Edgar Filing: ASHLAND INC.

12.31.2012 ASH 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________

FORM 10-Q



(Mark One)



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012



	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 o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):



	Large Accelerated Filer þ		Accelerated Filer o
	Non-Accelerated Filer o		Smaller Reporting Company o
	(Do not check if a smaller reporting company.)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At December 31, 2012, there were 78,979,725 shares of Registrant’s Common Stock outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME



	Three months ended
	December 31
(In millions except per share data - unaudited)	2012			2011
Sales	$	1,869		$	1,930
Cost of sales	1,332			1,408
Gross profit	537			522

Selling, general and administrative expense	343			362
Research and development expense	32			30
Equity and other income	14			14
Operating income	176			144

Net interest and other financing expense	44			57
Net loss on acquisitions and divestitures	—			4
Income from continuing operations before income taxes	132			83
Income tax expense - Note J	30			23
Income from continuing operations	102			60
(Loss) income from discontinued operations (net of income taxes) - Note D	(1		)	1
Net income	$	101		$	61

PER SHARE DATA
Basic earnings per share - Note M
Income from continuing operations	$	1.29		$	.77
(Loss) income from discontinued operations	(.01		)	.01
Net income	$	1.28		$	.78

Diluted earnings per share - Note M
Income from continuing operations	$	1.27		$	.76
(Loss) income from discontinued operations	(.01		)	.01
Net income	$	1.26		$	.77

DIVIDENDS PAID PER COMMON SHARE	$	.225		$	.175

COMPREHENSIVE INCOME (LOSS)
Net income	$	101		$	61
Other comprehensive income (loss), net of tax
Unrealized translation gain (loss)	45			(111		)
Pension and postretirement obligation adjustment	(4		)	—
Net unrealized gain (loss) on interest rate hedges	3			(5		)
Other comprehensive income (loss)	44			(116		)
Comprehensive income (loss)	$	145		$	(55	)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	December 31			September 30
(In millions - unaudited)	2012			2012

ASSETS
Current assets
Cash and cash equivalents	$	488		$	523
Accounts receivable (a)	1,380			1,481
Inventories - Note G	1,008			1,008
Deferred income taxes	116			116
Other assets	85			81
Total current assets	3,077			3,209
Noncurrent assets
Property, plant and equipment
Cost	4,541			4,478
Accumulated depreciation and amortization	(1,724		)	(1,646		)
Net property, plant and equipment	2,817			2,832
Goodwill - Note H	3,358			3,342
Intangibles - Note H	1,910			1,936
Asbestos insurance receivable (noncurrent portion) - Note L	444			449
Equity and other unconsolidated investments	220			217
Other assets	550			539
Total noncurrent assets	9,299			9,315
Total assets	$	12,376		$	12,524

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term debt - Note I	$	349		$	344
Current portion of long-term debt - Note I	114			115
Trade and other payables	738			877
Accrued expenses and other liabilities	569			577
Total current liabilities	1,770			1,913
Noncurrent liabilities
Long-term debt (noncurrent portion) - Note I	3,090			3,131
Employee benefit obligations - Note K	1,795			1,839
Asbestos litigation reserve (noncurrent portion) - Note L	753			771
Deferred income taxes	208			208
Other liabilities	608			633
Total noncurrent liabilities	6,454			6,582

Stockholders’ equity	4,152			4,029

Total liabilities and stockholders’ equity	$	12,376		$	12,524


(a)	Accounts receivable includes an allowance for doubtful accounts of $24 million at December 31, 2012 and September 30, 2012.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED STOCKHOLDERS’ EQUITY



(In millions - unaudited)	Common stock		Paid-in capital			Retained earnings			Accumulated other comprehensive income		(a)	Total
BALANCE AT SEPTEMBER 30, 2012	$	1	$	647		$	3,163		$	218		$	4,029
Total comprehensive income (loss)						101			44			145
Dividend on common stock, $.225 per share						(18		)				(18		)
Common shares issued under stock
incentive and other plans (b)			(4		)							(4		)
BALANCE AT DECEMBER 31, 2012	$	1	$	643		$	3,246		$	262		$	4,152


(a)	At December 31, 2012, the after-tax accumulated other comprehensive income of $262 million was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $81 million, net unrealized translation gains of $216 million and net unrealized losses on interest rate hedges of $35 million.


(b)	Common shares issued were 164,692 for the three months ended December 31, 2012.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS



	Three months ended
	December 31
(In millions - unaudited)	2012			2011
CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS
Net income	$	101		$	61
Loss (income) from discontinued operations (net of income taxes)	1			(1		)
Adjustments to reconcile income from continuing operations to
cash flows from operating activities
Depreciation and amortization	107			104
Debt issuance cost amortization	5			6
Deferred income taxes	(3		)	2
Equity income from affiliates	(5		)	(7		)
Distributions from equity affiliates	5			1
Gain from sale of property and equipment	(2		)	—
Stock based compensation expense	9			6
Net loss on acquisitions and divestitures	—			2
Inventory fair value adjustment related to ISP acquisition	—			25
Change in operating assets and liabilities (a)	(137		)	(380		)
	81			(181		)
CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS
Additions to property, plant and equipment	(51		)	(44		)
Proceeds from disposal of property, plant and equipment	2			1
	(49		)	(43		)
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS
Repayment of long-term debt	(43		)	(23		)
Proceeds from/(repayment of) short-term debt	5			(7		)
Cash dividends paid	(18		)	(14		)
Proceeds from exercise of stock options	1			1
Excess tax benefits related to share-based payments	2			—
	(53		)	(43		)
CASH USED BY CONTINUING OPERATIONS	(21		)	(267		)
Cash used by discontinued operations
Operating cash flows	(16		)	(3		)
Effect of currency exchange rate changes on cash and cash equivalents	2			(1		)
DECREASE IN CASH AND CASH EQUIVALENTS	(35		)	(271		)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	523			737
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	488		$	466


(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 – SIGNIFICANT ACCOUNTING POLICIES

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, 2012. Results of operations for the period ended December 31, 2012 are not necessarily indicative of results to be expected for the year ending September 30, 2013. Certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying footnotes to conform to current period presentation. Additionally, the presentation of the September 30, 2012 Condensed Consolidated Balance Sheet has been revised subsequent to the filing of Ashland’s Annual Report on Form 10-K.

Ashland is composed of four reportable segments: Ashland Specialty Ingredients (Specialty Ingredients), Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets).

Use of estimates, risks and uncertainties

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 and environmental remediation. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

Ashland’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, and changes in the prices of hydrocarbon-based products and other raw materials, can have a significant effect on operations. While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.

New accounting standards

A description of new accounting standards issued during the current year is included in interim financial reporting. As of December 31, 2012, no new standards have been issued since those that were previously disclosed in the most recent Annual Report on Form 10-K. A detailed listing of all new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B – ACQUISITIONS

International Specialty Products Inc. (ISP)

Background and financing

On August 23, 2011, Ashland completed its acquisition of ISP, a global specialty chemical manufacturer of innovative functional ingredients and technologies, in a transaction valued at $3.2 billion. ISP reported sales of $1.9 billion for the twelve month period ended September 30, 2011. The purchase price of $2,179 million was an all cash transaction, reduced by the amount of ISP’s net indebtedness at closing. Ashland has included ISP within the Specialty Ingredients reportable segment, with the exception of ISP’s Elastomers business line, which has been included within the Performance Materials reportable segment. The acquisition was recorded by Ashland using the acquisition method of accounting in accordance with applicable U.S. GAAP whereby the total purchase price was allocated to tangible and intangible assets and liabilities acquired based on respective fair values. The purchase price allocation for the acquisition was completed as of September 30, 2012.

On August 23, 2011, in conjunction with the ISP acquisition closing, Ashland entered into a $3.9 billion senior secured credit facility with a group of lenders (Senior Credit Facility). The Senior Credit Facility was comprised of (i) a $1.5 billion term loan A facility, (ii) a $1.4 billion term loan B facility and (iii) a $1.0 billion revolving credit facility. Proceeds from borrowings under the term loan A facility and the term loan B facility were used, together with cash on hand, to finance the cash consideration paid for the ISP acquisition, as well as to finance the repayment of existing indebtedness of ISP in connection with the acquisition.

NOTE C– DIVESTITURES

Synlubes business divestiture

In January 2012, Ashland completed the sale of its aviation and refrigerant lubricants business, a polyol/ester-based synlubes (Synlubes) business previously included within the Water Technologies business segment to Monument Chemical Inc., a Heritage Group Company. Annual sales of the business were approximately $50 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The transaction resulted in a pretax loss of less than $1 million recognized during 2012.

PVAc business divestiture

In January 2012, Ashland completed the sale of its polyvinyl acetate homopolymer and copolymer (PVAc) business previously included within the Performance Materials business segment to Celanese Corporation. Annual sales of the business were approximately $45 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The sale included the transfer of the PVAc business, inventory and related technology, but did not include any real estate or manufacturing facilities. Ashland’s PVAc business included two brands, Flexbond™ and Vinac™ emulsions. To support the transition, the products are being temporarily toll manufactured by Ashland for Celanese Corporation. The transaction resulted in a pretax gain of $2 million recognized during 2012.

Ashland Distribution

On March 31, 2011, Ashland completed the sale to Nexeo Solutions, LLC (Nexeo) of substantially all of the assets and certain liabilities of its global distribution business which previously comprised the Ashland Distribution (Distribution) segment. The transaction was an asset sale with the total post-closing adjusted cash proceeds received by Ashland of $972 million, before transaction fees and taxes. Ashland recognized an after-tax gain of $271 million during 2011. Because this transaction signified Ashland’s exit from the distribution business, the results of operations and cash flows of Distribution have been classified as discontinued operations

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C– DIVESTITURES (continued)

for all periods presented. During the year following the sale of Distribution, certain indirect corporate costs included within selling, general and administrative expense that were previously allocated to the Distribution reporting segment that did not qualify for discontinued operations accounting classification were reported as costs within the Unallocated and other section of continuing operations for segment reporting purposes and equaled $5 million for the three months ended December 31, 2011.

Ashland retained and agreed to indemnify Nexeo for certain liabilities of the Distribution business arising prior to the closing of the sale. This includes pension and other postretirement benefits, as well as certain other liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in the definitive agreement. The ongoing effects of the pension and postretirement plans for former Distribution employees are reported within the Unallocated and other section of continuing operations for segment reporting purposes.

As part of this sale, Ashland received transition service fees for ongoing administrative and other services provided to Nexeo. Ashland recognized transition service fees of $8 million during the three months ended December 31, 2011, which offset costs of providing transition services and were classified within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. While the transition service agreements varied in duration depending upon the type of service provided, Ashland implemented plans to reduce costs as the transition services were phased out.

NOTE D – DISCONTINUED OPERATIONS

As previously described in Note C, on March 31, 2011 Ashland completed the sale of substantially all of the assets and certain liabilities of Distribution. Ashland determined that this sale qualifies as a discontinued operation, in accordance with U.S. GAAP, since Ashland does not have significant continuing involvement in the distribution business. As a result, operating results and cash flows related to Distribution have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows. Ashland made subsequent adjustments to the gain on sale of Distribution, primarily relating to the tax effects of the sale, during the three months ended December 31, 2011.

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 businesses previously divested by Hercules, a wholly-owned subsidiary of Ashland that was acquired in 2009. Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations and continue periodically, primarily reflecting updates to the original estimates. See Note L for more information related to the adjustments on asbestos liabilities and receivables.

Components of amounts reflected in the Statements of Consolidated Comprehensive Income related to discontinued operations are presented in the following table for the three months ended December 31, 2012 and 2011.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE D – DISCONTINUED OPERATIONS (continued)



	Three months ended
	December 31
(In millions)	2012			2011
Income (loss) from discontinued operations (net of tax)
Distribution	$	(1	)	$	(1	)
Asbestos-related litigation reserves and receivables	—			6
Loss on disposal of discontinued operations (net of tax)
Distribution	—			(4		)
Total (loss) income from discontinued operations (net of tax)	$	(1	)	$	1

NOTE E – RESTRUCTURING ACTIVITIES

Ashland periodically implements restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business.

Severance costs

During 2011, Ashland announced steps to reduce stranded costs resulting from the divestiture of Distribution and the contribution of the Casting Solutions business to an expanded global joint venture. In addition, Ashland continues to take action to integrate ISP subsequent to its purchase in August 2011. As a first step to address cost reduction opportunities resulting from these transactions, Ashland announced a voluntary severance offer (VSO) in June 2011 to approximately 1,500 regular, full-time, non-union, U.S.-based employees, primarily within various shared resource groups as well as certain positions within the Specialty Ingredients business, ultimately resulting in 150 employees being formally approved for the VSO. An involuntary program was also initiated as a further step to capture targeted savings levels from these transactions and other business cost saving initiatives. The VSO and involuntary program resulted in a severance charge of $34 million during the September 2011 quarter. The involuntary program continued during 2012 and resulted in an expense of $28 million being recognized within the selling, general and administrative expense caption during the three months ended December 31, 2011. As of December 31, 2012 and 2011, the remaining restructuring reserve for these programs totaled $20 million and $56 million, respectively.

As of December 31, 2012 and 2011, the remaining $1 million and $8 million, respectively, in restructuring reserves for other previously announced programs consisting of expected future severance payments from the 2009 Hercules Integration Plan, which resulted in 12 permanent facility closings and a reduction in the global workforce of over 2,000 employees from 2008 through 2010 and the 2010 Performance Materials restructuring, which consisted of several plant closings and an operational redesign to eliminate excess capacity.

Facility costs

During the March 2012 quarter, Ashland incurred a $20 million lease abandonment charge related to its exit from an office facility that was retained as part of the Hercules acquisition. The costs related to the reserve are being paid over the remaining lease term through May 2016. Also during the March 2012 quarter, in order to maximize operational efficiencies, Ashland abandoned a construction project for a multi-purpose facility in China. This project abandonment resulted in a $13 million charge which primarily related to expenses incurred for engineering and construction in progress. Both charges were recognized within the selling, general and administrative expense caption during 2012.

The following table details, as of December 31, 2012 and 2011, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves for the three months ended

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – RESTRUCTURING ACTIVITIES (continued)

December 31, 2012 and 2011. The severance reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets while facility costs reserves are primarily within other noncurrent liabilities.



				Facility
(In millions)	Severance			costs			Total
Balance as of September 30, 2012	$	29		$	15		$	44
Utilization (cash paid or otherwise settled)	(8		)	(3		)	(11		)
Balance at December 31, 2012	$	21		$	12		$	33

Balance as of September 30, 2011	$	45		$	—		$	45
Restructuring reserve	28			—			28
Utilization (cash paid or otherwise settled)	(9		)	—			(9		)
Balance at December 31, 2011	$	64		$	—		$	64

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 of input that is significant to the instrument’s fair value measurement.

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 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 December 31, 2012.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – FAIR VALUE MEASUREMENTS (continued)



(In millions)	Carrying value		Total fair value		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets
Cash and cash equivalents	$	488	$	488	$	488	$	—	$	—
Deferred compensation investments (a)	176		176		55		121		—
Investments of captive insurance company (a)	2		2		2		—		—
Foreign currency derivatives	1		1		—		1		—
Total assets at fair value	$	667	$	667	$	545	$	122	$	—

Liabilities
Interest rate swap derivatives (b)	$	57	$	57	$	—	$	57	$	—


(a)	Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.


(b)	Included in accrued expense and other liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheets. See further discussion below on the interest rate swap liabilities.

The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2012.



(In millions)	Carrying value		Total fair value		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets
Cash and cash equivalents	$	523	$	523	$	523	$	—	$	—
Deferred compensation investments (a)	176		176		56		120		—
Investments of captive insurance company (a)	2		2		2		—		—
Foreign currency derivatives	1		1		—		1		—
Total assets at fair value	$	702	$	702	$	581	$	121	$	—

Liabilities
Interest rate swap derivatives (b)	$	62	$	62	$	—	$	62	$	—


(a)	Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.


(b)	Included in accrued expense and other liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheets. See further discussion below on the interest rate swap liabilities.

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 potential earnings volatility effects of certain assets and liabilities, including short-term inter-company loans, denominated in currencies other than Ashland’s functional currency of an entity. These derivative

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – FAIR VALUE MEASUREMENTS (continued)

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 expense caption. 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 following table summarizes the gains and losses recognized during the three months ended December 31, 2012 and 2011 within the Statements of Consolidated Comprehensive Income.



	Three months ended
	December 31
(In millions)	2012		2011
Foreign currency derivative gain	$	1	$	1

The following table summarizes the fair values of the outstanding foreign currency derivatives as of December 31, 2012 and September 30, 2012 included in other current assets and trade and other payables of the Condensed Consolidated Balance Sheets.



	December 31		September 30
(In millions)	2012		2012
Foreign currency derivative assets	$	1	$	1
Notional contract values	88		168

Foreign currency derivative liabilities (a)	$	—	$	—
Notional contract values	33		35


(a)	Fair values of liabilities of $0 denote values less than $1 million.

Interest rate hedges

During 2011, Ashland entered into interest rate swap agreements in order to manage the variable interest rate risk associated with term loans A and B that were borrowed in conjunction with the ISP acquisition. As of December 31, 2012 and September 30, 2012, the total notional values of interest rate swaps related to term loans A and B equaled $1.4 billion and $650 million, respectively. These instruments qualify for hedge accounting treatment and are designated as cash flow hedges whereby Ashland records these hedges at fair value, with the effective portion of the gain or loss reported as a component of accumulated other comprehensive income (AOCI) and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affects net income. There was no hedge ineffectiveness with these instruments during the three months ended December 31, 2012 and 2011.

The fair value of Ashland’s interest rate swap assets and liabilities are calculated using standard pricing models. These models utilize inputs derived from observable market data such as interest rate spot rates and forward rates, and are deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these interest rate swap agreements are highly rated financial institutions which Ashland believes carry only a minimal risk of nonperformance. The following table summarizes the fair values of the outstanding interest rate swap instruments as of December 31, 2012 and September 30, 2012.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – FAIR VALUE MEASUREMENTS (continued)



		December 31		September 30
(In millions)	Consolidated balance sheet caption	2012		2012
Interest rate swap liabilities	Accrued expenses and other liabilities	$	21	$	22
Interest rate swap liabilities	Other noncurrent liabilities	36		40

The following table summarizes the unrealized loss on interest rate hedges recognized in AOCI during the three months ended December 31, 2012 and 2011, as well as the loss reclassified from AOCI to the Statements of Consolidated Comprehensive Income during the three months ended December 31, 2012 and 2011. The loss reclassified to the Statements of Consolidated Comprehensive Income was recorded in the net interest and other financing expense caption.



	Three months ended
	December 31
(In millions)	2012		2011
Change in unrealized loss in AOCI	$	—	$	14
Loss reclassified from AOCI to income	5		5

Other financial instruments

At December 31, 2012 and September 30, 2012, Ashland’s long-term debt had a carrying value of $3,204 million and $3,246 million, respectively, compared to a fair value of $3,379 million and $3,405 million, respectively. 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, which are deemed to be Level 2 measurements within the fair value hierarchy.

NOTE G – INVENTORIES

Inventories are carried at the lower of cost or market. Certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method. The remaining inventories are stated at cost using the weighted-average cost method or the first-in, first-out method.

During the December 2012 quarter, the Specialty Ingredients business incurred a $31 million loss on straight guar, $28 million of which related to a lower of cost or market charge that was recognized within the cost of sales caption on the Statements of Consolidated Comprehensive Income. This charge was due to the identifiable market price of certain guar inventories, which fell below the cost of the product.

The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.



	December 31			September 30
(In millions)	2012			2012
Finished products	$	681		$	675
Raw materials, supplies and work in process	361			376
LIFO reserve	(34		)	(43		)
	$	1,008		$	1,008

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE H – GOODWILL AND OTHER INTANGIBLES

Goodwill

In accordance with U.S. GAAP, Ashland reviews goodwill and indefinite-lived 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 that its reporting units for allocation of goodwill include the Specialty Ingredients, Water Technologies and Consumer Markets reportable segments and the Composite Polymers/Specialty Polymers/Adhesives and Elastomers reporting units within the Performance Materials reportable segment. Ashland performed its most recent annual goodwill impairment test as of July 1, 2012, and determined at that time that no impairment existed.

The following is a progression of goodwill by segment for the quarter ended December 31, 2012.



	Specialty		Water		Performance		Consumer
(In millions)	Ingredients		Technologies		Materials		Markets		Total
Balance at September 30, 2012	$	2,202	$	659	$	315	$	166	$	3,342
Currency translation adjustment	11		4		—		1		16
Balance at December 31, 2012	$	2,213	$	663	$	315	$	167	$	3,358

Other intangible assets

Other intangible assets principally consist of trademarks and trade names, intellectual property, customer relationships, IPR&D and sale contracts and those classified as finite are amortized on a straight-line basis over their estimated useful lives. The cost of definite-lived trademarks and trade names is amortized principally over 4 to 25 years, intellectual property over 5 to 20 years, customer relationships over 3 to 24 years and other intangibles over 2 to 50 years.

IPR&D and certain intangible assets within trademarks and trade names have been classified as indefinite-lived and had a balance of $536 million as of December 31, 2012 and September 30, 2012. In accordance with U.S. GAAP, Ashland annually reviews indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Intangible assets were comprised of the following as of December 31, 2012 and September 30, 2012.



	December 31, 2012
	Gross					Net
	carrying		Accumulated			carrying
(In millions)	amount		amortization			amount
Trademarks and trade names	$	535	$	(41	)	$	494
Intellectual property	842		(148		)	694
Customer relationships	837		(188		)	649
IPR&D	73		—			73
Other intangibles	35		(35		)	—
Total intangible assets	$	2,322	$	(412	)	$	1,910

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE H – GOODWILL AND OTHER INTANGIBLES (continued)



	September 30, 2012
	Gross					Net
	carrying		Accumulated			carrying
(In millions)	amount		amortization			amount
Trademarks and trade names	$	535	$	(39	)	$	496
Intellectual property	843		(136		)	707
Customer relationships	833		(173		)	660
IPR&D	73		—			73
Other intangibles	35		(35		)	—
Total intangible assets	$	2,319	$	(383	)	$	1,936

Amortization expense recognized on intangible assets was $29 million and $30 million for the three months ended December 31, 2012 and 2011, respectively, and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. Estimated amortization expense for future periods is $115 million in 2013 (includes three months actual and nine months estimated), $114 million in 2014, $112 million in 2015, $109 million in 2016 and $108 million in 2017.

NOTE I – DEBT

The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.



	December 31			September 30
(In millions)	2012			2012
Term Loan A, due 2016 (a)	$	1,406		$	1,425
Term Loan B, due 2018 (a)	1,032			1,036
4.750% notes, due 2022	500			500
Accounts receivable securitization	300			300
6.50% junior subordinated notes, due 2029 (b)	130			129
9.125% notes, due 2017	76			76
Other international loans, interest at a weighted-
average rate of 6.7% at December 31, 2012 (2.0% to 11.8%)	73			69
Medium-term notes, due 2013-2019, interest at a weighted-
average rate of 8.4% at December 31, 2012 (7.7% to 9.4%)	21			21
8.80% debentures, due 2012	—			20
6.60% notes, due 2027 (b)	12			12
Other	3			2
Total debt	3,553			3,590
Short-term debt	(349		)	(344		)
Current portion of long-term debt	(114		)	(115		)
Long-term debt (less current portion)	$	3,090		$	3,131

(a)Senior credit facilities.

(b)Retained instrument from the Hercules acquisition.

The scheduled aggregate maturities of debt by year are as follows: $121 million remaining in 2013, $166 million in 2014, $459 million in 2015, $1,050 million in 2016 and $78 million in 2017. The borrowing

ASHLAND INC. AND CONSOLIDATED SUBSIDIAIRES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE I – DEBT (continued)

capacity remaining under the $1 billion revolving credit facility was $905 million, representing a reduction of $95 million for letters of credit outstanding at December 31, 2012. In total, Ashland’s total borrowing capacity was $929 million, which includes $24 million from the accounts receivable securitization facility.

Covenant restrictions

The Senior Credit Facility (Term Loan A, Term Loan B and revolving credit facility) contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and fixed charge coverage ratios, limitations on liens, additional indebtedness, further negative pledges, investments, payment of dividends, mergers, sale of assets and restricted payments, and other customary limitations. As of December 31, 2012, Ashland is in compliance with all debt agreement covenant restrictions.

Financial covenants

The maximum consolidated leverage ratios permitted under the Senior Credit Facility are as follows: 3.00 from the period December 31, 2012 through September 30, 2013 and 2.75 as of December 31, 2013 and each quarter thereafter. At December 31, 2012, Ashland’s calculation of the consolidated leverage ratio was 2.6 compared to the maximum consolidated leverage ratio permitted under the Senior Credit Facility of 3.00.

The minimum required consolidated fixed charge coverage ratio under the Senior Credit Facility is 2.00 as of December 31, 2012 and each quarter thereafter. At December 31, 2012, Ashland’s calculation of the fixed charge coverage ratio was 2.9 compared to the minimum required consolidated ratio of 2.00.

NOTE J – INCOME TAXES

Current fiscal year

Ashland’s effective tax rate is subject to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations. The overall effective tax rate was 22.7% for the three months ended December 31, 2012 and includes two net discrete tax benefit adjustments of $6 million and $4 million, respectively, related to the reversal of an unrecognized tax benefit and a foreign income tax rate change.

Prior fiscal year

The overall effective tax rate was 27.7% for the three months ended December 31, 2011 and included two discrete tax benefits of $9 million for both the $28 million severance and restructuring charge and the $25 million fair value assessment of inventory charge recorded during the current quarter.

Unrecognized tax benefits

Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2012.



(In millions)
Balance at October 1, 2012	$	124
Increases related to positions taken in the current year	2
Lapse of the statute of limitations	(5		)
Balance at December 31, 2012	$	121

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE J – INCOME TAXES (continued)

For the balance as of December 31, 2012, it is reasonably possible that there could be material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax positions or the expiration of applicable statute of limitations; however, Ashland is not able to estimate the impact of these items at this time.

NOTE K – EMPLOYEE BENEFIT PLANS

For the three months ended December 31, 2012, Ashland contributed $32 million to its U.S. pension plans and $4 million to its non-U.S. pension plans. After completion of the required monitoring status of the U.S. plans, based on the new provisions of the Moving Ahead for Progress in the 21^st Century Act, Ashland now expects to make additional contributions to U.S. plans of $78 million to $108 million and to the non-U.S. plans of $17 million during the remainder of 2013. The following table details the components of pension and other postretirement benefit costs.



							Other postretirement
	Pension benefits						benefits
(In millions)	2012			2011			2012			2011
Three months ended December 31
Service cost (a)	$	12		$	10		$	1		$	1
Interest cost (b)	44			49			2			3
Expected return on plan assets (b)	(59		)	(57		)	—			—
Amortization of prior service credit (b)	(1		)	(1		)	(5		)	(4		)
	$	(4	)	$	1		$	(2	)	$	—

(a)For segment reporting purposes, cost is proportionately allocated to each business segment, excluding the Unallocated and other segment.

(b)For segment reporting purposes, cost is recorded within the Unallocated and other segment.

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES

Asbestos litigation

Ashland and Hercules, a wholly-owned subsidiary of Ashland that was acquired in 2009, have liabilities from claims alleging personal injury caused by exposure to asbestos. To assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions, Ashland retained Hamilton, Rabinovitz & Associates, Inc. (HR&A). The methodology used by HR&A to project future asbestos costs is based largely on recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims and litigation defense. The claim experience of Ashland and Hercules are separately compared to the results of previously conducted third party epidemiological studies estimating the number of people likely to develop asbestos-related diseases. Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos. Using that information, HR&A estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims. Changes in asbestos-related liabilities and receivables are recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income.

Ashland asbestos-related litigation

The claims alleging personal injury caused by exposure to asbestos asserted against Ashland result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation, a former subsidiary. The amount and timing of settlements and number of open claims can fluctuate significantly from period to period. A summary of Ashland asbestos claims activity, excluding those related to Hercules, follows.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)



	Three months ended
	December 31				Years ended September 30
(In thousands)	2012		2011		2012		2011		2010
Open claims - beginning of period	66		72		72		83		100
New claims filed	1		1		2		2		2
Claims settled	—		—		(1	)	(1	)	(1	)
Claims dismissed	(1	)	(3	)	(7	)	(12	)	(18	)
Open claims - end of period	66		70		66		72		83

Ashland asbestos-related liability

From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A. During the most recent annual update of this estimate, completed during the June 2012 quarter, it was determined that the liability for asbestos claims should be increased by $11 million. Total reserves for asbestos claims were $513 million at December 31, 2012 compared to $522 million at September 30, 2012.

A progression of activity in the asbestos reserve is presented in the following table.



	Three months ended
	December 31						Years ended September 30
(In millions)	2012			2011			2012			2011			2010
Asbestos reserve - beginning of period	$	522		$	543		$	543		$	537		$	543
Reserve adjustment	—			—			11			41			28
Amounts paid	(9		)	(10		)	(32		)	(35		)	(34		)
Asbestos reserve - end of period	$	513		$	533		$	522		$	543		$	537

Ashland asbestos-related receivables

Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed. As a result, increases in the asbestos reserve have been largely offset by probable insurance recoveries. The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland’s insurance coverage.

For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. Approximately 69% of the estimated receivables from insurance companies are expected to be due from domestic insurers. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of December 31, 2012. The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings, and from Underwriters at Lloyd’s, whose insurance policy obligations have been transferred to a Berkshire Hathaway entity. Ashland discounts this piece of the receivable based upon the projected timing of the receipt of cash from those insurers unless likely settlement amounts can be determined.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

During the December 2011 quarter, Ashland received $7 million in cash after reaching a settlement with certain insolvent London market insurance companies. The cash received from this settlement during the prior period was recognized as an after-tax gain of $6 million within discontinued operations of the Statements of Consolidated Comprehensive Income since Ashland’s policy is to not record asbestos receivables for any carriers that are insolvent.

In October 2012, Ashland initiated arbitration proceedings against Underwriters at Lloyd’s and certain Chartis (AIG member) companies seeking to enforce these insurers’ contractual obligations to provide indemnity for asbestos liabilities and defense costs under existing coverage-in-place agreements. In addition, Ashland has initiated a lawsuit in Kentucky state court against certain Berkshire Hathaway entities (National Indemnity Company and Resolute Management Inc.) on grounds that these Berkshire entities have wrongfully interfered with Underwriters’ and Chartis’ performance of their respective contractual obligations to provide asbestos coverage by directing the insurers to reduce and delay certain claim payments. While Ashland anticipates its position will be supported by the proceedings, an adverse resolution of these proceedings could have a significant effect on the timing of loss reimbursement and the amount of Ashland’s recorded insurance receivables from these insurers.

At December 31, 2012, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $419 million, of which $63 million relates to costs previously paid. Receivables from insurers amounted to $423 million at September 30, 2012. During the June 2012 quarter, the annual update of the model used for purposes of valuing the asbestos reserve described above, and its impact on valuation of future recoveries from insurers, was completed. This model update resulted in an additional $19 million increase in the receivable for probable insurance recoveries.

A progression of activity in the Ashland insurance receivable is presented in the following table.



	Three months ended
	December 31						Years ended September 30
(In millions)	2012			2011			2012			2011			2010
Insurance receivable - beginning of period	$	423		$	431		$	431		$	421		$	422
Receivable adjustment	—			—			19			42			36
Amounts collected	(4		)	(8		)	(27		)	(32		)	(37		)
Insurance receivable - end of period	$	419		$	423		$	423		$	431		$	421

Hercules asbestos-related litigation

Hercules has liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of Hercules’ former subsidiaries to a limited industrial market. The amount and timing of settlements and number of open claims can fluctuate significantly from period to period. A summary of Hercules’ asbestos claims activity follows.



	Three months ended
	December 31		Years ended September 30
(In thousands)	2012	2011	2012		2011		2010
Open claims - beginning of period	21	21	21		20		21
New claims filed	—	—	1		2		—
Claims dismissed	—	—	(1	)	(1	)	(1	)
Open claims - end of period	21	21	21		21		20

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

Hercules asbestos-related liability

From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A. During the most recent annual update of this estimate, completed during the June 2012 quarter, it was determined that the liability for Hercules asbestos related claims should be increased by $30 million. Total reserves for asbestos claims were $311 million at December 31, 2012 compared to $320 million at September 30, 2012.

A progression of activity in the asbestos reserve is presented in the following table.



	Three months ended
	December 31						Years ended September 30
(In millions)	2012			2011			2012			2011			2010
Asbestos reserve - beginning of period	$	320		$	311		$	311		$	375		$	484
Reserve adjustment (a)	—			—			30			(48		)	(93		)
Amounts paid	(9		)	(6		)	(21		)	(16		)	(16		)
Asbestos reserve - end of period	$	311		$	305		$	320		$	311		$	375

(a) Includes a reduction of $49 million during 2010 for purchase accounting adjustments as part of the purchase price allocation for the Hercules acquisition.

Hercules asbestos-related receivables

For the Hercules asbestos-related obligations, certain reimbursements pursuant to coverage-in-place agreements with insurance carriers exist. As a result, increases in the asbestos reserve are partially offset by probable insurance recoveries. Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. The estimated receivable consists exclusively of domestic insurers. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of December 31, 2012.

As of December 31, 2012 and September 30, 2012, the receivables from insurers amounted to $55 million and $56 million, respectively. As previously mentioned, during the June 2012 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed. This model update caused a $9 million increase in the receivable for probable insurance recoveries.

A progression of activity in the Hercules insurance receivable is presented in the following table.



	Three months ended
	December 31					Years ended September 30
(In millions)	2012			2011		2012			2011			2010
Insurance receivable - beginning of period	$	56		$	48	$	48		$	68		$	118
Receivable adjustment (a)	—			—		9			(20		)	(50		)
Amounts collected	(1		)	—		(1		)	—			—
Insurance receivable - end of period	$	55		$	48	$	56		$	48		$	68

(a) Includes a reduction of $28 million during 2010 for purchase accounting adjustments as part of the purchase price allocation for the Hercules acquisition.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

Asbestos litigation cost projection

Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards. Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens. In light of these inherent uncertainties, Ashland believes that the asbestos reserves for Ashland and Hercules represent the best estimate within a range of possible outcomes. As a part of the process to develop these estimates of future asbestos costs, a range of long-term cost models was developed. These models are based on national studies that predict the number of people likely to develop asbestos-related diseases and are heavily influenced by assumptions regarding long-term inflation rates for indemnity payments and legal defense costs, as well as other variables mentioned previously. Ashland has currently estimated in various models ranging from approximately 40 to 50 year periods that it is reasonably possible that total future litigation defense and claim settlement costs on an inflated and undiscounted basis could range as high as approximately $830 million for the Ashland asbestos-related litigation and approximately $500 million for the Hercules asbestos-related litigation (or approximately $1.3 billion in the aggregate), depending on the combination of assumptions selected in the various models. If actual experience is worse than projected, relative to the number of claims filed, the severity of alleged disease associated with those claims or costs incurred to resolve those claims, Ashland may need to further increase the estimates of the costs associated with asbestos claims and these increases could be material over time.

Environmental remediation and asset retirement obligations

Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations. At December 31, 2012, such locations included 79 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 146 current and former operating facilities (including certain operating facilities conveyed to Marathon Ashland Petroleum LLC in 2005) and about 1,225 service station properties, of which 87 are being actively remediated.

Ashland’s reserves for environmental remediation amounted to $220 million at December 31, 2012 compared to $228 million at September 30, 2012, of which $178 million at December 31, 2012 and $187 million at September 30, 2012 were classified in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.

The following table provides a reconciliation of the changes in the environmental contingencies and asset retirement obligations during the three months ended December 31, 2012 and 2011.



	Three months ended
	December 31
(In millions)	2012			2011
Reserve - beginning of period	$	228		$	246
Disbursements, net of cost recoveries	(12		)	(8		)
Revised obligation estimates and accretion	3			5
Foreign currency translation	1			—
Reserve - end of period	$	220		$	243

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

The total reserves for environmental remediation reflect Ashland’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable, without regard to any third-party recoveries. Engineering studies, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. Ashland continues to discount certain environmental sites and regularly adjusts its reserves as environmental remediation continues. Ashland has estimated the value of its probable insurance recoveries associated with its environmental reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage. At December 31, 2012 and September 30, 2012, Ashland’s recorded receivable for these probable insurance recoveries was $26 million.

Components of environmental remediation expense included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income are presented in the following table for the three months ended December 31, 2012 and 2011.



	Three months ended
	December 31
(In millions)	2012			2011
Environmental expense	$	2		$	4
Accretion	1			1
Legal expense	—			1
Total expense	3			6

Insurance receivable	(2		)	(2		)
Total expense, net of receivable activity (a)	$	1		$	4


(a)	Net expense of $1 million for the three months ended December 31, 2011 relates to divested businesses which qualified for treatment as discontinued operations and for which the environmental liabilities were retained by Ashland. This amount is classified within the income from discontinued operations caption of the Statements of Consolidated Comprehensive Income.

Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites. Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range of future costs for identified sites could be as high as approximately $430 million. No individual remediation location is material, as the largest reserve for any site is 11% or less of the remediation reserve.

Insurance settlement

In March 2011, a disruption in the supply of a key raw material for Ashland occurred at a supplier. For a period of time while the raw material was not available from this supplier, an alternative source was used, but at a higher cost to Ashland. During the December 2012 quarter, the insurers agreed to a minimum value of the insurance claim, which resulted in a net gain of $22 million being recognized within the cost of sales caption of the Statements of Consolidated Comprehensive Income.

Other legal proceedings and claims

In addition to the matters described above, there are other various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

with respect to commercial matters, product liability, toxic tort liability, and other environmental matters, which seek remedies or damages, some of which are for substantial amounts. While Ashland cannot predict with certainty the outcome of such actions, it believes that adequate reserves have been recorded and losses already recognized with respect to such actions were immaterial as of December 31, 2012 and September 30, 2012. There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, Ashland believes that such potential losses were immaterial as of December 31, 2012.

NOTE M – EARNINGS PER SHARE

The following is the computation of basic and diluted earnings per share (EPS) from continuing operations. Stock options, SARs and warrants available to purchase shares outstanding for each reporting period whose grant price was greater than the average market price of Ashland Common Stock for each applicable period were not included in the computation of income from continuing operations per diluted share because the effect of these instruments would be antidilutive. The total number of these shares outstanding was approximately 0.6 million as of December 31, 2012 compared to 1.0 million at December 31, 2011. Earnings per share are reported under the treasury stock method. While certain non-vested stock awards granted prior to January 2010 qualify as participating securities, the effect on earnings per share calculated under the two class method is not significant.



	Three months ended
	December 31
(In millions except per share data)	2012		2011
Numerator
Numerator for basic and diluted EPS – Income
from continuing operations	$	102	$	60
Denominator
Denominator for basic EPS – Weighted-average
common shares outstanding	79		78
Share based awards convertible to common shares	1		1
Denominator for diluted EPS – Adjusted weighted-
average shares and assumed conversions	80		79

EPS from continuing operations
Basic	$	1.29	$	.77
Diluted	1.27		.76

NOTE N – STOCKHOLDERS’ EQUITY ITEMS

Capital stock

Ashland has the ability to make discretionary purchases of Ashland Common Stock on the open market, pursuant to a $400 million share repurchase authorization, approved by the Board of Directors of Ashland in March 2011, of which $329 million is still available at December 31, 2012. During the three months ended December 31, 2012 and 2011, Ashland did not execute any share repurchases.

During the December 2012 quarter, the Board of Directors of Ashland announced and paid a quarterly cash dividend of 22.5 cents per share to eligible shareholders of record. This amount was paid for quarterly dividends

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE N – STOCKHOLDERS’ EQUITY ITEMS (continued)

in June and September of 2012 and was an increase from the quarterly cash dividend of 17.5 cents per share paid during the first and second quarters of the prior year.

Accumulated other comprehensive income

Components of other comprehensive income recorded in the Statements of Consolidated Comprehensive Income are presented below, before tax and net of tax effects.



	2012									2011
				Tax									Tax
	Before			(expense)			Net of			Before			(expense)		Net of
(In millions)	tax			benefit			tax			tax			benefit		tax
Three months ended December 31
Other comprehensive income (loss)
Unrealized translation gain (loss)	$	45		$	—		$	45		$	(111	)	$	—	$	(111	)
Pension and postretirement obligation adjustment	(6		)	2			(4		)	—			—		—
Net unrealized gain (loss) on interest rate hedges	5			(2		)	3			(9		)	4		(5		)
Total other comprehensive income (loss)	$	44		$	—		$	44		$	(120	)	$	4	$	(116	)

NOTE O – STOCK INCENTIVE PLANS

Ashland has stock incentive plans under which key employees or directors are granted stock-settled stock appreciation rights (SARs), performance share awards or nonvested stock awards. Each program is typically a long-term incentive plan designed to link employee compensation with increased shareholder value or reward superior performance and encourage continued employment with Ashland. Ashland recognizes compensation expense for the grant date fair value of stock-based awards over the applicable vesting period. Stock-based compensation expense was $9 million and $6 million for the three months ended December 31, 2012 and 2011, respectively, and is included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income.

SARs

SARs are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and typically become exercisable over periods of one to three years. Unexercised SARs lapse ten years and one month after the date of grant. SARs granted for the three months ended December 31, 2012 and 2011 were 0.9 million and 0.7 million, respectively. As of December 31, 2012, there was $35 million of total unrecognized compensation costs related to SARs. That cost is expected to be recognized over a weighted-average period of 2.5 years. Ashland estimates the fair value of SARs granted using the Black-Scholes option-pricing model. This model requires several assumptions, which Ashland has developed and updates based on historical trends and current market observations. The accuracy of these assumptions is critical to the estimate of fair value for these equity instruments.

Nonvested stock awards

Nonvested stock awards are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and generally vest over a one-to-five-year period. However, such shares are subject to forfeiture upon termination of service before the vesting period ends. Nonvested stock awards entitle employees or directors to vote the shares. Cash dividends are paid on nonvested stock awards granted prior to January 2010, while dividends on subsequent nonvested stock awards granted are in the form of additional shares of nonvested stock awards, which are subject to vesting and forfeiture provisions. Since January 2010,

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE O – STOCK INCENTIVE PLANS (continued)

these instruments have been designated as non-participating securities under U.S. GAAP. Nonvested stock awards granted for the three months ended December 31, 2011 were 5,000, and none were granted for the three month period ended December 31, 2012. As of December 31, 2012, there was $4 million of total unrecognized compensation costs related to nonvested stock awards. That cost is expected to be recognized over a weighted-average period of 2.4 years.

Performance shares

Ashland sponsors a long-term incentive plan that awards performance shares/units to certain key employees that are tied to Ashland’s overall financial performance relative to the financial performance of selected industry peer groups and/or internal targets. Awards are granted annually, with each award covering a three-year performance cycle. Each performance share/unit is convertible to one share of Ashland Common Stock. These plans are recorded as a component of stockholders’ equity in the Condensed Consolidated Balance Sheets. Performance measures used to determine the actual number of performance shares issuable upon vesting include an equal weighting of Ashland’s total shareholder return (TSR) performance and Ashland’s return on investment (ROI) performance as compared to the performance peer groups and/or internal targets over the three-year performance cycle. TSR relative to peers is considered a market condition while ROI is considered a performance condition under applicable U.S. GAAP. Nonvested performance shares/units do not entitle employees to vote the shares or to receive any dividends thereon. Performance shares/units granted for the three months ended December 31, 2012 and 2011 were 0.1 million and 0.2 million, respectively. As of December 31, 2012, there was $17 million of total unrecognized compensation costs related to performance shares/units. That cost is expected to be recognized over a weighted-average period of 2.1 years.

NOTE P – SEGMENT INFORMATION

Ashland’s businesses are managed along four industry segments: Specialty Ingredients, Water Technologies, Performance Materials and Consumer Markets.

Ashland Specialty Ingredients offers industry-leading products, technologies and resources for solving formulation and product-performance challenges in key markets including personal care, pharmaceutical, food and beverage, coatings, construction and energy. Using natural, synthetic and semisynthetic polymers derived from plant and seed extract, cellulose ethers and vinyl pyrrolidones, Specialty Ingredients offers comprehensive and innovative solutions for consumer and industrial applications.

Ashland Water Technologies is a leading specialty chemicals supplier of process, utility and functional chemistries globally. It offers products and equipment technologies designed to help customers improve operational efficiencies, enhance product quality, protect plant assets and minimize environmental impact.

Ashland Performance Materials is a global leader in unsaturated polyester resins and epoxy vinyl ester resins, gelcoats, pressure-sensitive and structural adhesives, specialty coatings and elastomers. It also provides metal casting consumables and design services for effective foundry management through its 50% ownership in the ASK Chemicals GmbH joint venture.

Ashland Consumer Markets is a leading, worldwide producer and distributor of premium-branded automotive, commercial and industrial lubricants and car-care products. It operates and franchises more than 860 Valvoline Instant Oil Change™ centers in the United States. It markets Valvoline™ lubricants and automotive chemicals; MaxLife™ lubricants for cars with higher mileage engines; NextGen™ motor oil, created with 50-percent recycled, re-refined oil; SynPower™ synthetic motor oil; Eagle One™ and Car Brite™ automotive appearance products; and Zerex™ antifreeze.

Unallocated and other generally includes items such as components of pension and other postretirement benefit plan expenses (excluding service costs, which are proportionately allocated to the business segments), certain

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE P – SEGMENT INFORMATION (continued)

significant company-wide restructuring activities and legacy costs or adjustments that relate to divested businesses that are no longer operated by Ashland.

Segment results

The following table presents various financial information for each segment for the three months ended December 31, 2012 and 2011. Results of Ashland’s business segments are presented based on its management structure and internal accounting practices. The structure and practices are specific to Ashland; therefore, the financial results of Ashland’s business segments are not necessarily comparable with similar information for other comparable companies. Ashland allocates all costs to its business segments except for certain significant company-wide restructuring activities, such as the current restructuring plans described in Note E, and other costs or adjustments that generally relate to former businesses that Ashland no longer operates, as well as certain components of pension and other postretirement costs. Ashland refines its expense allocation methodologies to the reportable segments from time to time as internal accounting practices are improved, more refined information becomes available and businesses change. Revisions to Ashland’s methodologies that are deemed insignificant are applied on a prospective basis.



	Three months ended
	December 31
(In millions - unaudited)	2012		2011
SALES
Specialty Ingredients	$	622	$	628
Water Technologies	421		449
Performance Materials	345		378
Consumer Markets	481		475
	$	1,869	$	1,930
OPERATING INCOME (LOSS)
Specialty Ingredients	$	72	$	71
Water Technologies	17		21
Performance Materials	13		33
Consumer Markets	66		47
Unallocated and other (a)	8		(28		)
	$	176	$	144


(a)	For further information on the quantitative amounts of each component within this segment, see page 42 within Management's Discussion and Analysis.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements including, without limitation, statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A), within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Ashland has identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “may,” “will,” “should” and “intends” and the negative of these words or other comparable terminology. In addition, Ashland may from time to time make forward-looking statements in its Annual Report to Shareholders, quarterly reports and other filings with the Securities and Exchange Commission, news releases and other written and oral communications. These forward-looking statements are based on Ashland’s expectations and assumptions, as of the date such statements are made, regarding Ashland’s future operating performance and financial condition, the economy and other future events or circumstances. Ashland’s expectations and assumptions include, without limitation, those mentioned within the MD&A, internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, operating efficiencies and economic conditions (such as prices, supply and demand, cost of raw materials, and the ability to recover raw material cost increases through price increases), and risks and uncertainties associated with the following: Ashland’s substantial indebtedness (including the possibility that such indebtedness and related restrictive covenants may adversely affect Ashland’s future cash flows, results of operations, financial condition and its ability to repay debt), severe weather, natural disasters, and legal proceedings and claims (including environmental and asbestos matters). Various risks and uncertainties may cause actual results to differ materially from those stated, projected or implied by any forward-looking statements, including, without limitation, risks and uncertainties affecting Ashland that are described in its most recent Form 10-K (including Item 1A Risk Factors) filed with the SEC, which is available on Ashland’s website at http://investor.ashland.com or on the SEC’s website at www.sec.gov. Ashland believes its expectations and assumptions are reasonable, but there can be no assurance that the expectations reflected herein will be achieved. Ashland undertakes no obligation to subsequently update any forward-looking statements made in this Form 10-Q or otherwise except as required by securities or other applicable law.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements herein.

BUSINESS OVERVIEW

Ashland profile

Ashland is a leading, global specialty chemical company that provides products, services and solutions that meet customer needs throughout a variety of industries. Ashland’s chemistry is used in a wide variety of markets and applications, including architectural coatings, automotive, construction, energy, food and beverage, personal care, pharmaceutical, tissue and towel, and water treatment. With approximately 15,000 employees worldwide, Ashland serves customers in more than 100 countries.

Ashland’s sales generated outside of North America were 48% for the three months ended December 31, 2012 and 2011. Sales by region expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:



	Three months ended
	December 31
Sales by Geography	2012		2011
North America (a)	52	%	52	%
Europe	27	%	27	%
Asia Pacific	14	%	14	%
Latin America & other	7	%	7	%
	100	%	100	%

(a)Ashland includes only U.S. and Canada in its North America designation.

Business segments

Ashland’s reporting structure is composed of four reporting segments: Ashland Specialty Ingredients (Specialty Ingredients), Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets). For further descriptions of each business segment, see the “Results of Operations – Business Segment Review” beginning on page 36.

The contribution to sales by each business segment expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:



	Three months ended
	December 31
Sales by Business Segment	2012		2011
Specialty Ingredients	33	%	32	%
Water Technologies	23	%	23	%
Performance Materials	18	%	20	%
Consumer Markets	26	%	25	%
	100