         -  
    Total income from discontinued operations (net of tax)         $ 10       -  
                                             
                                             
 
 
NOTE F – FAIR VALUE MEASUREMENTS
 
As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value.  Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  An instrument’s categorization within the fair value hierarchy is based upon the lowest level on input that is significant to the instrument’s fair value measurement.  The three levels within the fair value hierarchy are described as follows:
 
Level 1 —Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
 
Level 2 —Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
Level 3 —Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date.  Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability.  The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
 
For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for
 
 
12
 
 
 
 
 
 
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 


NOTE F – FAIR VALUE MEASUREMENTS (continued)
any terms specific to that asset or liability.  For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.
 
The following table summarizes financial asset instruments subject to recurring fair value measurements as of December 31, 2009.  Ashland did not have any financial liability instruments subject to recurring fair value measurements as of December 31, 2009.

                                     
                    Quoted prices                
                   
in active
   
Significant
         
                   
markets for
   
other
   
Significant
   
     
 
      Total     
identical
   
observable
   
unobservable
   
     
Carrying
      fair     
assets
   
inputs
   
inputs
   
 
(In millions)
 
value
      value     
Level 1
   
Level 2
   
Level 3
   
 
Assets
                                 
 
Cash and cash equivalents
  $ 406     406     $ 406     $ -     $ -    
 
Auction rate securities
    126       126       -       -       126    
 
Deferred compensation investments (a)
    173       173       67       106       -    
 
Investments (a)
    3       3       3       -       -    
 
Total assets at fair value
  $ 708     708     $ 476     $ 106     $ 126    
                                             
 
  (a) 
Included in other noncurrent assets in the Condensed Consolidated Balance Sheet.
 
 
Level 3 instruments
 
Auction rate securities
 
At December 31, 2009, Ashland held at par value $142 million of student loan auction rate securities for which there was not an active market with consistent observable inputs.  Since the second quarter of fiscal 2008, the auction rate securities market became largely illiquid, as there was not enough demand to purchase all of the securities that holders desired to sell at par value during certain auctions.  Since this time the market for auction rate securities has failed to achieve equilibrium.  Due to the uncertainty as to when active trading will resume in the auction rate securities market, Ashland believes the recovery period for certain of these securities may extend beyond a twelve-month period.  At December 31, 2009, auction rate securities totaled $126 million and were classified as noncurrent assets in the Condensed Consolidated Balance Sheet.
 
During the December 2009 quarter, Ashland sold $50 million (par value) auction rate securities for $44 million in cash proceeds which approximated book value.  In December 2008, Ashland sold $20 million (par value) auction rate securities for $18 million in cash proceeds and recognized a loss of $2 million.  Additionally, in the December 2008 quarter Ashland recorded a $30 million temporary unrealized loss as permanent in the other expenses caption of the Statement of Consolidated Income.  A full valuation allowance was established for this tax benefit since Ashland did not have capital gains to offset this capital loss.
 
The following table provides a reconciliation of the beginning and ending balances of Ashland’s auction rate securities, as these are Ashland’s only assets measured at fair value using significant unobservable inputs (Level 3).
 
           
           
 
(In millions)
 
Level 3
   
 
Balance as of October 1, 2009 (par value)
  $ 170    
 
Sales of auction rate securities
    (44 )  
 
Balance as of December 31, 2009
  $ 126    
             
 
 
13
 
 
 
 



ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE F – FAIR VALUE MEASUREMENTS (continued)
 
Derivative and hedging activities
 
Currency Hedges
 
Ashland conducts business in a variety of foreign currencies.  Accordingly, Ashland regularly uses foreign currency derivative instruments to manage exposure on certain transactions denominated in foreign currencies to curtail the earnings volatility effects of short-term assets and liabilities denominated in currencies other than Ashland’s functional currency (the U.S. dollar).
 
Ashland contracts with counter-parties to buy and sell foreign currencies to offset the impact of exchange rate changes on transactions denominated in non-functional currencies, including short-term inter-company loans.  These contracts generally require exchange of one foreign currency for another at a fixed rate at a future date and generally have maturities of less than twelve months.  All contracts are marked-to-market with net changes in fair value recorded within the selling, general and administrative expenses caption.  For the three months ended December 31, 2009 and 2008, losses of $1 million for each period were recorded in the Statement of Consolidated Income for these contracts.  The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in non-functional currencies.  The net loss position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of December 31, 2009 was less than $1 million, consisting of a gain of less than $1 million with a notional amount of $43 million offset by a loss of less than $1 million with a notional amount of $56 million, and was included in other noncurrent assets and liabilities, respectively.  The net gain position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of December 31, 2008 was $1 million, consisting of a gain of $2 million with a notional amount of $48 million offset by a loss of $1 million with a notional amount of $37 million, and was included in other noncurrent assets and liabilities, respectively.  As of December 31, 2009 there were no open foreign currency derivatives which qualified for hedge accounting treatment.
 
Interest Rate Hedges
 
During 2009, Ashland purchased a three year interest rate cap on a notional amount of $300 million of variable rate debt.  This interest rate cap fixes Ashland’s interest rate on that outstanding variable interest rate debt when LIBOR interest rates equal or exceed 7% on a reset date.  Pursuant to the senior credit agreement, Ashland was required to enter into and maintain interest rate swap contracts in an amount sufficient to result in not less than 50% of the aggregated outstanding indebtedness for borrowed money (excluding amounts borrowed under the revolving credit facility) being subject to interest at a fixed rate until the maturity thereof, whether by the terms of such indebtedness or by the terms of such interest rate swap contracts for an initial period of no less than three years.  This interest rate cap qualifies as an interest rate swap within the provisions of the senior credit agreement.
 
This instrument does not qualify for hedge accounting and therefore gains or losses reflecting changes in fair value, along with the amortization of the upfront premium paid by Ashland to purchase the instrument, are reported in the Statements of Consolidated Income within the net interest and other financing (expense) income caption.  As of December 31, 2009, the fair value on the interest rate cap was an asset less than $1 million and recorded within the other noncurrent assets caption of the Condensed Consolidated Balance Sheet.
 
Other financial instruments
 
At December 31, 2009, Ashland’s long-term debt had a carrying value of $1,566 million compared to a fair value of $1,758 million.  The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates.

 
 
14
 




ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE G – DEBT
 
The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.
 
     
December 31
   
September 30
   
December 31
   
 
(In millions)
 
2009
   
2009
   
2008
   
 
Term loan A, due 2013 (a)
  $ 207     $ 219     $ 400    
 
Term loan B, due 2014 (a)
    536       542       850    
 
6.60% notes, due 2027 (b)
    12       12       12    
 
9.0% Bridge loan, due 2009
    -       -       750    
 
Accounts receivable securitization
    -       -       200    
 
9.125% notes, due 2017
    628       628       -    
 
Medium-term notes, due 2013-2019, interest at a weighted-
                         
 
average rate of 8.4% at December 31, 2009 (7.7% to 9.4%)
    21       21       21    
 
8.80% debentures, due 2012
    20       20       20    
 
6.86% medium-term notes, Series H, due 2009
    -       -       17    
 
Hercules Tianpu - term notes, due through 2011   (b)
    12       19       44    
 
6.50% junior subordinated notes, due 2029 (b)
    125       125       124    
 
International revolver agreements
    28       22       18    
 
Other
    5       5       12    
 
Total debt
    1,594       1,613       2,468    
 
Short-term debt
    (28 )     (23 )     (246 )  
 
Current portion of long-term debt
    (50 )     (53 )     (94 )  
 
Long-term debt (less current portion)
  $ 1,516     $ 1,537     $ 2,128    
                             
   (a)  Senior credit facilities.                          
   (b) Hercules retained instruments.                          
 
The scheduled aggregate maturities of debt by fiscal year are as follows: $55 million remaining in 2010, $71 million in 2011, $64 million in 2012, $95 million in 2013 and $531 million in 2014.  Total borrowing capacity remaining under the $400 million revolving credit facility was $282 million, which was reduced by $118 million for letters of credit outstanding at December 31, 2009.  Additionally, at December 31, 2009, Ashland had approximately $173 million in available funding from qualifying receivables sold to a wholly owned accounts receivable securitization facility that was renewed during the current quarter and now is set to expire on November 3, 2010.
 
Covenants and other related items
 
Ashland is subject to certain restrictions from various debt covenants related to the senior credit agreement entered into in November 2008.  This agreement originally provided for an aggregate principal amount of $1,650 million in senior credit facilities, consisting of a $400 million five year term loan A facility, an $850 million five and one-half year term loan B facility and a $400 million five-year revolving credit facility.  These debt covenants include certain affirmative covenants such as various internal certifications, maintenance of property, preferential security interest in acquired property and applicable insurance coverage as well as negative covenants that include financial covenant restrictions associated with leverage and fixed charge coverage ratios, total net worth and capital expenditure levels and restrictions on future dividend payments and stock repurchases.  As of December 31, 2009, Ashland is in compliance with all credit facility covenant restrictions.
 
At December 31, 2009, Ashland’s calculation of the consolidated leverage ratio per the senior credit agreement was 1.6 compared to the maximum consolidated leverage ratio permitted under Ashland’s senior credit agreement of 3.50.  At December 31, 2009, Ashland’s calculation of the fixed charge coverage ratio per the senior credit agreement was 3.6 compared to the permitted consolidated fixed charge coverage ratio of 1.25.  Further information regarding the terminology and calculation methodology governing the senior
 
15
 
 
 
 
 

 
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE G – DEBT (continued)
 
credit agreement can be located in a Form 8-K filed on November 21, 2008, as amended, as well as Ashland’s most recent Form 10-K filing.
 
Under Ashland’s financing facilities, the minimum consolidated net worth covenant at the end of any fiscal quarter ending after December 31, 2008 must not be less than 85% of Ashland’s consolidated net worth as of December 31, 2008, after giving effect to any purchase accounting adjustments relating to the Hercules acquisition subsequent to December 31, 2008, increased on a cumulative basis for each subsequent quarter commencing with January 1, 2009 by an amount equal to 50% of Ashland’s U.S. GAAP reported net income (to the extent positive with no deduction for net losses) plus 100% of net cash proceeds of any issuance of equity interests (other than disqualified equity interests).  As of December 31, 2009 Ashland’s consolidated calculation of net worth based on the loan covenant was $3,778 million versus the minimum consolidated net worth covenant of $3,198 million, a difference of $580 million.  This difference would be adversely impacted by any future operating losses, impairment (including goodwill, intangible assets and property, plant and equipment), pension remeasurement, severance or other related charges that reduce Ashland’s consolidated net worth.
 
As part of the financing arrangements to acquire Hercules, Ashland is now subject to the following capital expenditure limits: approximately $300 million in fiscal year 2010, which includes an approximate $50 million carryforward from fiscal 2009 in accordance with the senior credit agreement, $330 million in fiscal year 2011, $360 million in fiscal year 2012, $370 million in fiscal year 2013 and $375 million in fiscal year 2014.  Per the senior credit agreement, 50% of any amount set forth above that is not expended in the fiscal year for which it is permitted above may be carried over for expenditure in the next following fiscal year.
 

NOTE H – INVENTORIES
 
Inventories are carried at the lower of cost or market.  Certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.  The remaining inventories are stated at cost using the average cost method.  The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
     
December 31
   
September 30
   
December 31
   
 
(In millions)
 
2009
   
2009
   
2008
   
 
Finished products
  $ 609     $ 540     $ 724    
 
Raw materials, supplies and work in process
    112       112       150    
 
LIFO carrying values
    (128 )     (125 )     (186 )  
      $ 593     $ 527     $ 688    
                             
 
NOTE I – GOODWILL AND OTHER INTANGIBLES
 
In accordance with U.S. GAAP, Ashland reviews goodwill and other intangible assets for impairment either annually or when events and circumstances indicate an impairment may have occurred.  This annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value.  Ashland has determined its reporting units for allocation of goodwill include the Functional Ingredients, Water Technologies, Consumer Markets and Distribution reportable segments.  Within the Performance Materials reportable segment, because further discrete financial information is provided and management regularly reviews this information, this reportable segment is further broken down into the Casting Solutions and Composites and Adhesives reporting units.  Ashland had its most recent annual goodwill impairment test as of July 1, 2009 and has determined that no impairment exists.
 
16
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE I – GOODWILL AND OTHER INTANGIBLES (continued)
 
Ashland’s purchase of Hercules increased goodwill by $1,815 million.  In connection with the goodwill associated with this acquisition, Ashland determined that a certain amount of the goodwill should be allocated to all reporting units because each reporting unit will benefit from synergies related to the acquisition that will increase these businesses’ overall reported profitability.  Ashland calculated the increased value each reporting unit is expected to receive from the estimated synergy savings, which was then multiplied by industry valuation multiples for each specific reporting unit, in determining the appropriate amount of goodwill to allocate for this transaction.
 
The following is a progression of goodwill by segment for the periods ended December 31, 2009 and 2008.
 
                                         
   
Functional
   
Water
   
Performance
     
Consumer
               
 
(In millions)
Ingredients
   
Technologies
   
Materials
 
(a)
 
Markets
   
Distribution
   
Total
   
 
Balance at September 30, 2009
$ 1,106     $ 626     $ 293       $ 115     $ 80     $ 2,220    
 
Acquisitions
  6       3       -         -       -       9    
 
Currency translation adjustment
  (13 )     (3 )     -         -       -       (16 )  
 
Balance at December 31, 2009
$ 1,099     $ 626     $ 293       $ 115     $ 80     $ 2,213    
                                                     
                                                     
  (a) 
Goodwill consisted of $51 million and $242 million, respectively, for the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units.
 
 
                                         
   
Functional
   
Water
   
Performance
     
Consumer
               
 
(In millions)
Ingredients
   
Technologies
  (a) 
Materials
 
(b)
 
Markets
   
Distribution
   
Total
   
 
Balance at September 30, 2008
$ -     $ 56     $ 196       $ 30     $ 1     $ 283    
  Acquisitions   981       490        97         85       79        1,732    
 
Currency translation adjustment
  64       24       (3 )       -       -       85    
 
Balance at December 31, 2008
$ 1,045     $ 570     $ 290       $ 115     $ 80     $ 2,100    
                                                     
                                                     
(a)  
Excludes goodwill of $15 million as of December 31, 2008 associated with the Drew Marine sale during 2009 that has been classified within assets held for sale.
 
(b)  
Goodwill consisted of $51 million and $239 million, respectively, for the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units.
 
 
Intangible assets consist of trademarks and trade names, patents and licenses, non-compete agreements, sale contracts, customer lists and intellectual property. Intangibles with definite lives are amortized on a straight-line basis over their estimated useful lives. The cost of trademarks and trade names is amortized principally over 15 to 25 years, intellectual property over 5 to 20 years, customer relationships over 3 to 24 years and other intangibles over 2 to 50 years.
 
Certain intangible assets have been classified as indefinite lived and had a balance of $290 million as of December 31, 2009 and 2008. In accordance with U.S. GAAP, Ashland annually reviews these assets to determine whether events and circumstances continue to support the indefinite useful life designation. Intangible assets were comprised of the following as of each period disclosed below.
 
     
December 31, 2009
 
     
Gross
         
Net
   
     
carrying
   
Accumulated
 
carrying
   
 
(In millions)
 
amount
   
amortization
 
amount
   
 
Trademarks and trade names
  $ 353     $ (25 )   $ 328    
 
Intellectual property
    331       (47 )     284    
 
Customer relationships
    581       (50 )     531    
 
Other intangibles
    63       (24 )     39    
 
Total intangible assets
  $ 1,328     $ (146 )   $ 1,182    
                             
                             
 
17
 
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE I – GOODWILL AND OTHER INTANGIBLES (continued)
 
     
September 30, 2009
   
     
Gross
         
Net
   
     
carrying
   
Accumulated
 
carrying
   
 
(In millions)
 
amount
   
amortization
 
amount
   
 
Trademarks and trade names
  $ 353     $ (24 )   $ 329    
 
Intellectual property
    331       (41 )     290    
 
Customer relationships
    586       (40 )     546    
 
Other intangibles
    63       (24 )     39    
 
Total intangible assets
  $ 1,333     $ (129 )   $ 1,204    
                       
 
 
   
     
December 31, 2008
   
     
Gross
         
Net
   
     
carrying
   
Accumulated
 
carrying
   
 
(In millions)
 
amount
   
amortization
 
amount
   
 
Trademarks and trade names
  $ 367     $ (22 )   $ 345    
 
Intellectual property
    343       (24 )     319    
 
Customer relationships
    655       (10 )     645    
 
Other intangibles
    38       (19 )     19    
 
Total intangible assets
  $ 1,403     $ (75 )   $ 1,328    
 
Amortization expense recognized on intangible assets for the three months ended December 31 was $18 million for 2009 and $13 million for 2008 and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Income.
 
Estimated amortization expense for future periods is $65 million in 2010 (includes three months actual and nine months estimated), $63 million in 2011, $62 million in 2012, $61 million in 2013 and $60 million in 2014.

NOTE J – INCOME TAXES
 
For the three months ended December 31, 2009 and 2008, Ashland’s effective tax rates were 27.6% and 0.6%, respectively.  The significant items that generated the variance between the U.S. federal statutory rate and the effective rates are included in the following table.
 
     
Three months ended
   
     
December 31
   
 
(In millions)
 
2009
   
2008
   
 
Income (loss) from continuing operations before income taxes
  $ 105     $ (120 )  
 
Income tax expense (benefit) computed at U.S. Federal statutory rates (35%)
  $ 37     $ (42 )  
 
Increase (decrease) in amount computed resulting from:
                 
 
Resolution, evaluation and re-evaluation of tax positions
    (6 )     9    
 
Adjustment of statutory rates for projected annual income
    (3 )     3    
 
Nondeductible life insurance loss
    (1 )     5    
 
Nondeductible in-process research and development costs
    -       3    
 
APB 23 repatriated earnings (a)
    -       14    
 
Auction rate securities valuation allowance
    -       10    
 
Research and development tax credits
    -       (3 )  
 
Other
    2       -    
 
Income tax expense (benefit)
  $ 29     $ (1 )  
                     
                     
(a)  
Represents repatriation of historical earnings of certain foreign subsidiaries.
 
18
 
 


ASHLAND INC . AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE J – INCOME TAXES (continued)
 
It is reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next twelve months as the result of settlement of ongoing audits.  However, Ashland does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Condensed Consolidated Financial Statements.
 
Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2009.