[GRAPHIC OMITTED]
June 27, 2006
Mr. Rufus Decker
Mr. Scott Watkinson
United States Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, DC 20549
ASHLAND INC.
ANNUAL REPORT ON FORM 10-K AND FORM 10-K/A FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 2005
CURRENT REPORT ON FORM 8-K FILED ON APRIL 26, 2006
FILE NO. 1-32532
Dear Messrs. Decker and Watkinson:
Set forth below are responses from Ashland Inc. ("Ashland" or
"we") to the comments (the "Comments") of the staff (the "Staff") of the
United States Securities and Exchange Commission (the "SEC"), dated June
13, 2006, concerning Ashland's Annual Report on Form 10-K and Form 10-K/A
for the fiscal year ended September 30, 2005, and Ashland's Current Report
on Form 8-K filed on April 26, 2006.
For your convenience, the responses set forth below have been put
in the same order as the Comments were presented and repeat each Comment
prior to the response. The Comments are highlighted in bold.
FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
FINANCIAL STATEMENTS
NOTE I - SALE OF ACCOUNTS RECEIVABLE, PAGE F-18
COMMENT 1
WE READ YOUR RESPONSE TO COMMENT EIGHT. WE STILL DO NOT UNDERSTAND
HOW YOU CONCLUDED THAT CASH FLOWS RELATED TO THE PURCHASE OF RECEIVABLES
FROM ANOTHER ENTITY AND SUBSEQUENT CASH COLLECTIONS WOULD BE OPERATING
ACTIVITIES. ONCE YOU SOLD THESE RECEIVABLES UNDER SFAS 140, YOU RECORDED
THE CASH RECEIPTS RELATED TO YOUR SALES OF GOODS OR SERVICES, AS REQUIRED
BY PARAGRAPH 22(A) OF SFAS 95, AND THESE BECAME THE RECEIVABLES OF ANOTHER
ENTITY. AFTER THEIR INITIAL SALE, THESE RECEIVABLES SHOULD NOT BE TREATED
ANY DIFFERENTLY UPON REPURCHASE THAN THE PURCHASE OF ANY RECEIVABLES FROM
ANOTHER ENTITY. AS SUCH, THE CASH FLOWS RELATED TO THE REPURCHASE WOULD
APPEAR TO MEET THE REQUIREMENTS OF PARAGRAPHS 15, 16(A) AND 17(A) OF SFAS
95 FOR TREATMENT AS INVESTING ACTIVITIES.
SINCE THE IMPACT ON YOUR OPERATING AND INVESTING CASH FLOWS FOR
THE NINE MONTHS ENDED JUNE 30, 2005 IS MATERIAL, WE BELIEVE YOU SHOULD
REVISE YOUR FINANCIAL STATEMENTS ACCORDINGLY. WE ALSO BELIEVE THAT WHEN YOU
FILE YOUR UPCOMING FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2006, YOU
SHOULD DISCUSS THE IMPACT OF THIS RESTATEMENT ON YOUR OPERATING AND
INVESTING CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AS WELL.
Messrs. Decker and Watkinson
June 27, 2006
Page 2
Response 1
Perhaps much of the confusion surrounding this topic is
attributable to our use of the word "repurchase" in describing this
transaction in the Liquidity section of Management's Discussion and
Analysis of Financial Condition and Results of Operations (the "MD&A") in
Ashland's Form 10-K, as amended, for the fiscal year ended September 30,
2005 and our Response to Comment 8 in our letter to you dated May 25, 2006.
Ashland did not purchase (or repurchase) any receivables on June 30, 2005.
We chose not to sell any receivables in the eligible pool as of June 30,
2005. Instead we remitted $250 million of the approximately $308 million of
collections of pool receivables collected in June, which represented the
purchaser's interest in that pool upon settlement of purchaser's
receivables interest. Therefore, the payment from Ashland to the
purchaser's agent on June 30, 2005 represented collections of those
receivables by Ashland (as collection agent) at the time of any settlement.
Per the agreement, the purchaser was entitled to the first $250 million of
collections from the pool receivables. Receivables sold under the facility
were increased from $150 million to $250 million in May 2005, resulting in
$100 million additional proceeds to Ashland during the quarter. The payment
to the purchaser's agent ($250 million), net of the receipt ($100 million)
during the June 2005 quarter, represented the $150 million decline in
receivables sold, presented as a reduction in cash flows from operations in
the cash flow statement for the nine months ended June 30, 2005, as well as
the year ended September 30, 2005.
We intend to change the language in the Liquidity section of MD&A
in both the Form 10-Q for the period ended June 30, 2006, and the Form 10-K
for the year ended September 30, 2006, to read as follows: "Cash flows from
operations were reduced in the 2005 period as a result of a $150 million
decrease in accounts receivable sold under a sale of receivables facility."
We trust that this revised explanation and proposed change in the
text of the MD&A will clarify that Ashland's presentation of the
transaction as a reduction in cash flows from operations (reflected as an
increase in Ashland's accounts receivable) is appropriate under SFAS 95. We
have not received any inquiries from analysts or investors regarding the
cash flow presentation of this transaction. We apologize for any confusion
caused by our description of the transaction as a "repurchase" of accounts
receivable.
INFORMATION BY INDUSTRY SEGMENT, PAGE F-30
COMMENT 2
WE HAVE REVIEWED YOUR RESPONSES TO COMMENTS TEN AND ELEVEN. IT IS
UNCLEAR HOW DECISIONS REGARDING THE ALLOCATION OF RESOURCES ARE MADE
WITHOUT SEPARATELY EVALUATING PERFORMANCE MATERIALS AND WATER TECHNOLOGIES
GIVEN THE DIFFERENT MARKETS AND CUSTOMERS SERVED BY THE UNITS IN THESE
LINES OF BUSINESS. PLEASE PROVIDE US WITH ADDITIONAL INFORMATION TO HELP US
UNDERSTAND HOW THIS IS DONE. PLEASE PROVIDE A SIMILAR DISCUSSION FOR APAC
AND ASHLAND DISTRIBUTION. ALSO, TELL US WHAT CONSIDERATION YOU GAVE TO THE
POSSIBILITY THAT THE CHIEF OPERATING DECISION MAKING FUNCTION IS, IN PART,
SHARED BY YOUR CHIEF EXECUTIVE OFFICER AND CERTAIN OF HIS DIRECT REPORTS.
Messrs. Decker and Watkinson
June 27, 2006
Page 3
Response 2
Ashland is organized internally as we report externally, along our
four segments (APAC, Ashland Distribution, Ashland Specialty Chemical and
Valvoline), each managed by a segment manager. The organizational charts
provided in response to Comment 3 clarify that structure and our external
reporting under SFAS 131 is consistent with our internal structure - the
overriding requirement of segmentation as explained in paragraphs 4 and 5
of that standard. Ashland's Executive Committee is composed of Jim O'Brien
- - Chief Executive Officer; Gary Cappeline - Senior Vice President;
President and Chief Operating Officer, Chemical Sector; David Hausrath,
Senior Vice President, General Counsel and Secretary; and Marvin Quin,
Senior Vice President and Chief Financial Officer. We have considered
whether the chief operating decision making function is, in part, shared by
Mr. O'Brien and the other members of the Executive Committee. We believe
Mr. O'Brien functions as the Chief Operating Decision Maker (CODM) as
defined in paragraph 12 of SFAS 131, as have the previous chief executive
officers of Ashland. Mr. O'Brien regularly reviews operating results and
makes decisions about allocation of resources and assesses performance at
the segment level. It is up to the segment managers to determine the
allocations within their segments. As we stated in our previous response,
Mr. Cappeline also serves in the role of segment manager for Ashland
Specialty Chemical.
While APAC and Ashland Distribution are generally managed by their
segment managers along regional lines, they are able to be effectively
assessed and reviewed by the CODM at the segment level because each of the
components within the segments provide essentially the same products and
services. While Ashland Specialty Chemical is managed by the segment
manager as six separate businesses, they also are able to be effectively
assessed and reviewed by the CODM as one segment because they share many
common characteristics. They sell specialty chemicals that are typically
manufactured by Ashland and include a high level of related technical
services and, therefore, command a much higher gross margin than the
chemical products typically sold by Ashland Distribution.
Under separate cover, we have provided you with a redacted copy of
the monthly Financial Summary provided to Mr. O'Brien, the other members of
the Executive Committee, several other employees with management
responsibility, and Ashland's Board of Directors. In the Financial Summary,
the total company results are summarized at the segment level, though each
of those four segments are further broken down into various components. We
have also provided you a redacted copy of Ashland's Annual Budget, which is
developed at the segment level, through consolidation of the various
components. The Annual Budget is presented at the segment level to Mr.
O'Brien and the three other members of the Executive Committee for review
and approval and then presented to the Board of Directors for review and
approval.
Messrs. Decker and Watkinson
June 27, 2006
Page 4
COMMENT 3
PLEASE ALSO PROVIDE US WITH A COPY OF YOUR ORGANIZATIONAL CHART
AND THE PERIODIC OPERATING RESULTS INFORMATION REGULARLY PROVIDED TO MR.
O'BRIEN.
Response 3
Under separate cover, you will receive a redacted copy of
Ashland's Monthly Financial Summary for March, 2006, a redacted copy of
Ashland's Annual Budget for fiscal 2006, and organizational charts for the
upper management of Ashland and its four segments.
FORM 8-K FILED APRIL 26, 2006
EXHIBIT 99.17
COMMENT
WE HAVE REVIEWED YOUR RESPONSE TO COMMENT 15. PLEASE REVISE YOUR
PROPOSED DISCLOSURE TO DESCRIBE THE DERIVATION OF INVESTED CAPITAL AND
DISCLOSE HOW THE 9.5% RATE WAS ARRIVED AT IN THE PARENTHESIS NEXT TO COST
OF CAPITAL.
Response
The computation of Pocket Profit will be expanded in future
filings to show the computation of Average Invested Capital (including the
derivation of Invested Capital and how the 9.5% rate was arrived at), as
illustrated below, using the computation for the March 2006 and 2005
quarters included in Form 8-K filed April 26, 2006.
Ashland Distribution Non-GAAP Metric Information
($, Thousands)
POCKET PROFIT Q2 2006 Q2 2005
- ------------------------------------------------ ---------------- ---------------
Operating Income 30,367 28,894
Income Taxes (11,427) (11,352)
---------------- ---------------
Net Income 18,940 17,542
Invested Capital - Jan 31 620,227 558,207
Invested Capital - Feb 28 626,511 552,472
Invested Capital - Mar 31 588,884 523,469
---------------- ---------------
Total 1,835,622 1,634,148
---------------- ---------------
Average Invested Capital (Total / 3) 611,874 544,716
Cost of Capital (9.5% / 4) 2.375% 2.375%
---------------- ---------------
Cost of Capital $ (COC$) 14,532 12,937
Pocket Profit 4,408 4,605
(Net Income less COC$)
Notes:
1. "Invested Capital" is defined as total assets less total
liabilities, excluding intercompany receivables and payables.
Messrs. Decker and Watkinson
June 27, 2006
Page 5
2. For purposes of the Pocket Profit computation, Ashland has
established an estimated cost of capital annual rate of 9.5%, which is
intended to represent a reasonable estimate of the weighted average of
Ashland's after-tax cost of long-term debt and the cost of equity, based on
a targeted ratio of debt and equity to Ashland's total capitalization.
3. Pocket Profit is a Non-GAAP metric used by management to measure
our overall performance as it relates to covering our cost of capital.
4. "Pocket Profit" is defined as: Operating Income less Income Taxes
equals Net Income. The Average Invested Capital for the quarter is
multiplied by 2.375% (9.5% / 4) which equals the Cost of Capital, which is
then subtracted from our Net Income to arrive at our Pocket Profit.
Ashland acknowledges that it is responsible for the adequacy and
accuracy of the disclosure in the filings; that the Staff Comments or
changes to disclosure in response to Staff Comments do not foreclose the
Commission from taking any action with respect to the filing; and that
Ashland may not assert Staff Comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws
of the United States.
We believe that the information contained in this letter is responsive
to the Comments in the Comment Letter.
Please acknowledge receipt of this response letter by electronic
confirmation.
Please call David Mattingly, Senior Counsel, or William Thompson,
Assistant Controller, at (859) 815-5368 and (859) 815-5937, respectively,
if you have any questions regarding this submission.
Very truly yours,
/s/ J. Marvin Quin
J. Marvin Quin
Senior Vice President
and Chief Financial Officer