Ashland Global Holdings Inc.
ASHLAND INC. (Form: 10-Q, Received: 08/06/2010 08:45:23)



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 June 30, 2010
 
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 Web site, 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 þ   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 June 30, 2010, there were 78,730,445 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
   
Nine months ended
 
   
June 30
   
June 30
 
(In millions except per share data - unaudited)
 
2010
   
2009
   
2010
   
2009
 
                         
SALES
  $ 2,362     $ 2,037     $ 6,630     $ 5,993  
                                 
COSTS AND EXPENSES
                               
Cost of sales (a)
    1,838       1,544       5,110       4,716  
Selling, general and administrative expenses (a)
    351       330       1,038       976  
Research and development expenses (b)
    23       23       63       73  
      2,212       1,897       6,211       5,765  
EQUITY AND OTHER INCOME
    13       12       42       29  
                                 
OPERATING INCOME
    163       152       461       257  
Net interest and other financing expense (c)
    (26 )     (62 )     (172 )     (144 )
Net gain on acquisitions and divestitures (d)
    23       1       18       2  
Other income and expenses (e)
    -       -       1       (86 )
INCOME FROM CONTINUING OPERATIONS
                               
BEFORE INCOME TAXES
    160       91       308       29  
Income tax expense - Note J
    26       40       79       49  
INCOME (LOSS) FROM CONTINUING OPERATIONS
    134       51       229       (20 )
Income (loss) from discontinued operations (net of income taxes) - Note E
    14       (1 )     27       (2 )
NET INCOME (LOSS)
  $ 148     $ 50     $ 256     $ (22 )
                                 
BASIC EARNINGS PER SHARE - Note K
                               
Income (loss) from continuing operations
  $ 1.71     $ .69     $ 2.95     $ (.27 )
Income (loss) from discontinued operations
    .18       (.02 )     .34       (.03 )
Net income (loss)
  $ 1.89     $ .67     $ 3.29     $ (.30 )
                                 
DILUTED EARNINGS PER SHARE - Note K
                               
Income (loss) from continuing operations
  $ 1.67     $ .68     $ 2.89     $ (.27 )
Income (loss) from discontinued operations
    .18       (.02 )     .34       (.03 )
Net income (loss)
  $ 1.85     $ .66     $ 3.23     $ (.30 )
                                 
DIVIDENDS PAID PER COMMON SHARE
  $ .15     $ .075     $ .30     $ .225  
                                 
                                 
(a)
The three and nine months ended June 30, 2009 include $9 million and $13 million, respectively, within the cost of sales caption and $4 million and $39 million, respectively, within the selling, general and administrative expenses caption for restructuring charges related to the ongoing integration and reorganization from the Hercules Incorporated (Hercules) acquisition and other cost reduction programs.  In addition, a charge of $37 million for the nine months ended June 30, 2009 was 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 nine months ended June 30, 2009 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 GAAP and SEC accounting regulations applicable at the date of acquisition, these purchased in-process research and development costs were expensed upon acquisition.
(c)
The nine months ended June 30, 2010 includes a $66 million charge related to the refinancing of the Senior Credit Facility and related extinguishment of debt during the March quarter.
(d)
Includes a gain of $23 million for the three and nine months ended June 30, 2010 related to Ashland’s acquisition of the additional 50% interest in Ara Quimica S.A. (Ara Quimica).
(e)
The nine months ended June 30, 2009 includes a $54 million loss on currency swaps related to the Hercules acquisition and a $32 million loss on auction rate securities.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
 
 
2
 
 

                   
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
                 
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
                   
   
June 30
   
September 30
   
June 30
 
(In millions - unaudited)
 
2010
   
2009
   
2009
 
                   
ASSETS
                 
                   
CURRENT ASSETS
                 
Cash and cash equivalents
  $ 484     $ 352     $ 256  
Accounts receivable (a)
    1,569       1,392       1,405  
Inventories - Note H
    611       527       517  
Deferred income taxes
    102       115       95  
Other current assets
    50       40       57  
Current assets held for sale - Note C
    2       41       89  
      2,818       2,467       2,419  
NONCURRENT ASSETS
                       
Auction rate securities - Note F
    54       170       188  
Goodwill - Note I
    2,131       2,220       2,150  
Intangibles - Note I
    1,103       1,204       1,178  
Asbestos insurance receivable (noncurrent portion) - Note O
    463       510       464  
Deferred income taxes
    99       161       -  
Other noncurrent assets
    545       596       564  
Noncurrent assets held for sale - Note C
    20       61       88  
      4,415       4,922       4,632  
PROPERTY, PLANT AND EQUIPMENT
                       
Cost
    3,370       3,449       3,448  
Accumulated depreciation and amortization
    (1,458 )     (1,391 )     (1,334 )
      1,912       2,058       2,114  
                         
TOTAL ASSETS
  $ 9,145     $ 9,447     $ 9,165  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
                         
CURRENT LIABILITIES
                       
Short-term debt - Note G
  $ 287     $ 23     $ 44  
Current portion of long-term debt - Note G
    32       53       71  
Trade and other payables
    1,020       944       783  
Accrued expenses and other liabilities
    474       541       455  
Current liabilities held for sale - Note C
    -       5       17  
      1,813       1,566       1,370  
NONCURRENT LIABILITIES
                       
Long-term debt (noncurrent portion) - Note G
    1,102       1,537       1,878  
Employee benefit obligations - Note L
    1,129       1,214       657  
Asbestos litigation reserve (noncurrent portion) - Note O
    855       956       828  
Deferred income taxes
    -       -       147  
Other noncurrent liabilities
    590       590       578  
      3,676       4,297       4,088  
                         
STOCKHOLDERS’ EQUITY
    3,656       3,584       3,707  
                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 9,145     $ 9,447     $ 9,165  
                         
                         
(a)
Accounts receivable includes an allowance for doubtful accounts of $26 million and $43 million at June 30, 2010 and 2009, 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 income (loss) (b)
                    (22 )     71         49  
Regular dividend, $.225 per common share
                    (17 )               (17 )
Issuance of common shares - Note M
            450                         450  
Common shares issued under stock
                                         
   incentive and other plans (c) (d)
            26                         26  
Other
            (3 )                       (3 )
BALANCE AT JUNE 30, 2009
  $ 1     $ 506     $ 3,099     $ 101       $ 3,707  
                                           
                                           
BALANCE AT SEPTEMBER 30, 2009
  $ 1     $ 521     $ 3,185     $ (123 )     $ 3,584  
Total comprehensive income (loss) (b)
                    256       (285 )       (29 )
Regular dividend, $.30 per common share
                    (23 )               (23 )
Issuance of common shares (e) - Note M
            100                         100  
Common shares issued under stock
                                         
   incentive and other plans (c) (d)
            24                         24  
BALANCE AT JUNE 30, 2010
  $ 1     $ 645     $ 3,418     $ (408 )     $ 3,656  
                                           
(a)
At June 30, 2010 and 2009, the after-tax accumulated other comprehensive (loss) income of ($408) million for 2010 and $101 million for 2009 was comprised of pension and postretirement obligations of $453 million for 2010 and $107 million for 2009 and net unrealized translation gains of $45 million for 2010 and $208 million for 2009.
(b)
Reconciliations of net income (loss) to total comprehensive (loss) income follow.
 
             
   
Three months ended
   
Nine months ended
 
   
June 30
   
June 30
 
(In millions)
 
2010
   
2009
   
2010
   
2009
 
                         
Net income (loss)
  $ 148     $ 50     $ 256     $ (22 )
Pension and postretirement obligation adjustments, net of tax
    (1 )     (2 )     9       -  
Unrealized translation (loss) gain, net of tax
    (171 )     112       (294 )     51  
Unrealized gain on investment securities, net of tax
    -       -       -       20  
Total comprehensive (loss) income
  $ (24 )   $ 160     $ (29 )   $ 49  
                                 
                                 
(c)  
Common shares issued were 894,589 and 922,920 for the nine months ended June 30, 2010 and 2009, respectively.
(d)  
Includes income tax benefits resulting from the exercise of stock options of $8 million for the nine months ended June 30, 2010.  Includes $10 million from the fair value of Hercules stock options converted into stock options for Ashland shares for the nine months ended June 30, 2009.
(e)  
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
           
             
   
Nine months ended
   
June 30
(In millions - unaudited)
 
2010
   
2009
 
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
           
Net income (loss)
  $ 256     $ (22 )
(Income) loss from discontinued operations (net of income taxes)
    (27 )     2  
Adjustments to reconcile income (loss) from continuing operations
               
  to cash flows from operating activities
               
Depreciation and amortization
    226       244  
Debt issuance cost amortization
    77       35  
Purchased in-process research and development amortization
    -       10  
Deferred income taxes
    45       33  
Equity income from affiliates
    (16 )     (9 )
Distributions from equity affiliates
    11       13  
Gain from sale of property and equipment
    (5 )     -  
Stock based compensation expense
    10       6  
Stock contributions to qualified savings plans
    18       8  
Net gain on acquisitions and divestitures
    (18 )     (2 )
Loss on early retirement of debt
    5       -  
Inventory fair value adjustment related to Hercules acquisition
    -       37  
Loss on currency swaps related to Hercules acquisition
    -       54  
(Gain) loss on auction rate securities
    (1 )     32  
Change in operating assets and liabilities (a)
    (283 )     208  
      298       649  
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
               
CONTINUING OPERATIONS
               
Additions to property, plant and equipment
    (100 )     (107 )
Proceeds from disposal of property, plant and equipment
    14       5  
Purchase of operations - net of cash acquired
    (24 )     (2,080 )
Proceeds from sale of operations
    60       7  
Settlement of currency swaps related to Hercules acquisition
    -       (95 )
Proceeds from sales and maturities of available-for-sale securities
    117       55  
      67       (2,215 )
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES FROM
               
CONTINUING OPERATIONS
               
Proceeds from issuance of long-term debt
    313       2,628  
Repayment of long-term debt
    (776 )     (1,502 )
Proceeds from/repayments of issuance of short-term debt
    264       3  
Debt issuance costs
    (13 )     (161 )
Cash dividends paid
    (23 )     (17 )
Proceeds from exercise of stock options
    6       2  
Excess tax benefits related to share-based payments
    2       -  
      (227 )     953  
CASH PROVIDED (USED) BY CONTINUING OPERATIONS
    138       (613 )
Cash used by discontinued operations
               
Operating cash flows
    -       (1 )
Effect of currency exchange rate changes on cash and cash equivalents
    (6 )     (16 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    132       (630 )
                 
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
    352       886  
                 
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 484     $ 256  
                 
(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 June 30, 2010 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, and liabilities and receivables associated with 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.
 

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
 
Ara Quimica
 
In April 2010, Ashland acquired the remaining 50% interest in Ara Quimica, a leading producer of custom unsaturated polyester resin formulations for the composites industry in South America, for $28 million.  Prior to the acquisition, Ashland owned a 50% interest in Ara Quimica, which it recorded as an equity-method investment within the Performance Materials reporting segment.  Ara Quimica reported sales of approximately $50 million from its most recent fiscal year ended December 31, 2009.  Ashland recognized a pretax gain of $23 million as a result of revaluing its existing equity interest held in Ara Quimica before the business combination.  The gain is included in the net gain on acquisitions and divestitures caption on the Statements of Consolidated Income for the current quarter.
 
Hercules
 
On November 13, 2008, Ashland completed its acquisition of Hercules.  The acquisition created 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 created 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 United States generally accepted accounting principles (U.S. GAAP or GAAP) whereby the total purchase price, including qualifying transaction-related expenses, was 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.  A significant amount of this debt has been repaid, and during the March 2010 quarter Ashland refinanced the remaining debt from this transaction.  For further information on the refinancing and remaining debt outstanding see Note G.
 
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   1,093    
    Goodwill   1,808    
    Asbestos receivable   97    
    Property, plant and equipment   1,058    
    Purchased in-process research and development   10    
    Other noncurrent assets   187    
  Liabilities :        
    Accounts payable   (232  
    Accrued expenses   (217  
    Debt  
(798
)
 
    Pension and other postretirement obligations  
(316
)
 
    Environmental     (106 )  
    Asbestos  
(451
)
 
    Deferred tax - net  
(144
)
 
    Other noncurrent liabilities  
(122
)
 
  Total purchase price
$
2,594
   
 
The purchase price allocation for the acquisition was essentially completed during the December 2009 quarter.  Adjustments made during the December 2009 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 and environmental 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 were part of the allocation of the purchase price of the business combination.  Ashland recorded pretax expense 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)

As part of the valuation of the Hercules acquisition, Ashland recorded $1,093 million of intangible assets.  Of these intangible assets, 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 worldwide recognition in the industry.  The remaining $838 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
 
 
Total
$ 1,093            
 
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 was comprised of $60 million in cash and a $15 million five-year promissory note from TorQuest Partners.  The Pinova business, with annual revenues of approximately $85 million per year, had approximately 200 employees along with an associated manufacturing facility located in Brunswick, Georgia.  The transaction resulted in a pretax gain of less than $1 million, which was included in the net gain on acquisitions and divestitures caption on the Statements of Consolidated Income for the quarter ended March 2010.  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 per year.  The transaction resulted in a pretax gain of $56 million, which was included in the net gain on acquisitions and divestitures 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 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)
 
                       
      June 30    
September 30
    June 30    
 
(In millions - unaudited)
 
2010
   
2009
   
2009
   
 
Accounts receivable
  $ 1     $ 13     $ 42    
 
Inventories
    1       28       46    
  Other current assets     -       -       1    
 
Current assets
  $ 2     $ 41     $ 89    
                             
 
Property, plant and equipment, net
  $ -     $ 39     $ 42    
  Goodwill and intangible assets     -       -       15    
  Deferred income tax     -       -       -    
  Other noncurrent assets     -       -       6    
  Noncurrent assets   $ -     $ 39     $ 63    
                             
  Trade payables   $ -     $ 5     $ 16    
 
Accrued expenses and other liabilities
    -       -       1    
 
Current liabilities
  $ -     $ 5     $ 17    
 
In addition to the Drew Marine and Pinova assets and liabilities identified above that were previously designated in prior periods as held for sale, Ashland held other noncurrent assets for sale of $20 million, $25 million and $22 million as of June 30, 2010 and 2009 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 carrying value or below this level if an impairment is indicated.  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.
 
Other divestiture activity
 
In December 2008, Ashland completed the sale of its indirectly held 33.5% 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 Ashland’s interest in FiberVisions generated a capital loss of approximately $220 million for tax purposes that can be used to offset 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 initially recognized on this transaction.
 
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
 
 
 
10
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE D – RESTRUCTURING ACTIVITIES (continued)
 
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 of $425 million related to these cost reduction initiatives.  The cumulative effect of these restructuring activities has resulted in 12 permanent facility closings through the end of the June 30, 2010 quarter, and in total has reduced the global workforce by over 2,000 employees, or approximately 13%, exceeding the previous estimate by over 100 employees.  The total restructuring cost incurred under the cost-structure efficiency programs for the three and nine months ended June 30, 2010 was income of $2 million and expense of $1 million, respectively, and was classified within the selling, general and administrative expenses caption.  The total restructuring cost incurred under the cost-structure efficiency programs for the three and nine months ended June 30, 2009 was $16 million and $73 million, respectively, of which $4 million and $39 million, respectively, was classified within the selling, general and administrative expenses caption and $9 million and $13 million were charged to the cost of sales caption.  For the three and nine months ended June 30, 2009, the remaining cost of $3 million and $21 million, respectively, related to established severance reserves associated with Hercules personnel which qualified for purchase method of accounting in accordance with U.S. 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 principally completing these restructuring activities during 2010.
 
The following table details at June 30, 2010 and 2009, 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 nine months ended June 30, 2010 and 2009.
 
 
 
 
(In millions)
    S everance
 
 
   Balance as of September 30, 2009 $ 38    
   Restructuring reserve    1    
   Utilization (cash paid or otherwise settled)    (25 )  
   Balance at June 30, 2010 $  14    
           
   Balance as of September 30, 2008 $ 7    
   Restructuring reserve   73    
   Utilization (cash paid or otherwise settled)    (32 )  
   Balance at June 30, 2009 $ 48    
 
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 of Ashland, and from the acquisition of Hercules during fiscal 2009, a wholly owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables continue periodically and primarily reflect updates to the estimates.  During the three and nine month periods ended June 30, 2010 and 2009, Ashland recorded income from asbestos-related items, as a result of Ashland’s ongoing assessment of these matters.  See Note O for more information related to the adjustments on asbestos liabilities and receivables.
 
Ashland’s divestiture of Ashland Paving And Construction (APAC) during 2006 qualified as a discontinued operation.  As a result, the previous operating results, assets and liabilities related to APAC have been
 
 
 
 
11
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE E – DISCONTINUED OPERATIONS (continued)
 
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 and nine month periods ended June 30, 2010 and 2009.  In addition, Ashland recorded an adjustment to the gain on the sale of the Electronic Chemicals business (divested in 2003) as a result of adjustments to environmental claims associated with the transaction.  Such adjustments to these and other divested businesses 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 and nine months ended June 30, 2010 and 2009.
 
                             
     
Three months ended
   
Nine months ended
   
     
June 30
   
June 30
   
 
(In millions)
 
2010
   
2009
   
2010
   
2009
   
 
Income from discontinued operations (net of tax)
                         
 
Asbestos- related litigation reserves and receivables
  $ 12     $ 3     $ 21     $ 3    
 
APAC
     1        -        1        -    
 
Gain (loss) on disposal of discontinued operations (net of tax)
                                 
 
APAC
    1       (1     3       (2  
 
Electronic Chemicals
    -       (3     2       (3  
 
Total income (loss) from discontinued operations (net of tax)
  $ 14     $ (1   $ 27     $ (2  
 
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 occasional market quotes or sales of similar instruments or 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 (market
 

 
12
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)
 
approach), adjusted for 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 June 30, 2010.  Ashland did not have any financial liability instruments subject to recurring fair value measurements as of June 30, 2010.
 
                                     
                    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
  $ 484     484     $ 484     $ -     $ -    
 
Auction rate securities
    54       54       -       -       54    
 
Deferred compensation investments (a)
    166       166       63       103       -    
 
Investments (a)
    1       1       1       -       -    
 
Total assets at fair value
  $ 705     705     $ 548     $ 103     $ 54    
                                             
  (a)
Included in other noncurrent assets in the Condensed Consolidated Balance Sheet.
 
 
Level 3 instruments
 
Auction rate securities
 
At June 30, 2010, Ashland held $54 million of student loan auction rate securities, that had a par value $61 million, for which there was not an active market with consistent observable inputs.  During 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.  As a result, these instruments have been classified as noncurrent assets in the Condensed Consolidated Balance Sheet.
 
The following details the auction rate securities sold during the applicable periods.
 
                             
   
Three months ended
        Nine months ended  
      June 30     June 30  
 
(In millions)
 
2010
   
2009
   
2010
   
2009
   
 
Par value
  $ 37     $ 29     $ 132     $ 62    
 
Cash received
    33       26       117       55    
 
Gain or (loss)
    -       -       1       (2 )  
 
During the December 2008 quarter, Ashland liquidated $20 million (par and book value) auction rate securities for $18 million in cash proceeds and recognized a loss of $2 million.  As a result of this sale, as well as Ashland’s debt structure following the Hercules acquisition and the ongoing impact from the global economic downturn, Ashland also determined in the December 2008 quarter that it no longer had the intent to hold these instruments until their maturity date.  As a result, Ashland recorded a $30 million temporary unrealized loss as permanent in the other income and expenses caption of the Statement of Consolidated Income.  At that time, a full valuation allowance was established for this tax benefit since Ashland did not have capital gains to offset this capital loss.
 
 
 
13
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)
 
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
  $ 170    
 
Sales of auction rate securities
    (117 )  
 
Realized gain recognized in the Consolidated Statement of Income
    1    
 
Balance as of June 30, 2010
  $ 54    
             
 
Balance as of October 1, 2008
  $ 243    
 
Sales of auction rate securities
    (55 )  
 
Balance as of June 30, 2009
  $ 188    
             
 
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 the functional currency of an entity.
 
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 and nine months ended June 30, 2010, losses of less than $1 million and $1 million, respectively, were recorded in the Statement of Consolidated Income for these contracts.  For the three and nine months ended June 30, 2009, losses of less than $1 million and gains of $2 million, respectively, 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.
 
Ashland’s net gain position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of June 30, 2010 was less than $1 million, consisting of a gain of $1 million with a notional amount of $54 million offset by a loss of less than $1 million with a notional amount of $51 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 June 30, 2009 was less than $1 million, consisting of a gain of $1 million with a notional amount of $61 million offset by a loss of $1 million with a notional amount of $44 million, and was included in other noncurrent assets and liabilities, respectively.  As of June 30, 2010, 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.  This interest rate cap qualifies as an interest rate swap within the provisions of the Senior Credit Agreement.  This instrument does not qualify for
 
 
 
 
14
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)
 
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 caption.  As of June 30, 2010 and 2009, the fair value on the interest rate cap was less than $1 million and recorded within the other noncurrent assets caption of the Condensed Consolidated Balance Sheet.
 
Other financial instruments
 
At June 30, 2010, Ashland’s long-term debt had a carrying value of $1,134 million compared to a fair value of $1,323 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.
 

NOTE G – DEBT
 
The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.
                       
     
June 30
   
September 30
   
June 30
   
 
(In millions)
 
2010
   
2009
   
2009
   
 
Term Loan A, due 2013 (a)
  $ -     $ 219     $ 340    
 
Term Loan B, due 2014 (a)
    -       542       780    
 
Term Loan A, due 2014 (a)
    296       -       -    
 
6.60% notes, due 2027 (b)
    12       12       12    
 
Accounts receivable securitization
    250       -       -    
 
9.125% notes, due 2017
    630       628       628    
 
Medium-term notes, due 2013-2019, interest at a weighted-
                         
 
average rate of 8.4% at June 30, 2010 (7.7% to 9.4%)
    21       21       21    
 
8.80% debentures, due 2012
    20       20       20    
 
Hercules Tianpu - term notes, due through 2011   (b)
    14       19       19    
  Hercules Jiangmen - term notes, due through 2010 (b)     -       -       1    
  Hercules Nanjing - term notes, due 2015     13       -       -    
 
6.50% junior subordinated notes, due 2029 (b)
    126       125       124    
 
International revolver agreements
    38       22       45    
 
Other
    1       5       3    
 
Total debt
    1,421       1,613       1,993    
 
Short-term debt
    (287 )     (23 )     (44 )  
 
Current portion of long-term debt
    (32 )     (53 )     (71 )  
 
Long-term debt (less current portion)
  $ 1,102     $ 1,537     $ 1,878    
                             
  (a) Senior credit facilities.  On March 31, 2010, Term Loan A due 2014 was entered into while the Term Loan A due 2013 and Term Loan B due 2014 were paid in full.  
 
(b)
Hercules retained instruments.
 
 
The scheduled aggregate maturities of debt by fiscal year are as follows: $15 million remaining in 2010, $59 million in 2011, $27 million in 2012, $323 million in 2013, $203 million in 2014 and $794 million in 2015 and thereafter. 
 

 
15
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE G – DEBT (continued)
 
Senior Credit Facilities
 
On March 31, 2010, as part of a refinancing of its then-existing senior credit facilities, Ashland entered into a Credit Agreement with Bank of America, N.A., as Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, and the other Lenders party thereto, (the “Senior Credit Agreement”).  The Senior Credit Agreement provides for an aggregate principal amount of $850 million in senior secured credit facilities (the “Senior Credit Facilities”), consisting of a $300 million four-year Term Loan A facility and a $550 million revolving credit facility.  The proceeds from the borrowings from the Term Loan A facility were used, together with proceeds from the accounts receivable securitization facility described below, and cash on hand to repay all amounts outstanding under Ashland’s previous senior secured facilities and to pay for fees and expenses incurred in connection with the Senior Credit Facilities and the related transactions.  The new revolving credit facility will provide ongoing working capital and will be used for other general corporate purposes as well as support for the issuance of letters of credit.
 
The Senior Credit Facilities are guaranteed by Ashland’s present and future subsidiaries (other than certain immaterial subsidiaries, regulated subsidiaries, joint ventures, special purpose finance subsidiaries, certain foreign subsidiaries and certain unrestricted subsidiaries) and are secured by a first priority security interest in substantially all the personal property assets of Ashland and such guarantor subsidiaries, including the capital stock or other equity interests of certain of Ashland’s U.S. and first-tier foreign subsidiaries and a portion of the stock of certain of Ashland’s other first-tier foreign subsidiaries.  The Senior Credit Facilities may cease to be secured upon Ashland achieving an Investment Grade corporate family rating as defined in the Senior Credit Agreement.
 
The Senior Credit Facilities carried an initial interest rate of either LIBOR plus 275 points or base rate plus 175 basis points, at Ashland’s option, and as of June 30, 2010, the weighted-average interest rate on the Term Loan A was 2.8%.  Total borrowing capacity remaining under the $550 million revolving credit facility was $428 million, representing a reduction of $122 million for letters of credit outstanding at June 30, 2010.  The Term Loan A facility was drawn in full at closing and is required to be repaid by Ashland in consecutive quarterly installments commencing with the installment due on June 30, 2010, with 5% of the original principal amount due during year one, 7.5% of the original principal amount due during year two, 10% of the original principal amount due during year three, and 77.5% of the original principal amount due during year four (in quarterly installments of 5.0%, 5.0%, 5.0% and 62.5%), with a final payment of all outstanding principal and interest on March 31, 2014.
 
As a result of the new Senior Credit Agreement and prepayments made during the March 2010 quarter, Ashland expensed $62 million of the remaining $84 million debt issuance costs related to the loan fees paid to originate the initial term facility and incurred an additional $4 million of prepayment fee penalties related to the previous Term Loan B facility, which were included in the net interest and other financing expense caption in the Statements of Consolidated Income.  In addition, Ashland incurred $12 million of new debt issuance costs associated with the new Senior Credit Agreement that will be recognized as an expense ratably over the life of the new term of the agreement.
 
Covenant restrictions
 
The Senior Credit Facilities include less restrictive covenants than the previous credit facility and no longer contain covenants associated with minimum consolidated net worth and capital expenditure limits.  The covenants contain certain usual and customary representations and warranties, and usual and customary affirmative and negative covenants which include financial covenants; limitations on liens, additional indebtedness, further negative pledges, investments, payment of dividends, mergers, sale of assets and restricted payments; and other customary limitations. 
 

 
 
16
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
           
 
 
NOTE G - DEBT (continued)
   
The maximum consolidated leverage ratio permitted under the Senior Credit Facilities are as follows:  3.25 from the period March 31, 2010 through September 30, 2010, 3.00 from the period December 31, 2010 through September 30, 2011 and 2.75 from December 31, 2011 and each fiscal quarter thereafter. 
 
The permitted consolidated fixed charge coverage ratio under the Senior Credit Facility is 1.25 from the period March 31, 2010 through September 30, 2010 and 1.50 from December 31, 2010 and for each fiscal quarter thereafter.
 
As of June 30, 2010, Ashland is in compliance with all credit facility covenant restrictions.  At June 30, 2010, Ashland’s calculation of the consolidated leverage ratio per the refinancing was 0.9 compared to the maximum consolidated leverage ratio permitted under Ashland’s Senior Credit Agreement of 3.25.  At June 30, 2010, Ashland’s calculation of the fixed charge coverage ratio was 5.5 compared to the permitted consolidated ratio of 1.25.
 
Accounts receivable securitization
 
As part of the refinancing described above, on March 31, 2010, Ashland amended and restated its existing accounts receivable securitization facility, pursuant to (i) a First Amendment to Sale Agreement, between Ashland and CVG Capital II, LLC, a wholly-owned “bankruptcy remote” special purpose subsidiary of Ashland (“CVG”), which amended the Sale Agreement, dated as of November 13, 2008 (as so amended, the “Sale Agreement”) and (ii) an Amended and Restated Transfer and Administration Agreement (the “Transfer and Administration Agreement”), among CVG, Ashland, each of Liberty Street Funding LLC, Market Street Funding LLC and Three Pillars Funding LLC, as Conduit Investors and Uncommitted Investors, The Bank of Nova Scotia, as the Agent (the “Agent”), a Letter of Credit Issuer, a Managing Agent, an Administrator and a Committed Investor, PNC Bank, National Association, as a Letter of Credit Issuer, a Managing Agent, an Administrator and a Committed Investor, SunTrust Bank, as a Letter of Credit Issuer and a Committed Investor, SunTrust Robinson Humphrey, Inc., as a Managing Agent and an Administrator and Wells Fargo Bank, National Association, as a Letter of Credit Issuer, a Managing Agent and a Committed Investor, as acknowledged and agreed to by Bank of America, National Association and YC SUSI Trust, as exiting parties.
 
The primary purposes of the amendment of the accounts receivable securitization facility were to increase the maximum available funds under the facility from $200 million to $350 million and to extend the maturity date of the facility to March 29, 2013.  During the March 2010 quarter, Ashland incurred an additional $1 million in fees related to the amendment and restatement of the facility that was capitalized and included within other noncurrent assets within the Condensed Consolidated Balance Sheet.  At June 30, 2010, the outstanding amount of accounts receivable sold by Ashland to CVG was $689 million.  Ashland had drawn $250 million under the facility as of June 30, 2010 of the approximate $350 million in available funding from qualifying receivables.
 
As part of the receivables securitization facility, under the Sale Agreement Ashland will sell, on an ongoing basis, substantially all of its qualifying accounts receivable (but not those of its subsidiaries), certain related assets and the right to the collections on those accounts receivable to CVG.  Under the terms of the Transfer and Administration Agreement, CVG may, from time to time, obtain up to $350 million (in the form of cash or letters of credit for the benefit of Ashland and its other subsidiaries) from the Conduit Investors, the Uncommitted Investors and/or the Committed Investors (together the “Investors”) through the sale of its interest in such receivables, related assets and collections or by financing those receivables, related assets and rights to collection.  Ashland accounts for its transfers under the facility as secured borrowings, and the receivables sold pursuant to the facility are included in the Condensed Consolidated Balance Sheet as accounts receivable.  Borrowings under the facility will be repaid as accounts receivable are collected, with
 
 
 

 
17
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
 
NOTE G – DEBT (continued)

new borrowings created as, and when, CVG requests additional fundings from the Investors under the Transfer and Administration Agreement, which will generally occur on a monthly basis.  Once sold to CVG, the accounts receivable, related assets and rights to collection described above will be separate and distinct from Ashland’s own assets and will not be available to its creditors should Ashland become insolvent.  Ashland’s equity interest in CVG has been pledged to the lenders under Ashland’s new senior secured credit facilities described above.  Substantially all of CVG’s assets have been pledged to the Agent in support of its obligations under the Transfer and Administration Agreement.
 
The foregoing summary of the Transfer and Administration Agreement and the First Amendment to Sale Agreement is qualified in its entirety by reference to the text of such agreements, which are filed as Exhibits 10.2 and 10.3 to Ashland’s Form 8-K filed on April 6, 2010.  The original Sale Agreement dated as of November 13, 2008, was filed as Exhibit 10.4 to Ashland’s Form 8-K filed on November 19, 2008.
 
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 .   During the three and nine month periods ended June 30, 2009 certain inventory quantities valued under the LIFO method were reduced.  This reduction resulted in a liquidation of LIFO quantities carried at lower costs prevailing in prior years as compared with the cost of purchases within the periods presented, the effect of which decreased cost of goods sold for the three and nine months ended June 30, 2009 by $3 million and $14 million, respectively.   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.
                       
     
June 30
   
September 30
   
June 30
   
 
(In millions)
 
2010
   
2009
   
2009
   
 
Finished products
  $ 598     $ 486     $ 468    
 
Raw materials, supplies and work in process
    159       166       168    
 
LIFO carrying values
    (146 )     (125 )     (119 )  
      $ 611     $ 527     $ 517    
 
NOTE I – GOODWILL AND OTHER INTANGIBLES
 
In accordance with U.S. GAAP, Ashland reviews goodwill and other intangible assets for impairment annually and when events and circumstances indicate an impairment may have occurred.  The 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 Composite Polymers/Specialty Polymers and Adhesives reporting units.  Ashland performed its most recent annual goodwill impairment test as of July 1, 2009, and determined at that time, that no impairment existed.
 
Ashland’s purchase of Hercules increased goodwill by $1,808 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 is benefiting from synergies related to the acquisition that increases 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.
 
 
18
 
 

             
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           
             
 
NOTE I – GOODWILL AND OTHER INTANGIBLES (continued)

The following is a progression of goodwill by segment for the periods ended June 30, 2010 and 2009.
                                         
   
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
  1       1       42         -       -       44    
 
Currency translation adjustment
  (80 )     (43 )     (10 )       -       -       (133 )  
 
Balance at June 30, 2010
$ 1,027     $ 584     $ 325       $ 115     $ 80     $ 2,131    
                                                     
  (a)
Goodwill consisted of $51 million and $274 million, respectively, for the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units.  The addition of $42 million of goodwill is related to the Ara Quimica acquisition.
 
                                         
   
Functional
   
Water
   
Performance
     
Consumer
                   
 
(In millions)
Ingredients
   
Technologies
 
(a)
Materials
 
(b)
 
Markets
   
Distribution
   
Total
   
 
Balance at September 30, 2008
$ -     $ 56     $ 196       $ 30     $ 1     $ 283