NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
–
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. In the opinion of management all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008. Included within these Condensed Consolidated Financial Statements is a variable interest entity, acquired as part of the Hercules Incorporated (Hercules)
acquisition, in which Ashland has a 40% ownership interest and has been deemed to be the primary beneficiary. As of June 30, 2009, the variable interest entity had an equity position of $29 million. Results of operations for the period ended June 30, 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, expenses and related disclosures of contingent assets and liabilities as well as qualifying subsequent events,
which have been assessed up to the filing date of this Form 10-Q. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and intangible assets), employee benefit obligations, income taxes, other liabilities and associated receivables for asbestos litigation, environmental remediation and asset retirement obligations. Although management bases its estimates on historical experience and various other assumptions
that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions. Ashland has evaluated the period from June 30, 2009, the date of the financial statements, through August 5, 2009, the date of the issuance and filing of the financial statements, and determined that no material subsequent events have occurred that would affect the information presented in these financial statements nor require additional
disclosure.
NOTE B – NEW ACCOUNTING STANDARDS
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
6
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B – NEW ACCOUNTING STANDARDS (continued)
pronouncements that require or permit fair value measurements because 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 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 has prospectively applied 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 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 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.
7
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B – NEW ACCOUNTING STANDARDS (continued)
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 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.
In May 2009, FASB issued FAS No. 165 (FAS 165), “Subsequent Events” which gives guidance on when to record and disclose events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. This Statement was effective
for Ashland on June 30, 2009 and did not have an impact on the Condensed Consolidated Financial Statements.
In June 2009, FASB issued FAS No. 167 (FAS 167), “Amendments to FASB Interpretation No. 46(R),” which alters how an entity determines whether it has a controlling financial interest in a variable interest entity. This Statement also requires ongoing reassessments of the analysis and provides
for enhanced disclosures about an entity’s involvement in a variable interest entity. This Statement becomes effective for Ashland on October 1, 2010. Ashland does not anticipate FAS 167 will have a material impact on the Condensed Consolidated Financial Statements.
In July 2009, FASB issued FAS No. 168 (FAS 168), “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and the framework for selecting the principles used in preparation of financial statements. FAS 168
establishes The FASB Standards Codification™ and interpretative releases of the SEC as the only sources of authoritative U.S. GAAP. This statement is effective for Ashland on September 15, 2009 and will affect any references made to authoritative U.S. GAAP standards in future filings.
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 which was subsequently replaced in May 2009 by $650 million senior unsecured notes, see Note F for further information. The total debt
8
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)
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:
|
|
|
|
|
|
|
|
|
|
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 ten 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.
|
|
9
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
|
|
1,082
|
|
|
|
|
Goodwill
|
|
1,785
|
|
|
|
|
Asbestos receivable
|
|
58
|
|
|
|
|
Property, plant and equipment
|
|
1,116
|
|
|
|
|
Purchased in-process research and development
|
|
10
|
|
|
|
|
Other noncurrent assets
|
|
169
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
(232
|
)
|
|
|
|
Accrued expenses
|
|
(237
|
)
|
|
|
|
Debt
|
|
(786
|
)
|
|
|
|
Pension and other postretirement obligations
|
|
(309
|
)
|
|
|
|
Environmental
|
|
(100
|
)
|
|
|
|
Asbestos
|
|
(373
|
)
|
|
|
|
Deferred tax - net
|
|
(198
|
)
|
|
|
|
Other noncurrent liabilities
|
|
(93
|
)
|
|
|
|
Total purchase price
|
$
|
2,594
|
|
|
The purchase price allocation for the acquisition is preliminary and still ongoing. Since the November 13, 2008 acquisition date of Hercules, adjustments to the purchase price allocation have 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, and such changes 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
|
|
|
|
|
|
|
|
|
|
|
10
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 lived assets. Ashland’s designation of an indefinite life for these assets took many factors into consideration, including the current
market leadership position of the brands as well as their recognition worldwide in the industry. The remaining $827 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
|
$
|
288
|
|
|
|
10 - 24
|
|
|
|
|
Customer relationships - Water Technologies
|
|
234
|
|
|
|
12
|
|
|
|
|
Developed technology - Functional Ingredients
|
|
217
|
|
|
|
15
|
|
|
|
|
Developed technology - Water Technologies
|
|
56
|
|
|
|
5 - 20
|
|
|
|
|
Product trade names - Functional Ingredients
|
|
32
|
|
|
|
20
|
|
|
|
|
Product trade names - Functional Ingredients
|
|
104
|
|
|
Indefinite
|
|
|
|
Product trade names - Water Technologies
|
|
151
|
|
|
Indefinite
|
|
|
|
Total
|
$
|
1,082
|
|
|
|
|
|
|
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
|
|
|
Nine months ended
|
|
|
|
|
Unaudited pro forma information
|
|
June 30
|
|
|
June 30
|
|
|
|
|
(In millions, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Revenues
|
|
$
|
2,037
|
|
|
$
|
2,814
|
|
|
$
|
6,260
|
|
|
$
|
7,877
|
|
|
|
|
Income from continuing operations
|
|
$
|
75
|
|
|
$
|
76
|
|
|
$
|
155
|
|
|
$
|
137
|
|
|
|
|
Net income
|
|
$
|
73
|
|
|
$
|
108
|
|
|
$
|
153
|
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.02
|
|
|
$
|
1.04
|
|
|
$
|
2.09
|
|
|
$
|
1.87
|
|
|
|
|
Net income
|
|
$
|
.99
|
|
|
$
|
1.48
|
|
|
$
|
2.07
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.01
|
|
|
$
|
1.02
|
|
|
$
|
2.07
|
|
|
$
|
1.83
|
|
|
|
|
Net income
|
|
$
|
.98
|
|
|
$
|
1.45
|
|
|
$
|
2.04
|
|
|
$
|
2.29
|
|
|
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
11
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)
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.
Divestitures
In June 2009, Ashland signed a definitive agreement to sell its global marine services business known as Drew Marine, a business unit of Water Technologies, to J.F. Lehman & Co. in a transaction valued at approximately $120 million before tax. The Drew Marine business, with annual revenues of approximately
$140 million a year, has approximately 325 employees, 28 offices and 98 stocking locations in 47 countries. The business is a recognized global leader in providing technical solutions, high value products and services to the global marine industry, including chemicals and testing equipment, water treatment, tank cleaners and corrosion inhibitors, sealing and welding products, refrigerants and refrigeration services, engineered systems and products, fuel management programs, and fire safety and rescue
products and services. The transaction is expected to close during the September 2009 quarter.
The assets and liabilities of this business were reflected as assets and liabilities held for sale in the Condensed Consolidated Balance Sheets and are comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
September 30
|
|
|
June 30
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
26
|
|
|
$
|
28
|
|
|
$
|
29
|
|
|
|
|
Inventories
|
|
|
18
|
|
|
|
19
|
|
|
|
17
|
|
|
|
|
Other current assets
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Current assets
|
|
$
|
45
|
|
|
$
|
47
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
Goodwill and intangible assets
|
|
|
15
|
|
|
|
16
|
|
|
|
17
|
|
|
|
|
Deferred income tax
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
Other noncurrent assets
|
|
|
5
|
|
|
|
5
|
|
|
|
6
|
|
|
|
|
Noncurrent assets
|
|
$
|
23
|
|
|
$
|
24
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
9
|
|
|
$
|
12
|
|
|
$
|
9
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
Current liabilities
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
10
|
|
|
In addition to the Drew Marine assets, Ashland held for sale noncurrent assets of $18 million, $23 million and $22 million as of June 30, 2009 and 2008 and September 30, 2008, respectively, related to corporate aviation and Consumer Markets.
In December 2008, Ashland completed the sale of its indirectly held 33.5 percent ownership interest in FiberVisions Holdings, LLC (FiberVisions), which was acquired by Ashland as part of the Hercules acquisition, to 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 has generated a significant capital loss of approximately $220 million for tax purposes that could be used to offset future capital gains. This capital loss benefit was fully offset by a deferred tax asset valuation allowance because Ashland is not permitted to anticipate additional future capital gains, therefore, no tax benefit was recognized on this transaction. FiberVisions is a leading global
producer of specialty fibers for nonwoven fabrics and textile fibers used in consumer and industrial products.
12
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)
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 June 30, 2009 has resulted in the elimination of approximately
1,300 employee positions and six facility closings. As of June 30, 2009, the total restructuring reserve charges under the program, related to the Hercules integration, was $49 million, of which $26 million for the nine month period ended June 30, 2009, has been charged as an expense within the Unallocated and Other category 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. The remaining reserve of $21 million related to severance associated with Hercules personnel and various plant closing costs, which qualified for the 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 June 30, 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 nine months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
Restructuring reserve
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
Utilization (cash paid or otherwise settled)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
Balance at June 30, 2009
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
30
|
|
|
In addition, Ashland incurred selling, general and administrative expenses of $4 million and $13 million for the three and nine months ended June 30, 2009 for severance charges with an additional $9 million and
13
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C – ACQUISITIONS, DIVESTITURES AND RESTRUCTURING (continued)
$11 million for the three and nine months ended June 30, 2009 charged to the cost of sales and operating expense caption relating to accelerated depreciation for plant or facility 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 $7 million remained as of June 30, 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. Ashland has made adjustments to the gain on the sale of APAC, relating to the tax effects of the sale, during the three and nine month periods ended June 30, 2008. 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. During the three and
nine month periods ended June 30, 2009 and 2008, Ashland recorded income from asbestos-related items, primarily due to an increase in the insurance receivable as a result of Ashland’s ongoing assessment of these matters. 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 nine months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine month
s
ended
|
|
|
|
|
|
|
|
|
June 30
|
|
June 30
|
|
|
(In millions)
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
|
2008
|
|
|
|
Income from discontinued operations (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related litigation reserves and expenses
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
3
|
|
|
|
$
|
7
|
|
|
|
Loss on disposal of discontinued operations (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
(6
|
)
|
|
|
Electronic Chemicals
|
|
|
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
-
|
|
|
|
Total income (loss) from discontinued operations (net of tax)
|
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
|
$
|
(2
|
)
|
|
|
$
|
1
|
|
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 lowest priority to unobservable inputs (Level 3). An
instrument’s categorization within the fair value hierarchy is based upon the lowest level on input that is significant to the instrument
’s
fair value measurement. The three levels within the fair value hierarchy are described as follows.
Level 1
—Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
14
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE E – FAIR VALUE MEASUREMENTS (continued)
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 June 30, 2009. Ashland did not have any financial liability instruments subject to recurring fair value measurements as of June 30, 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
|
|
$
|
256
|
|
|
$
|
256
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Auction rate securities
|
|
|
188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
188
|
|
|
|
|
Deferred compensation investments
(a)
|
|
|
170
|
|
|
|
70
|
|
|
|
100
|
|
|
|
-
|
|
|
|
|
Investments
(a)
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Total assets at fair value
|
|
$
|
616
|
|
|
$
|
328
|
|
|
$
|
100
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included in other noncurrent assets in the Condensed Consolidated Balance Sheet.
|
|
Level 3 instruments
At June 30, 2009, Ashland held at par value $213 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 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.
15
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE E – FAIR VALUE MEASUREMENTS (continued)
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 a permanent realized loss in the other expenses caption of the Statement of Consolidated Income. A full valuation allowance was established for this tax benefit at December 31, 2008 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. During the June 2009 quarter, Ashland sold $29 million (par value) auction rate securities for $26 million in cash proceeds which approximated book
value. In addition, during March 2009, Ashland signed an agreement with UBS 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 June 30, 2009, auction rate securities totaled $188 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 June 30, 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
|
|
|
(55
|
)
|
|
|
|
Balance as of June 30, 2009
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
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 currencies to prevent changes in the value of short-term 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 short-term inter-company loans. These contracts generally require exchange of one foreign currency for another at
a fixed rate at a
16
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE E – FAIR VALUE MEASUREMENTS (continued)
future date and generally have maturities of less than twelve months. All contracts are marked-to-market with net changes in fair value recorded within the selling, general and administrative expenses caption. For the three and nine months ended June 30, 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 gain position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of June 30, 2009 was less than $1 million
(consisting of a gain of $1 million with a notional amount of $61 million offset by a loss of $1 million with a notional amount of $44 million) and was included in other noncurrent assets. As of June 30, 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 interest rate cap qualifies as an interest rate swap within the provisions of the senior credit agreement.
This instrument does not qualify for hedge accounting and therefore gains or losses reflecting changes in fair value, along with the amortization of the upfront premium paid by Ashland to purchase the instrument, are reported in the Statement of Consolidated Income within the net interest
and other financing (expense) income caption. As of June 30, 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.
17
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE F – DEBT (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
September 30
|
|
|
June 30
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Term loan A, due 2013
(a)
|
|
$
|
340
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Term loan B, due 2014
(a)
|
|
|
780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
6.60% notes, due 2027
(b)
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
9.125% notes, due 2017
|
|
|
628
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
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
|
|
|
|
|
Hercules Tianpu - term notes, due through 2011
(b)
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Hercules Jiangmen - term notes, due through 2010
(b)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
6.50% junior subordinated notes, due 2029
(b)
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
International revolver agreements
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Other
|
|
|
3
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
Total debt
|
|
|
1,993
|
|
|
|
66
|
|
|
|
65
|
|
|
|
|
Short-term debt
|
|
|
(44
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Current portion of long-term debt
|
|
|
(71
|
)
|
|
|
(21
|
)
|
|
|
(20
|
)
|
|
|
|
Long-term debt (less current portion)
|
|
$
|
1,878
|
|
|
$
|
45
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Senior credit facilities.
|
|
|
|
(b)
|
Hercules retained instruments.
|
|
The scheduled aggregate maturities of debt by fiscal year are as follows: $38 million in 2009, $93 million in 2010, $92 million in 2011, $95 million in 2012 and $128 million in 2013. Total borrowing capacity remaining under the $400 million revolving credit facility was $261 million, which was reduced
by $139 million for letters of credit outstanding at June 30, 2009. Total short-term debt at June 30, 2009 was $44 million, which primarily related to draws on revolving credit facilities among international operations.
The following summarizes each new credit facility Ashland entered into or inherited from Hercules during the nine months ended June 30, 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 approximately 15% of the outstanding principal amount to be repaid during each of years one and two, approximately
20% of the outstanding principal amount to be repaid during year three, and approximately 25% of the outstanding 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 which commenced on March 31, 2009, with an aggregate annual amount equal to approximately
1% of the outstanding principal amount of the term loan B facility to be repaid in each of the first five years, approximately 0.25% of the outstanding 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 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.
18
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE F – DEBT (continued)
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 June 30, 2009 the interest rate on the term loan A and term loan B were 6.75%
and 7.65%, respectively.
In April 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. In May 2009, the senior credit facility was amended to revise the definition of “Consolidated EBITDA” to include an adjustment for “noncash equity compensation expense” and to also provide for more integration costs associated with the Hercules acquisition during the first year after the acquisition. In exchange, Ashland agreed to limit Capital Expenditures in fiscal 2010 to no more than $250 million.
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, in certain circumstances,
with excess cash flow, in each case subject to certain conditions. During the current June quarter and year-to-date period, Ashland repaid $22 million and $31 million of the term loan A facility and $48 million and $66 million of the term loan B facility, respectively. Because these payments qualified as mandatory prepayments, no premium was paid.
Senior unsecured notes
In May 2009, Ashland issued $650 million aggregate principal amount of 9.125% senior unsecured notes due 2017. The notes were issued at 96.577% of the aggregate principal amount to yield 9.75%. Ashland may redeem some or all of the notes at any time on or after June 1, 2013 at certain fixed
redemption prices. The notes will mature on June 1, 2017 and rank equally with other unsecured and unsubordinated senior obligations. Ashland used the net proceeds from this issuance, together with available liquidity, to repay the $750 million bridge loan facility entered into as part of the interim credit agreement in connection with the closing of the Hercules acquisition on November 13, 2008. The interim credit agreement for the bridge loan facility provided $750 million of
unsecured senior interim loans at a rate of 9% per annum through November 13, 2009, the interim loan maturity date. Upon termination of the bridge facility, Ashland
19
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE F – DEBT (continued)
expensed the remaining $10 million of debt issuance cost related to the loan fees paid to originate the bridge loan facility and was included in the net interest and other financing (expense) income caption in the Statements of Consolidated Income.
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 2.97% to 6.58% 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 CRESTS
SM
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 CRESTS
SM
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 and applicable insurance coverage as well as negative covenants that include financial covenant restrictions associated with leverage and fixed charge coverage ratios, total net worth and capital expenditure levels and restrictions on future dividend payments and stock
repurchases. As of June 30, 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:
ASHLAND
INC
. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE F – DEBT (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 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, as amended) 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)
|
Q4'08
|
|
(b)
|
|
Q1'09
|
|
|
|
Q2'09
|
|
|
|
Q3'09
|
|
|
Total
|
|
|
ratio
|
|
|
|
|
Debt/EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated EBITDA
|
$
|
193
|
|
|
|
$
|
155
|
|
|
|
$
|
227
|
|
|
|
$
|
266
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
2,473
|
|
|
|
|
2,266
|
|
|
|
|
2,021
|
|
|
|
2,021
|
|
|
|
|
|
|
|
|
Debt/EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
x
|
|
|
3.75
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|