Edgar Filing: ASHLAND INC.

form10q.htm

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 March 31, 2009

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 (§232.405 of this chapter) 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 March 31, 2009, there were 74,159,149 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					Six months ended
	March 31					March 31
(In millions except per share data - unaudited)	2009			2008		2009			2008

SALES AND OPERATING REVENUES	$	1,990		$	2,059	$	3,956		$	3,964

COSTS AND EXPENSES
Cost of sales and operating expenses (a)		1,531			1,725		3,172			3,314
Selling, general and administrative expenses (b)		352			292		696			573
		1,883			2,017		3,868			3,887
EQUITY AND OTHER INCOME		5			10		17			21

OPERATING INCOME		112			52		105			98
(Loss) gain on the MAP Transaction (c)		(1	)		22		-			22
Net interest and other financing (expense) income		(54	)		8		(82	)		21
Other expenses (d)		-			-		(86	)		-
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES		57			82		(63	)		141
Income tax expense - Note J		9			10		8			31
INCOME (LOSS) FROM CONTINUING OPERATIONS		48			72		(71	)		110
Loss from discontinued operations (net of income taxes) - Note D		-			-		-			(5	)
NET INCOME (LOSS)	$	48		$	72	$	(71	)	$	105

BASIC EARNINGS PER SHARE - Note K
Income (loss) from continuing operations	$	.65		$	1.14	$	(1.00	)	$	1.76
Loss from discontinued operations		-			-		-			(.09	)
Net income (loss)	$	.65		$	1.14	$	(1.00	)	$	1.67

DILUTED EARNINGS PER SHARE - Note K
Income (loss) from continuing operations	$	.65		$	1.13	$	(1.00	)	$	1.74
Loss from discontinued operations		-			-		-			(.09	)
Net income (loss)	$	.65		$	1.13	$	(1.00	)	$	1.65

DIVIDENDS PAID PER COMMON SHARE	$	.075		$	.275	$	.15		$	.55

(a)	The three and six months ended March 31, 2009 include a $16 million and $37 million, respectively, charge for a one-time fair value assessment of Hercules Incorporated (Hercules) inventory as of the date of the transaction.

(b)

The six months ended March 31, 2009 includes a $10 million charge related to the original 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 should be expensed as recognized. The three and six months ended March 31, 2009 include $5 million and $31 million, respectively, for severance charges for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs.

(c)	“MAP Transaction” refers to the June 30, 2005 transfer of Ashland’s 38% interest in Marathon Ashland Petroleum LLC (MAP) and two other businesses to Marathon Oil Corporation.

(d)	The six months ended March 31, 2009 includes a $54 million loss on currency swaps related to the Hercules acquisition and a $32 million realized loss on auction rate securities, of which $4 million relates to securities sold.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31			September 30			March 31
(In millions - unaudited)	2009			2008			2008

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	203		$	886		$	847
Available-for-sale securities - Note E		-			-			74
Accounts receivable - (less allowance for doubtful accounts of $41 million and
$46 million at March 31, 2009 and 2008 and $33 million at September 30, 2008)		1,400			1,469			1,498
Inventories - Note H		628			494			545
Deferred income taxes		93			97			68
Other current assets		100			86			83
		2,424			3,032			3,115
INVESTMENTS AND OTHER NONCURRENT ASSETS
Auction rate securities - Note E		214			243			254
Goodwill - Note I		2,088			299			279
Intangibles - Note I		1,293			109			106
Asbestos insurance receivable (noncurrent portion) - Note O		440			428			443
Deferred income taxes		-			154			145
Other noncurrent assets		590			394			421
		4,625			1,627			1,648
PROPERTY, PLANT AND EQUIPMENT
Cost		3,462			2,297			2,178
Accumulated depreciation and amortization		(1,274	)		(1,185	)		(1,163	)
		2,188			1,112			1,015

TOTAL ASSETS	$	9,237		$	5,771		$	5,778

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Short-term debt - Note F	$	84		$	-		$	-
Current portion of long-term debt - Note F		94			21			3
Trade payables		752			899			861
Accrued expenses and other liabilities		459			310			272
		1,389			1,230			1,136
NONCURRENT LIABILITIES
Long-term debt (noncurrent portion) - Note F		2,084			45			64
Employee benefit obligations - Note L		667			344			259
Asbestos litigation reserve (noncurrent portion) - Note O		796			522			539
Deferred income taxes		218			-			-
Other noncurrent liabilities		540			428			484
		4,305			1,339			1,346

STOCKHOLDERS’ EQUITY		3,543			3,202			3,296

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	9,237		$	5,771		$	5,778

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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, 2007	$	1	$	16		$	3,040		$	97		$	3,154
Total comprehensive income (b)							105			67			172
Cash dividends, $.55 per common share							(35	)					(35	)
Issued 58,964 common shares under
stock incentive and other plans (c)				5									5
BALANCE AT MARCH 31, 2008	$	1	$	21		$	3,110		$	164		$	3,296


BALANCE AT SEPTEMBER 30, 2008	$	1	$	33		$	3,138		$	30		$	3,202
Total comprehensive loss (b)							(71	)		(39	)		(110	)
Cash dividends, $.15 per common share							(11	)					(11	)
Issuance of common shares - Note M				450									450
Issued 651,593 common shares under
stock incentive and other plans (d)				18									18
Other				(4	)		(2	)					(6	)
BALANCE AT MARCH 31, 2009	$	1	$	497		$	3,054		$	(9	)	$	3,543

(a)

At March 31, 2009 and 2008, the accumulated other comprehensive loss (after-tax) of $9 million for 2009 and income (after-tax) of $164 million for 2008 was comprised of pension and postretirement obligations of $105 million for 2009 and $55 million for 2008, net unrealized translation gains of $96 million for 2009 and $223 million for 2008, and net realized losses on available-for-sale securities of $4 million for 2008.

(b)	Reconciliations of net income (loss) to total comprehensive income (loss) follow.



	Three months ended						Six months ended
	March 31						March 31
(In millions)		2009			2008			2009			2008

Net income (loss)	$	48		$	72		$	(71	)	$	105
Pension and postretirement obligation adjustments, net of tax		1			-			2			-
Unrealized translation (loss) gain, net of tax		(99	)		35			(61	)		71
Unrealized gain (loss) on investment securities, net of tax		-			(4	)		20			(4	)
Total comprehensive income (loss)	$	(50	)	$	103		$	(110	)	$	172

(c)	Includes income tax benefits resulting from the exercise of stock options of $2 million for the six months ended March 31, 2008.

(d)	Includes $10 million from the fair value of Hercules stock options converted into stock options for Ashland shares.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS

	Six months ended
	March 31
(In millions - unaudited)	2009			2008

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net (loss) income	$	(71	)	$	105
Loss from discontinued operations (net of income taxes)		-			5
Adjustments to reconcile income from continuing operations to cash flows from operating activities
Depreciation and amortization		156			71
Purchased in-process research and development amortization		10			-
Debt issuance cost amortization		16			-
Deferred income taxes		2			13
Equity income from affiliates		(7	)		(11	)
Distributions from equity affiliates		4			5
Gain from the sale of property and equipment		-			(1	)
Stock based compensation expense		3			5
Gain on the MAP Transaction		-			(22	)
Inventory fair value adjustment		37			-
Loss on currency swaps related to Hercules acquisition		54			-
Loss on auction rate securities		32			-
Change in operating assets and liabilities (a)		58			52
		294			222
CASH FLOWS USED BY INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Additions to property, plant and equipment		(80	)		(85	)
Proceeds from the disposal of property, plant and equipment		4			8
Purchase of operations - net of cash acquired		(2,078	)		(4	)
Proceeds from sale of operations		7			26
Settlement of currency swaps related to Hercules acquisition		(95	)		-
Purchases of available-for-sale securities		-			(435	)
Proceeds from sales of available-for-sale securities		29			255
		(2,213	)		(235	)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of long-term debt		2,000			-
Repayment of long-term debt		(645	)		(3	)
Proceeds from/repayments of issuance of short-term debt		43			-
Debt issuance costs		(137	)		-
Cash dividends paid		(11	)		(35	)
Proceeds from the exercise of stock options		-			2
Excess tax benefits related to share-based payments		-			1
		1,250			(35	)
CASH USED BY CONTINUING OPERATIONS		(669	)		(48	)
Cash provided (used) by discontinued operations
Operating cash flows		3			(5	)
Effect of currency exchange rate changes on cash and cash equivalents - Note A		(17	)		3
DECREASE IN CASH AND CASH EQUIVALENTS		(683	)		(50	)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR		886			897

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	203		$	847

(a) Excludes changes resulting from operations acquired or sold.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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 Condensed Consolidated Financial Statements should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008. Included within these Condensed Consolidated Financial Statements is a variable interest entity, for which Ashland is now the primary beneficiary, acquired as part of the Hercules Incorporated (Hercules) acquisition where a 40% ownership interest exists, that as of March 31, 2009 had an equity position of $29 million. Results of operations for the period ended March 31, 2009, are not necessarily indicative of results to be expected for the year ending September 30, 2009. Certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying footnotes to conform to current period presentation. The effect of currency exchange rate changes on cash and cash equivalents, which previously had been classified within operating activities of the Statements of Condensed Consolidated Cash Flows during 2008, has been reclassified as a separate caption within these financial statements. This reclassification had no impact on operating income, net income, earnings per share or the net change in cash and cash equivalents, as previously reported.

In November 2008, Ashland completed the acquisition of Hercules. Ashland’s reporting structure, incorporating the former Hercules businesses, is now 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), previously Ashland’s Valvoline segment, and Ashland Distribution (Distribution). Functional Ingredients is a manufacturer and supplier of specialty additives and functional ingredients derived from renewable resources that are designed to manage the properties of water-based systems. The restructured Water Technologies business is a global supplier of functional and process chemicals for the paper industry in addition to water treatment chemicals. See Notes C and P for additional information.

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 and expenses, and the disclosures of contingent assets and liabilities. 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.

NOTE B – NEW ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 157 (FAS 157), “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires expanded disclosures about fair value measurements. This Statement applies to all other accounting pronouncements that require or permit fair value measurements since the FASB has previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. FAS 157 became effective for financial assets and liabilities of Ashland on October 1, 2008. The provisions of FAS 157 related to nonfinancial assets and liabilities will be effective for Ashland on October 1, 2009 in accordance with FSP FAS 157-2, Effective Date of FASB Statement No. 157, and will be applied prospectively. Ashland is currently evaluating the impact that these additional provisions will have on the Condensed

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B – NEW ACCOUNTING STANDARDS (continued)

Consolidated Financial Statements. Fair value disclosures for financial assets and liabilities in connection with the initial adoption of FAS 157 are provided in Note E.

In June 2007, the FASB’s Emerging Issues Task Force issued EITF Issue No. 06-11 (EITF 06-11), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 states that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 was effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Ashland will prospectively apply EITF 06-11 to applicable dividends declared on or after October 1, 2008. The adoption of this consensus did not have a material impact on the Condensed Consolidated Financial Statements.

In December 2007, the FASB issued FAS No. 141(R) (FAS 141R), “Business Combinations” which replaces FAS No. 141 (FAS 141), “Business Combinations.” As did FAS 141, this revised Statement provides that the acquisition method of accounting (formerly referred to as purchase method) be used for all business combinations and that an acquirer be identified for each business combination. In addition, FAS 141R establishes revised principles and requirements for how Ashland will recognize and measure assets, liabilities and expenses related to a business combination. This Statement becomes effective for Ashland on October 1, 2009.

In December 2007, the FASB issued FAS No. 160 (FAS 160), “Noncontrolling Interests in Consolidated Financial Statements—an Amendment to ARB No. 51.” This Statement establishes new accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the Condensed Consolidated Balance Sheet within equity, but separate from the parent’s equity. FAS 160 also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary shall be initially measured at fair value, with the gain or loss on the deconsolidation of the subsidiary measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment. FAS 160 also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. The Statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This Statement becomes effective for Ashland on October 1, 2009. Ashland does not anticipate FAS 160 will have a material impact on the Condensed Consolidated Financial Statements.

In March 2008, the FASB issued FAS No. 161 (FAS 161), “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities.” FAS 161 requires enhanced disclosures for derivative and hedging activities by providing qualitative information about the objectives and strategies for using derivatives, quantitative data about the fair value of the gains and losses on derivative contracts, and details of credit risk related to contingent features of hedged positions. This Statement also requires additional disclosure concerning the location and amounts of derivative instruments in the Condensed Consolidated Financial Statements and how derivatives and related hedges are accounted for under FAS 133. FAS 161 became effective on January 1, 2009 and did not have a material impact on Ashland’s disclosures. See Note E for disclosure information.

In April 2008, the FASB issued Staff Position No. FAS 142-3 (FSP 142-3), “Determination of the Useful Life of Intangible Assets,” which amends the list of factors an entity should consider in developing renewal

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B – NEW ACCOUNTING STANDARDS (continued)

or extension assumptions used in determining the useful life of recognized intangible assets under FAS No. 142 (FAS 142), “Goodwill and Other Intangible Assets.” The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. FSP 142-3 becomes effective for Ashland on October 1, 2009. Ashland is currently in the process of determining the effect, if any, the adoption of FSP 142-3 will have on the Condensed Consolidated Financial Statements.

In December 2008, the FASB issued Staff Position No. FAS 140-4 and FIN 46(R)-8 (FSP 140-4), “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP 140-4 requires additional disclosures about transfers of financial assets. This Statement was effective for Ashland on December 31, 2008 and did not have a material impact within the financial statement disclosures.

In December 2008, the FASB issued Staff Position No. FAS 132(R)-1 (FSP 132(R)-1) “Employers’ Disclosures about Postretirement Benefit Plan Assets” which requires additional disclosures such as significant risks within plan assets, investment allocation decisions, fair values by major category of plan assets and valuation techniques. FSP 132(R)-1 becomes effective for Ashland on January 1, 2010. Ashland is currently in the process of determining the effect, if any, the adoption of FSP 132(R)-1 will have on the financial statement disclosures.

NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING

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 FAS 141 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 consideration for outstanding Hercules Common Stock was $2,096 million in cash and $450 million in Ashland Common Stock. 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. 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 purchase price of Hercules, excluding debt assumed, was $2,594 million, including expenses incurred in connection with the transaction, and consisted of the following items:

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)


Purchase price (in millions)
Cash consideration for stock		$	2,096	(a)
Stock consideration			450	(b)
Cash consideration for Restricted Stock Units (RSUs)			5	(c)
Options
Cash-out options			15	(d)
Fair value of Hercules stock options converted into stock options for Ashland shares			10	(e)
Transaction costs			18	(f)
Total purchase price		$	2,594


(a)	The cash portion ($18.60) of the merger consideration paid per outstanding share of Hercules Common Stock.
(b)	The stock portion of the merger consideration was based on 0.0930 of a share of Ashland Common Stock for each share of Hercules Common Stock. A price of $42.93 per Ashland common share was assumed, which represents the average closing price per share of Ashland Common Stock on the NYSE on the announcement date two days immediately prior to and immediately subsequent to the announcement date of the proposed acquisition in accordance with GAAP.
(c)	The cash payment for RSUs was calculated by multiplying the number of shares of Hercules Common Stock underlying the RSUs by the cash-out amount, which is the sum of $18.60 and the product of 0.0930 and the average closing price of Ashland Common Stock on the NYSE for the 10 trading days preceding the completion of the merger. Hercules RSUs represented the equivalent of approximately 240 thousand shares.
(d)	The cash payment for certain stock options was equal to the product of the number of Hercules shares subject to the option and the amount by which the exercise price of the Hercules option is exceeded by the sum of $18.60 and the amount calculated by multiplying 0.0930 by the average closing price of Ashland Common Stock on the NYSE for the ten trading days preceding the completion of the merger.
(e)	Approximately one million of Hercules’ stock options were converted into options to purchase shares of Ashland Common Stock based on the option exchange ratio set forth in the merger agreement. The fair value of Hercules stock options that were converted into options to purchase shares of Ashland Common Stock were recognized as a component of the purchase price, based on the fair value of the options, as described below. The additional purchase price was calculated using the Black-Scholes option pricing model, which considered a price of $42.93 per Ashland common share assumed and the following weighted-average assumptions.


	Black-Scholes
	Expected option life (in years)	1.3
	Volatility	26.0	%
	Risk-free rate	0.7	%
	Dividend yield	1.2	%


	The expected life of the options was determined by taking into account the contractual life of the options (of which a significant amount were less than one year), the accelerated vesting of all Hercules options at the date of the acquisition, and estimated attrition of the option holders. The volatility, dividend yield, and risk-free interest rate assumptions used were derived using the closing date of the acquisition and were impacted by the short-term expected option life. Ashland believes the fair value of the converted stock options approximates the fair value of the Hercules stock options. Accordingly, the fair value of the converted stock options was recognized as a component of the purchase price and no additional amounts have been reflected as compensation expense.
(f)	Ashland’s costs for various legal and financial services associated with the transaction.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)

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.


Purchase price allocation (in millions)	At November 13 2008
Assets:
Cash	$	54
Accounts receivable		355
Inventory		261
Other current assets		32
Intangible assets		1,174
Goodwill		1,737
Asbestos receivable		35
Property, plant and equipment		1,142
Purchased in-process research and development		10
Other noncurrent assets		178
Liabilities:
Accounts payable		(232	)
Accrued expenses		(229	)
Debt		(786	)
Pension and other postretirement obligations		(316	)
Environmental		(80	)
Asbestos		(338	)
Deferred tax - net		(308	)
Other noncurrent liabilities		(95	)
Total purchase price	$	2,594

The purchase price allocation for the acquisition is preliminary and still ongoing. During the three months ended March 31, 2009, adjustments to the purchase price allocation consisted of an accrual adjustment for transaction costs, deferred taxes and other ongoing fair value valuation adjustments. The fair value estimates for the purchase price allocation will continue to change as valuations and assessments are completed, primarily within taxes, pensions and other postretirement obligations, asbestos, environmental, property, plant and equipment, and intangible assets, which could take up to one year from the acquisition date.

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 within the selling, general and administrative expenses caption in the Statement of Consolidated Income pretax charges totaling $10 million in the December 2008 quarter associated with the Hercules acquisition. 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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)

Ashland has identified approximately $255 million of certain trade names, primarily related to the Hercules and Aqualon brands that have been designated as indefinite lives. 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 $919 million identified finite-lived intangible assets are being amortized over the estimated useful life in proportion to the economic benefits consumed. Ashland considered 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 accounting 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. The following details the total intangible assets identified.


			Life
Intangible asset type (in millions)	Value		(years)
Customer relationships - Functional Ingredients	$	341		10 - 24
Customer relationships - Water Technologies		270		12
Developed technology - Functional Ingredients		217		15
Developed technology - Water Technologies		59		5 - 20
Product trade names - Functional Ingredients		32		20
Product trade names - Functional Ingredients		104	Indefinite
Product trade names - Water Technologies		151	Indefinite
Total	$	1,174

The results of Hercules’ operations have been included in Ashland’s Condensed Consolidated Financial Statements since the November 13, 2008 closing date. The following unaudited pro forma information assumes the acquisition of Hercules occurred at the beginning of the respective periods presented and excludes certain nonrecurring charges, such as purchase accounting adjustments and other nonrecurring charges associated with the Hercules acquisition, that were deemed necessary to exclude for comparability purposes.


	Three months ended				Six months ended
Unaudited pro forma information	March 31				March 31
(In millions, except per share amounts)	2009		2008		2009		2008
Revenues	$	1,990	$	2,617	$	4,223	$	5,063
Income from continuing operations	$	63	$	43	$	80	$	72
Net income	$	63	$	43	$	80	$	74

Basic earnings per share
Income from continuing operations	$	.85	$	.59	$	1.09	$	.98
Net income	$	.85	$	.59	$	1.09	$	1.00

Diluted earnings per share
Income from continuing operations	$	.85	$	.58	$	1.08	$	.96
Net income	$	.85	$	.58	$	1.08	$	.98

The unaudited pro forma information is presented above for illustrative purposes only and does not purport to be indicative of the results of future operations of Ashland or the results that would have been attained had the operations been combined during the periods presented.

On June 30, 2008, Ashland acquired the assets of the pressure-sensitive adhesive business and atmospheric emulsions business of Air Products and Chemicals, Inc. The $92 million transaction included manufacturing facilities in Elkton, Maryland and Piedmont, South Carolina. The purchased operations, which were merged into Performance Materials, had sales of $126 million in calendar year 2007, principally in North America.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)

Divestitures

On December 18, 2008, Ashland completed the closing of a transaction whereby Ashland’s subsidiary, WSP, Inc. (WSP), sold its indirectly held 33.5 percent ownership interest in FiberVisions Holdings, LLC (FiberVisions) acquired by Ashland as part of the Hercules acquisition. The buyer was WSP’s partner in the venture, Snow Phipps Group, LLC (Snow Phipps), a New York-based private equity firm and the majority owner of FiberVisions. Ashland received $7 million as the purchase price and also will generate a significant capital loss of approximately $220 million for tax purposes, that could be used to offset future capital gains. In December 2008, this capital loss benefit was reduced to zero by a deferred tax asset valuation allowance. A full valuation allowance was established for this tax benefit since Ashland is not permitted to anticipate future capital gains, therefore, no tax benefit was recognized on this transaction. FiberVisions is a leading global producer of specialty fibers for nonwoven fabrics and textile fibers used in consumer and industrial products. In 2006, Snow Phipps obtained a controlling interest in FiberVisions through a transaction with WSP, then a subsidiary of Hercules. WSP retained a minority investor position in the joint venture until its sale in December 2008.

In June 2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of understanding to form a new, global joint venture to serve the foundries and metal casting industry. Under the terms of the memorandum, each parent company would hold a 50-percent share of the joint venture. The new enterprise would combine three businesses: Ashland’s Casting Solutions, a business unit of Performance Materials, the foundry-related businesses of Süd-Chemie, and Ashland-Südchemie-Kernfest GmbH (ASK), which currently operates as a joint venture. Ashland and ASK businesses to be contributed recorded revenues of approximately $650 million for fiscal year 2008. The foundry-related businesses of Süd-Chemie AG to be contributed to the joint venture generated revenues of approximately $400 million for the year ended December 31, 2007. Preliminary due diligence has been completed; however, due to the current global economic environment, alternative arrangements and structures for the transaction are being considered.

Restructuring

As a result of the Hercules acquisition and the current economic environment, Ashland has implemented an organizational restructuring designed to integrate operational processes and streamline various resource groups and functions to produce greater efficiencies throughout Ashland.

Since the closing date of the Hercules acquisition, Ashland has commenced integration activities, focusing on reducing resources and facilities while maximizing operational efficiencies. The cumulative effect of the integration and restructuring as of March 31, 2009 has resulted in the elimination of approximately 1,000 employee positions and four plant closings. As of March 31, 2009, the total restructuring reserve under the program was $46 million, of which $3 million and $26 million for the three and six month periods ended March 31, 2009, respectively, have been charged as an expense and classified within the selling, general and administrative expense caption, with an additional $2 million charged to the cost of sales and operating expense caption relating to accelerated depreciation for plant closings formally approved by management during the March 2009 quarter. The remaining reserve of $18 million related to severance associated with Hercules personnel and various plant closing costs, which qualified for purchase method of accounting in accordance with FAS 141, and had no effect on the Statements 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. Ashland anticipates completing these restructuring activities during fiscal year 2010.

The following table details at March 31, 2009 the amount of restructuring reserves related to the Hercules integration included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets and the related activity in these reserves during the six months ended March 31, 2009.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)


				Plant
				closure/
(In millions)	Severance			other costs			Total
Balance as of September 30, 2008	$	-		$	-		$	-
Restructuring reserve		39			-			39
Balance as of December 31, 2008		39			-			39
Restructuring reserve		3			4			7
Utilization (cash paid or otherwise settled)		(5	)		(4	)		(9	)
Balance at March 31, 2009	$	37		$	-		$	37

In addition, Ashland incurred selling, general and administrative expenses of $4 million and $7 million for the three and six months ended March 31, 2009 for severance charges with an additional $2 million charged to the cost of sales and operating expense caption relating to accelerated depreciation for plant closures, not included in the table above because these programs were associated with other specific operating segment programs and were not individually significant. Additionally, Ashland inherited Hercules restructuring plans with reserves of $9 million as of November 13, 2008, of which $8 million remained as of March 31, 2009.

NOTE D – DISCONTINUED OPERATIONS

On August 28, 2006, Ashland completed the sale of the stock of APAC to Oldcastle Materials, Inc. (Oldcastle) for $1.3 billion. The operating results and assets and liabilities related to APAC have been previously reflected as discontinued operations in the Condensed Consolidated Financial Statements. Such adjustments may continue to occur in future periods. Adjustments to the gain are reflected in the period they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.

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. In conjunction with the purchase of Hercules in November 2008, Ashland inherited certain asbestos-related liabilities and personal injury lawsuits that have been classified within this caption. See Note O for further discussion of Ashland’s asbestos-related activity including inherited Hercules obligations.

Components of amounts in the Statements of Consolidated Income related to discontinued operations are presented in the following table for the three and six months ended March 31, 2009 and 2008.


	Three months ended				Six months ended
	March 31				March 31
(In millions)		2009		2008		2009		2008
Loss on disposal of discontinued operations (net of income taxes)
APAC	$	-	$	-	$	-	$	(5	)

NOTE E – FAIR VALUE MEASUREMENTS

Ashland adopted FAS 157 as of October 1, 2008. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures for instruments measured at fair value. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. FAS 157 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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)

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 instruments 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 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 March 31, 2009. Ashland did not have any financial liability instruments subject to recurring fair value measurements as of March 31, 2009.


			Quoted prices
				in active		Significant
				markets for		other		Significant
	Total			identical		observable		unobservable
	fair			assets		inputs		inputs
(In millions)	value			Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	203		$	203	$	-	$	-
Auction rate securities		214			-		-		214
Deferred compensation investments (a)		193			99		94		-
Investments (a)		2			2		-		-
Total assets at fair value	$	612		$	304	$	94	$	214

(a)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheet.

Level 3 instruments

At March 31, 2009, Ashland held at par value $242 million student loan auction rate securities for which there was not an active market with consistent observable inputs. In February 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. As of September 30, 2008, Ashland had recorded, as a

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)

component of stockholders’ equity, a temporary $32 million unrealized loss on the portfolio. As of that date, all the student loan instruments held by Ashland were AAA rated and collateralized by student loans which are substantially guaranteed by the U.S. government under the Federal Family Education Loan Program. Ashland’s estimate of fair value for auction rate securities as of September 30, 2008 was based on various internal discounted cash flow models and relevant observable market prices and quotes. The assumptions within the models include credit quality, liquidity, estimates on the probability of each valuation model and the impact due to extended periods of maximum auction rates.

In December 2008, Ashland sold $20 million (par value) auction rate securities for $18 million in cash proceeds and realized a loss of $2 million, which was the recorded book value of these instruments. 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 determined in December 2008 that it no longer had the intent to hold these instruments until their maturity date. As a result, Ashland recorded the remaining $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 because for tax purposes Ashland did not have capital gains to offset this capital loss. For further information on income taxes see Note J.

During the March 2009 quarter, Ashland sold $13 million (par value) auction rate securities for $11 million in cash proceeds which approximated book value. In addition, Ashland signed an agreement with USB Financial Services, Inc. agreeing to sell a $5 million (par value) auction rate instrument at its par value on or before June 30, 2010. As a result, Ashland recorded a minimal unrealized gain associated with this settlement.

At March 31, 2009, auction rate securities totaled $214 million and were classified as noncurrent assets in the Condensed Consolidated Balance Sheet. 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, Ashland has classified these instruments as noncurrent at March 31, 2009 in the Condensed Consolidated Balance Sheet.

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, 2008 (par value)	$	275
Unrealized losses as of October 1, 2008 included in other comprehensive income		(32	)
Recorded balance as of October 1, 2008		243
Transfers in and/or (out) of Level 3		-
Total losses charged in the Consolidated Statement of Income		(32	)
Total reversal of losses included in other comprehensive income		32
Sales		(29	)
Balance as of March 31, 2009	$	214

Derivative and hedging activities

Ashland’s derivative instruments are summarized as follows.

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)

currencies to prevent changes in the value of assets and liabilities denominated in currencies other than Ashland’s functional currency (the U.S. dollar) which may create undue earnings volatility.

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 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 six months ended March 31, 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. The net loss position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of March 31, 2009 was less than $1 million (consisting of a loss of $1 million with a notional amount of $70 million offset by a gain of $1 million with a notional amount of $60 million) and was included in other noncurrent liabilities. As of March 31, 2009 there were no open foreign currency derivatives which qualified for hedge accounting treatment.

Interest Rate Hedges

During the March 2009 quarter 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 (described in more detail in Note F – Debt), within 90 days of November 13, 2008, 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 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 Statement of Consolidated Income within the net interest and other financing (expense) income caption. As of March 31, 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.

NOTE F – DEBT

In conjunction with the acquisition of Hercules on November 13, 2008, Ashland secured $2,600 million in 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. The total debt drawn upon the closing of the acquisition was $2,300 million which included amounts used to fund the $594 million extinguishment of certain debt instruments that Hercules held as of the closing date. The remaining Hercules debt inherited as part of the acquisition was recorded at its fair value of $205 million as of the acquisition date. The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – DEBT (continued)


	March 31			September 30			March 31
(In millions)	2009			2008			2008
Term loan A, due 2013 (a)	$	377		$	-		$	-
Term loan B, due 2014 (a)		830			-			-
6.60% notes, due 2027 (b)		12			-			-
9.0% Bridge loan, due 2009 (c)		750			-			-
Accounts receivable securitization		40			-			-
Medium-term notes, due 2013-2019, interest at a weighted-
average rate of 8.4% at March 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			17			17
Hercules Tianpu - term notes, due through 2011 (b)		42			-			-
Hercules Jiangmen - term notes, due through 2010 (b)		18			-			-
6.50% junior subordinated notes, due 2029 (b)		124			-			-
Other		11			8			9
Total debt		2,262			66			67
Short-term debt		(84	)		-			-
Current portion of long-term debt		(94	)		(21	)		(3	)
Long-term debt (less current portion)	$	2,084		$	45		$	64

	(a)	Senior credit facilities.
	(b)	Hercules retained instruments.
	(c)	Interim credit agreement.

The scheduled aggregate maturities of debt by fiscal year are as follows: $85 million in 2009, $131 million in 2010, $98 million in 2011, $104 million in 2012 and $137 million in 2013. Total borrowing capacity remaining under the $400 million revolving credit facility was $280 million, which was reduced by $120 million for letters of credit outstanding at March 31, 2009. Total short-term debt at March 31, 2009 was $84 million, of which $40 million relates to the associated debt of the accounts receivable facility discussed further in Note G.

The following summarizes each new credit facility Ashland entered into or inherited from Hercules during the six months ended March 31, 2009:

Senior credit facilities

The senior credit agreement provides 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.

The term loan A facility was drawn in full on November 13, 2008 and is required to be repaid by Ashland in consecutive quarterly installments commencing with the installment due on March 31, 2009, with 15% of the original principal amount to be repaid during each of years one and two, 20% of the original principal amount to be repaid during year three, and 25% of the original principal amount to be repaid during each of years four and five, with a final payment of any outstanding principal and interest on November 13, 2013. The term loan B facility was drawn in full on November 13, 2008 and is required to be repaid by Ashland in consecutive quarterly installments commencing with the installment due on March 31, 2009, with an aggregate annual amount equal to 1% of the original principal amount of the term loan B facility to be repaid in each of the first five years, 0.25% of the original principal amount of the term loan B facility to be repaid in the first quarter of the sixth year, with the final payment of any outstanding principal and interest on May 13, 2014. The senior credit facilities have been secured by a first priority security interest in substantially all of the personal property assets, and certain of the real property assets, of Ashland and the subsidiaries who have guaranteed the loans made under the credit agreement, including the capital stock or

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – DEBT (continued)

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.

At Ashland’s option, the term loan A and B facilities will bear interest at either the alternate base rate or LIBOR, plus the applicable interest margin. The alternate base rate will be the highest of (1) the Federal Funds Rate as published by the Federal Reserve Bank of New York plus one-half of 1%, (2) the prime commercial lending rate of Bank of America, National Association, as established from time to time and (3) the one-month LIBOR rate. Interest on alternate base rate loans will be payable quarterly in arrears. LIBOR will be the British Banker’s Association LIBOR Rate, as published by Reuters (or other commercially available source) and if such rate is not available, then it will be determined by the Administrative Agent at the start of each interest period and will be fixed through such period. Interest on LIBOR loans will be paid at the end of each interest period, but if any interest period exceeds three months, then interest on LIBOR loans also will be paid every three months. The alternative base rate can never be lower than 4.25% and LIBOR can never be lower than 3.25%, effectively establishing a floor on the interest rates to be paid. The applicable margin for the revolving credit facility and the term loan A ranges from 1.75% to 2.75% per annum in the case of base rate loans and 2.75% to 3.75% per annum for LIBOR loans, based upon the Consolidated Leverage Ratio (as defined in the senior credit agreement) with the initial applicable margin of 2.50% in the case of base rate loans and 3.50% in the case of LIBOR loans. The applicable margin for the term loan B is 3% per annum in the case of base rate loans and 4% for LIBOR loans. As of March 31, 2009 the interest rate on the term loan A and term loan B were 6.75% and 7.25%, respectively.

Effective April 17, 2009, the senior credit facility was amended to increase the applicable margin for term B loans from 3% to 3.40% for base rate loans and from 4% to 4.40% for LIBOR loans. Ashland agreed to this increase in exchange for reduced flexibility on behalf of the lenders to convert a portion of the term B loans to interim loans or long-term securities.

The term loan A facility and the revolving credit facility may be prepaid at any time without penalty. If Ashland refinances or makes an optional prepayment of all or any portion of the term loan B facility, Ashland must pay a prepayment premium equal to either 2% of the principal amount of the term loan B facility prepaid if such prepayment is made on or prior to November 13, 2009, or 1% of the principal amount of the term loan B facility prepaid if such prepayment is made after November 13, 2009 but on or prior to November 13, 2010. The senior credit facilities are subject to mandatory prepayment with specified percentages of the net cash proceeds of certain asset dispositions, casualty events, extraordinary receipts and debt and equity issuances and with excess cash flow, in each case subject to certain conditions. During the current March quarter, Ashland repaid $8 million of the term loan A facility and $18 million of the term loan B facility. Because these payments qualified as mandatory prepayments related to tax receipts, no premium was paid.

Interim credit agreement

The interim credit agreement for the bridge loan facility provides for $750 million of unsecured senior interim loans, which were drawn in full upon closing of the Hercules acquisition on November 13, 2008. Loans outstanding under the interim credit agreement bear interest at a rate of 9% per annum through November 13, 2009, the interim loan maturity date.

If Ashland does not repay the lenders under the interim credit agreement on or before the loan maturity date, loans under the interim credit agreement will convert automatically into rollover loans at such date, which would mature on November 13, 2014 and bear interest at an agreed upon rate. Such lenders may choose to exchange the rollover loans for exchange notes that would bear interest at an agreed upon rate; however, these exchange notes would be callable on or after November 13, 2012 and would mature on a date no later than November 13, 2014. Interest on interim loans under the interim credit agreement and on the rollover loans and any exchange notes issued will be payable quarterly in arrears. Rollover loans and any exchange

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – DEBT (continued)

notes issued would be secured by a second priority security interest in substantially all of the personal property assets, and certain of the real property assets, of Ashland and the subsidiaries who have guaranteed the loans made under the interim credit agreement, 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. Such security interest shall be subject to the terms of an intercreditor agreement with respect to the senior credit facilities.

The lenders may demand that Ashland issue long-term securities in amounts that would be sufficient to repay all interim loans outstanding under the interim credit agreement prior to the interim loan maturity date. Such long-term securities would have such form, term, yield, guarantees, covenants, default and other terms as are customary for securities of the type issued and may be issued in one or more tranches. These securities would be non-callable for no more than four years, and would mature no later than six years, in each case from the funding of the interim credit agreement (November 13, 2008), and may be secured on a second lien basis. Any securities sold prior to the six-month anniversary of the funding of the interim credit agreement must include a distribution to third-party investors of at least 50% of the securities issued.

Hercules retained instruments

Upon completion of the Hercules acquisition, Ashland assumed the following Hercules debt facilities: 6.60% notes due 2027, 6.50% junior subordinated deferrable interest debentures due 2029, Term loans of Hercules Tianpu at rates ranging from 5.31% to 8.41% through 2011, and Term loans of Hercules Jiangmen at rates ranging from 4.62% to 6.97% through 2010.

The 6.5% junior subordinated deferrable interest debentures due 2029 (the 6.5% debentures) had an initial issue price of $741.46 and have a redemption price of $1,000. The 6.5% debentures were initially issued to Hercules Trust II (Trust II), a subsidiary trust established in 1999. Trust II had issued, in an underwritten public offering, 350,000 CRESTSSM Units, each consisting of a 6.5% preferred security of Trust II and a warrant (exercisable through 2029) to purchase 23.4192 shares of the Hercules Common Stock for the equivalent of $42.70 per share. The preferred securities and the warrants were separable and were initially valued at $741.46 and $258.54, respectively. In connection with the Hercules dissolution and liquidation of Trust II in December 2004, Trust II distributed the 6.5% debentures to the holders of the preferred securities and the preferred securities were cancelled. The CRESTSSM Units now consist of the 6.5% debentures and the warrants, both of which were fair valued in conjunction with the Hercules acquisition. Ashland will accrete the difference between the $282 million par value and the $124 million recorded fair value of the 6.5% debentures over the remaining term.

Hercules Tianpu, a joint venture, and Hercules Jiangmen are consolidated within Ashland’s Condensed Consolidated Financial Statements. Loans issued by Hercules Tianpu are guaranteed by Ashland for approximately 55% of the outstanding balances. The loans are denominated in Renminbi and U.S. dollar equivalents.

Receivables facility

Ashland entered into a $200 million accounts receivable securitization facility. As a part of this facility Ashland may sell on an ongoing basis, a portion of its accounts receivable to obtain up to $200 million in cash or letters of credit. For further information on this facility see Note G.

Covenants and other related items

As a result of the financing and subsequent debt issued to complete the Hercules acquisition, Standard & Poor’s downgraded Ashland’s corporate credit rating to BB- and Moody’s Investor Services downgraded Ashland’s corporate credit rating to Ba2. In addition, Ashland is now subject to certain restrictions from various debt covenants. These covenants include certain affirmative covenants such as various internal certifications, maintenance of property, preferential security interest in acquired property, restriction on future dividend payments and applicable insurance coverage as well as negative covenants that include

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – DEBT (continued)

financial covenant restrictions associated with leverage and fixed charge coverage ratios and total net worth and capital expenditure levels. As of March 31, 2009, Ashland is in compliance with all credit facility covenant restrictions. The financial covenant restrictions are summarized in the following tables.

The following describes the maximum consolidated leverage ratio permitted under Ashland’s senior credit agreement by associated period:


		Maximum
		consolidated
		leverage ratio
For fiscal quarters ending:
	Funding date through September 30, 2009	3.75:1.00
	December 31, 2009 through September 30, 2010	3.50:1.00
	December 31, 2010 through September 30, 2011	3.00:1.00
	December 31, 2011 through September 30, 2012	2.75:1.00
	December 31, 2012 and each fiscal quarter thereafter	2.50:1.00

The following describes Ashland’s March 2009 calculation of the consolidated leverage ratio per the senior credit agreement as previously disclosed in a Form 8-K filed on November 21, 2008 and reconciliation of Consolidated EBITDA (as defined by the senior credit agreement) to net income: Ashland has included certain non-GAAP information below to assist in the understanding of various financial debt covenant calculations.


														Covenant
(In millions, except ratios) (a)	Q3'08		(b)	Q4'08		(b)	Q1'09		Q2'09		Total			ratio
Debt/EBITDA
Consolidated EBITDA	$	241		$	193		$	155	$	227	$	816
Debt								2,473		2,266		2,266
Debt/EBITDA												2.8	x		3.75	x
														max.

Reconciliation of Consolidated EBITDA:
(In millions)		Q1'09		Q2'09
Net (loss) income	$	(119	)	$	48
Key items excluded (c)		82			(1	)
Consolidated interest charges		35			56
Income taxes (benefit) expense		(1	)		9
Depreciation and amortization		63			93
Hercules stub-period results (d)		34			-
Other nonrecurring or noncash charges (gains) (e)		61			22
Total consolidated EBITDA	$	155		$	227

Reconciliation of Debt:
(In millions)		Q1'09		Q2'09
Total debt (long-term and short-term)	$	2,468		$	2,262
Defeased debt		(31	)		(31	)
Guarantees (bank and third party)		36			35
	$	2,473		$	2,266

	(a)	All numbers adjusted to reflect terminology and calculation methodology governing the senior credit agreement, included in a Form 8-K filed on November 21, 2008.
	(b)	Amounts for Q3’08 through Q4’08 are as prescribed in the senior credit agreement.
	(c)	Excludes certain income or costs that have been specifically identified within the senior credit agreement.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – DEBT (continued)

	(d)	In accordance with the senior credit agreement, Hercules’ financial results from October 1, 2008 through November 13, 2008, which is the period of time during Ashland’s first quarter that it did not own Hercules, have been included within this calculation.
	(e)	Includes certain nonrecurring or noncash transactions, including restructuring and integration charges, defined within the senior credit agreement. Allowable restructuring and integration charges are capped, per the senior credit agreement, at $40 million in any one fiscal year through 2011, but not to exceed $80 million during this three fiscal year period. Ashland has incurred approximately $34 million of restructuring and integration expenses to date in fiscal year 2009.

The permitted consolidated fixed charge coverage ratio as of the end of any fiscal quarter for Ashland is as follows under Ashland’s senior credit agreement.


		Minimum
		consolidated
		fixed charge
		coverage ratio
For fiscal quarters ending:
	Funding date through September 30, 2010	1.25:1.00
	December 31, 2010 through each fiscal quarter thereafter	1.50:1.00

The following describes Ashland’s March 2009 calculation of the fixed charge coverage ratio per the senior credit agreement included in a Form 8-K filed on November 21, 2008:


														Covenant
(In millions, except ratios) (a)	Q3'08		(b)	Q4'08		(b)	Q1'09		Q2'09		Total			ratio
Fixed charge coverage
Consolidated EBITDA	$	241		$	193		$	155	$	227	$	816
Capital expenditures		57			116			57		42		272
Adjusted interest expense		47			47			51		45		190
Scheduled debt payments		-			-			-		17		17
Adjusted dividend payment		5			6			6		5		22
Fixed charge coverage ratio												2.4	x		1.25	x
														min.