Attached files

file filename
EX-10.3 - FORM OF RESTRICTED STOCK AWARD AGREEMENT - ASHLAND LLCa12312015exhibit103.htm
EX-10.4 - FORM OF RESTRICTED STOCK UNIT AWARD AGREEMENT - ASHLAND LLCa12312015exhibit104.htm
EX-10.5 - FORM OF STOCK APPRECIATION RIGHTS AWARD AGREEMENT - ASHLAND LLCa12312015exhibit105.htm
EX-10.6 - FORM OF PERFORMANCE UNIT (LTIP) AWARD AGREEMENT - ASHLAND LLCa12312015exhibit106.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - ASHLAND LLCa12312015exhibit12.htm
EX-31.1 - CERTIFICATION OF WILLIAM A. WULFSOHN - ASHLAND LLCa12312015exhibit311.htm
EX-31.2 - CERTIFICATION OF J. KEVIN WILLIS - ASHLAND LLCa12312015exhibit312.htm
EX-32 - CERTIFICATION OF WILLIAM A. WULFSOHN AND J. KEVIN WILLIS - ASHLAND LLCa12312015exhibit32.htm
10-Q - PDF VERSION - ASHLAND LLCa12312015ash10qfinal.pdf


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 

___________________________
 
FORM 10-Q
                 
(Mark One)
 
 
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2015
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934
 
For the transition period from _________ to ___________

Commission file number 1-32532

ASHLAND INC.

(a Kentucky corporation)
I.R.S. No. 20-0865835

50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333

Indicate by check mark whether the Registrant: (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ No  o    
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes þ No 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, 2015, there were 63,225,021 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)
2015

 
2014

Sales
$
1,163

 
$
1,391

Cost of sales
771

 
982

Gross profit
392

 
409

 
 
 
 
Selling, general and administrative expense
224

 
226

Research and development expense
25

 
25

Equity and other income
8

 
11

Operating income
151

 
169

 
 
 
 
Net interest and other financing expense
42

 
41

Net gain (loss) on divestitures
2

 
(85
)
Income from continuing operations before income taxes
111

 
43

Income tax expense - Note J
20

 
3

Income from continuing operations
91

 
40

Loss from discontinued operations (net of tax) - Note D
(2
)
 
(8
)
Net income
$
89

 
$
32

 
 
 
 
PER SHARE DATA
 
 
 
Basic earnings per share - Note M
 

 
 

Income from continuing operations
$
1.39

 
$
0.58

Loss from discontinued operations
(0.02
)
 
(0.11
)
Net income
$
1.37

 
$
0.47

 
 
 
 
Diluted earnings per share - Note M
 

 
 

Income from continuing operations
$
1.38

 
$
0.57

Loss from discontinued operations
(0.03
)
 
(0.11
)
Net income
$
1.35

 
$
0.46

 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.39

 
$
0.34

 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
 
 
Net income
$
89

 
$
32

Other comprehensive income (loss), net of tax - Note N
 
 
 
Unrealized translation loss
(61
)
 
(127
)
Pension and postretirement obligation adjustment
(3
)
 
(5
)
Unrealized gain on available-for-sale securities
6

 

Other comprehensive loss
(58
)
 
(132
)
Comprehensive income (loss)
$
31

 
$
(100
)




SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
December 31

 
September 30

(In millions - unaudited)
2015

 
2015

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,039

 
$
1,257

Accounts receivable (a)
851

 
961

Inventories - Note G
723

 
706

Deferred income taxes
155

 
155

Other assets
164

 
169

Total current assets
2,932

 
3,248

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
4,161

 
4,144

Accumulated depreciation
2,005

 
1,962

Net property, plant and equipment
2,156

 
2,182

Goodwill - Note H
2,462

 
2,486

Intangibles - Note H
1,114

 
1,142

Restricted investments - Note F
289

 
285

Asbestos insurance receivable - Note L
176

 
180

Equity and other unconsolidated investments
64

 
65

Other assets
480

 
476

Total noncurrent assets
6,741

 
6,816

Total assets
$
9,673

 
$
10,064

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note I
$
645

 
$
326

Current portion of long-term debt - Note I
55

 
55

Trade and other payables
461

 
573

Accrued expenses and other liabilities
433

 
494

Total current liabilities
1,594

 
1,448

Noncurrent liabilities
 

 
 

Long-term debt - Note I
3,337

 
3,348

Employee benefit obligations - Note K
1,059

 
1,076

Asbestos litigation reserve - Note L
648

 
661

Deferred income taxes
81

 
89

Other liabilities
407

 
405

Total noncurrent liabilities
5,532

 
5,579

Commitments and contingencies - Note L


 


Stockholders’ equity
2,547

 
3,037

 
 
 
 
Total liabilities and stockholders’ equity
$
9,673

 
$
10,064

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $11 million at December 31, 2015 and September 30, 2015.






SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS EQUITY

 
 
 

(In millions - unaudited)
Common
stock

 
Paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income (loss)

(a)
Total

BALANCE AT SEPTEMBER 30, 2015
$
1

 
$
46

 
$
3,281

 
$
(291
)

$
3,037

Total comprehensive income (loss)
 

 
 
 
89

 
(58
)

31

Regular dividends, $.39 per common share
 

 
 

 
(24
)
 
 

 
(24
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 

   incentive and other plans (b)
 

 
3

 
 
 
 

 
3

Repurchase of common shares (c)
 
 
(49
)
 
(451
)
 
 
 
(500
)
BALANCE AT DECEMBER 31, 2015
$
1

 
$

 
$
2,895

 
$
(349
)

$
2,547

 
 
 
 
 
 
 
 
 
 
(a)
At December 31, 2015 and September 30, 2015, the after-tax accumulated other comprehensive loss of $349 million and $291 million, respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $38 million and $41 million, respectively, net unrealized translation loss of $382 million and $321 million, respectively, and net unrealized loss on available-for-sale securities of $5 million and $11 million, respectively.
(b)
Common shares issued were 306,271 for the three months ended December 31, 2015.
(c)
Common shares repurchased were 3,873,850 for the three months ended December 31, 2015. See Note N of the Notes to Condensed Consolidated Financial Statements.










































SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
Three months ended
 
December 31
(In millions - unaudited)
2015

 
2014

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
89

 
$
32

Loss from discontinued operations (net of tax)
2

 
8

Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
83

 
85

Debt issuance cost amortization
3

 
4

Deferred income taxes
3

 
(10
)
Equity income from affiliates
(4
)
 
(4
)
Distributions from equity affiliates
5

 
3

Stock based compensation expense
8

 
7

Gain on available-for-sale securities
(2
)
 

Net loss (gain) on divestitures
(2
)
 
85

Pension contributions
(4
)
 
(6
)
Change in operating assets and liabilities (a)
(115
)
 
(154
)
Total cash flows provided by operating activities from continuing operations
66

 
50

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Additions to property, plant and equipment
(53
)
 
(43
)
Proceeds from disposal of property, plant and equipment
1

 
1

Purchase of operations - net of cash acquired
(4
)
 

Proceeds (uses) from sale of operations or equity investments
(2
)
 
106

Reimbursements from restricted investments
7

 

Proceeds from the settlement of derivative instruments
7

 

Total cash flows provided (used) by investing activities from continuing operations
(44
)
 
64

CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Repayment of long-term debt
(14
)
 

Proceeds (repayment) from short-term debt
319

 
(6
)
Repurchase of common stock
(500
)
 
(127
)
Cash dividends paid
(24
)
 
(24
)
Excess tax benefits related to share-based payments

 
2

Total cash flows used by financing activities from continuing operations
(219
)
 
(155
)
CASH USED BY CONTINUING OPERATIONS
(197
)
 
(41
)
Cash used by discontinued operations
 

 
 

Operating cash flows
(10
)
 
(84
)
Investing cash flows

 
(2
)
Total cash used by discontinued operations
(10
)
 
(86
)
Effect of currency exchange rate changes on cash and cash equivalents
(11
)
 
(10
)
DECREASE IN CASH AND CASH EQUIVALENTS
(218
)
 
(137
)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
1,257

 
1,393

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
1,039

 
$
1,256

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

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

5

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 



NOTE A  SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation  
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and Securities and Exchange Commission regulations.  In the opinion of management, all 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, 2015.  Results of operations for the period ended December 31, 2015 are not necessarily indicative of the expected results for the remaining quarters in the fiscal year.
Ashland is composed of three reportable segments:  Ashland Specialty Ingredients (Specialty Ingredients), Ashland Performance Materials (Performance Materials) and Valvoline.
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 certain key 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 U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting.  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, 2015. The following standards relevant to Ashland were either issued or adopted in the current period, or will become effective in a subsequent period.
In November 2015, the Financial Accounting Standards Board (FASB) issued accounting guidance requiring all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance will become effective for Ashland on October 1, 2017, with early adoption permitted. The guidance may be adopted on either a prospective or retrospective basis. Ashland is currently evaluating the new accounting standard and the impact this new guidance will have on Ashland's Condensed Consolidated Financial Statements.

6

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE B – ACQUISITIONS


Oil Can Henry's
On December 11, 2015, Ashland announced that it signed a definitive agreement to acquire OCH International, Inc. (Oil Can Henry's) for $72 million. Oil Can Henry's is the 14th largest quick-lube network in the United States, servicing approximately 1 million vehicles annually. It operates and franchises a total of 89 quick-lube stores, 47 company-owned stores and 42 franchise locations, in six states, including Oregon, Washington, California, Arizona, Idaho and Colorado. The acquisition is expected to be completed during the second quarter of fiscal 2016. 
Zeta Fraction™
In September 2015, Specialty Ingredients completed the acquisition of the patented Zeta Fraction™ technology from AkzoNobel for $8 million. The acquisition broadens Ashland’s value-added portfolio in the personal care, pharmaceutical, food and beverage, and agriculture markets. The patented Zeta Fraction™ process and technology selectively isolates efficacious components from living plants and marine sources to produce a wide range of biofunctional ingredients. The purchase price allocation primarily included intellectual property and property, plant and equipment.
NOTE C - DIVESTITURES
Ashland Separation of Valvoline
On September 22, 2015, Ashland announced that the Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the new Ashland and Valvoline. Ashland has begun the process to separate its Valvoline business from its Specialty Ingredients and Performance Materials businesses while it finalizes the transaction structure and obtains customary regulatory and other approvals. Ashland intends for the separation, which is subject to final board approval prior to completion, to be tax free for Ashland shareholders. Immediately following the separation, Ashland shareholders will own shares of both the new Ashland and Valvoline. The separation is expected to be completed as soon as practicable, but not before the end of fiscal 2016. During the three months ended December 31, 2015, Ashland recognized $6 million of separation costs primarily related to consulting and legal fees and employee retention awards.
The new Ashland will be a global leader in providing specialty chemical solutions to customers in a wide range of consumer and industrial markets. These markets are currently served by Specialty Ingredients and Performance Materials. Key markets and applications include pharmaceutical, personal care, food and beverage, architectural coatings, adhesives, automotive, construction and energy.
Valvoline will focus on building the world's leading engine and automotive maintenance business by providing hands-on expertise to customers in each of its primary market channels: Do-It-Yourself (DIY); Installers; Valvoline Instant Oil ChangeSM; and International.
Industrial Biocides
During May 2015, Ashland entered into a definitive sale agreement to sell the industrial biocides assets within Specialty Ingredients, which closed on July 1, 2015. As a result of the sale, Ashland received net cash proceeds of approximately $30 million and recognized a nominal gain before tax during the September 2015 quarter.
The sale of Specialty Ingredient's industrial biocides assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results.


7

 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE C – DIVESTITURES (continued)



Valvoline Car Care Products
In April 2015, Ashland entered into a definitive sale agreement to sell Valvoline's car care product assets for $24 million, which included Car Brite™ and Eagle One™ automotive appearance products. Prior to the sale, Ashland recognized a loss of $26 million before tax to recognize the assets at fair value less cost to sell, using Level 2 nonrecurring fair value measurements. The loss was reported within the net gain (loss) on divestitures caption within the Statements of Consolidated Comprehensive Income during the March 2015 quarter. The transaction closed on June 30, 2015 and Ashland received net proceeds of $19 million after adjusting for certain customary closing costs and final working capital totals during the June 2015 quarter.
The sale of Valvoline's car care product assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results.
Valvoline Joint Venture
During April 2015, Ashland sold a Valvoline joint venture equity investment in Venezuela. Prior to the sale, Ashland recognized a $14 million impairment in the March 2015 quarter, for which there was no tax effect, using Level 2 nonrecurring fair value measurements within the equity and other income caption of the Statements of Consolidated Comprehensive Income.
Ashland’s decision to sell the equity investment and the resulting charge recorded in the prior year was reflective of the continued devaluation of the Venezuelan currency (bolivar) based on changes to the Venezuelan currency exchange rate mechanisms during the prior year. In addition, the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar had restricted the joint venture’s ability to pay dividends and obligations denominated in U.S. dollars. These exchange regulations and cash flow limitations, combined with other recent Venezuelan regulations and the impact of declining oil prices on the Venezuelan economy, had significantly restricted Ashland’s ability to conduct normal business operations through the joint venture arrangement. Ashland determined this divestiture did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results, and thus it did not qualify for discontinued operations treatment.
Elastomers
On October 9, 2014, Ashland entered into a definitive agreement to sell the Elastomers division of the Performance Materials reportable segment, which operated a 250-person manufacturing facility in Port Neches, Texas, to Lion Copolymer Holdings, LLC. The Elastomers division, which primarily served the North American replacement tire market, accounted for approximately 5% of Ashland's 2014 sales of $6.1 billion and 18% of Ashland Performance Materials' $1.6 billion in sales in 2014. The sale was completed on December 1, 2014 in a transaction valued at approximately $120 million which was subject to working capital adjustments. The total post-closing adjusted cash proceeds received before taxes by Ashland during 2015 was $105 million, which included working capital adjustments and transaction costs, as defined in the definitive agreement.
Elastomers' net assets as of November 30, 2014 were $191 million which primarily included accounts receivable, inventory, property, plant and equipment, non-deductible goodwill and other intangibles and payables. Since the net proceeds received were less than book value, Ashland recorded a loss of $86 million pre-tax, using Level 2 nonrecurring fair value measurements, within the net gain (loss) on divestitures caption within the Statements of Consolidated Comprehensive Income during 2015. The related tax effect was a benefit of $28 million included in the income tax expense caption within the Statements of Consolidated Comprehensive Income.

8

 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE C – DIVESTITURES (continued)



Ashland determined that the sale of Elastomers did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results. As such, Elastomers' results were included in the Performance Materials reportable segment results of operations and financial position within the Statements of Consolidated Comprehensive Income and Condensed Consolidated Balance Sheets, respectively, until its December 1, 2014 sale.
NOTE D – DISCONTINUED OPERATIONS
In previous periods, Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income for all periods presented and are discussed further within this note.
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, which qualified as a discontinued operation, and from the 2009 acquisition of Hercules, a wholly-owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations. See Note L for more information related to the adjustments on asbestos liabilities and receivables.
On July 31, 2014, Ashland completed the sale of the Ashland Water Technologies (Water Technologies) business to Clayton, Dubilier & Rice. Ashland has made certain post-closing adjustments as defined by the definitive agreement during the three months ended December 31, 2015 and 2014.
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, 2015 and 2014.
 
Three months ended
 
December 31
(In millions)
2015

 
2014

Loss from discontinued operations (net of tax)
 
 
 
Water Technologies
$

 
$
(3
)
Asbestos-related litigation

 
(1
)
Loss on disposal of discontinued operations (net of tax)
 

 
 

Water Technologies
(2
)
 
(4
)
Total loss from discontinued operations (net of tax)
$
(2
)
 
$
(8
)
NOTE E – RESTRUCTURING ACTIVITIES
Ashland periodically implements company-wide 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 2014, Ashland announced a global restructuring program to streamline the resources used across the organization. As part of this global restructuring program, Ashland executed a voluntary severance offer (VSO) to certain U.S. employees and an involuntary program for certain employees. Substantially all payments related

9

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE E – RESTRUCTURING ACTIVITIES (continued)

to the VSO and involuntary programs were paid by the end of fiscal year 2015. As of December 31, 2015 and September 30, 2015, the remaining restructuring reserve for this global restructuring program was $5 million and $7 million, respectively. Additional restructuring reserves of $1 million for other previously announced programs also remained as of December 31, 2015 and September 30, 2015.
Facility costs
In prior years, Ashland incurred lease abandonment charges related to its exit from an office facility that was obtained as part of the Hercules acquisition. The costs related to the reserve will be paid over the remaining lease term through May 2016. As of December 31, 2015 and September 30, 2015, the remaining restructuring reserve for all qualifying facility costs totaled $2 million and $3 million, respectively.
The following table summarizes the related activity in these reserves for the three months ended December 31, 2015 and 2014.  The severance reserves and facility costs reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.
 
 
 
Facility

 
 
(In millions)
Severance

 
costs

 
Total

Balance as of September 30, 2015
$
8

 
$
3

 
$
11

Utilization (cash paid)
(2
)
 
(1
)
 
(3
)
Balance as of December 31, 2015
$
6

 
$
2

 
$
8

 
 
 
 
 
 
Balance as of September 30, 2014
$
56

 
$
9

 
$
65

Utilization (cash paid)
(15
)
 
(1
)
 
(16
)
Balance as of December 31, 2014
$
41

 
$
8

 
$
49

Specialty Ingredients Restructuring
During the March 2015 quarter, Specialty Ingredients committed to a restructuring plan within an existing manufacturing facility. As of December 31, 2015 and September 30, 2015, the remaining restructuring reserve related to severance for the Specialty Ingredients' manufacturing facility totaled $2 million and $13 million, respectively. During the three months ended December 31, 2015, as the structure of the program was finalized, the severance reserve was reduced by a $5 million reversal of the accrual as well as reclassifications of certain non-severance related costs. The restructuring plan is expected to be completed during fiscal 2016. The severance reserve is included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.
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.  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.

10

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE F – 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 instruments subject to recurring fair value measurements as of December 31, 2015.
(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
$
1,039

 
$
1,039

 
$
1,039

 
$

 
$

Restricted investments (a)
319

 
319

 
319

 

 

Deferred compensation investments (b)
184

 
184

 
40

 
144

 

Investments of captive insurance company (b)
3

 
3

 
3

 

 

Foreign currency derivatives
2

 
2

 

 
2

 

Total assets at fair value
$
1,547

 
$
1,547

 
$
1,401

 
$
146

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
2

 
$
2

 
$

 
$
2

 
$

 
 
 
 
 
 
 
 
 
 
(a)
Included in restricted investments and $30 million within other current assets in the Condensed Consolidated Balance Sheets.
(b)
Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.
The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2015.

11

 
 
 
 
 
 
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
$
1,257

 
$
1,257

 
$
1,257

 
$

 
$

Restricted investments (a)
315

 
315

 
315

 

 

Deferred compensation investments (b)
180

 
180

 
40

 
140

 

Investments of captive insurance company (b)
4

 
4

 
4

 

 

Foreign currency derivatives
13

 
13

 

 
13

 

Total assets at fair value
$
1,769

 
$
1,769

 
$
1,616

 
$
153

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
16

 
$
16

 
$

 
$
16

 
$

 
 
 
 
 
 
 
 
 
 
(a)
Included in restricted investments and $30 million within other current assets in the Condensed Consolidated Balance Sheets.
(b)
Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.
Restricted investments
On January 13, 2015, Ashland and Hercules, a wholly owned subsidiary of Ashland that was acquired in 2009, entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity Company and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). During the March 2015 quarter, Ashland placed $335 million of the settlement funds into a renewable annual trust restricted for the purpose of paying ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims. These funds were classified primarily as noncurrent restricted investment assets, with $30 million classified within other current assets, in the Condensed Consolidated Balance Sheets as of December 31, 2015 and September 30, 2015.
During the June 2015 quarter, Ashland diversified the restricted investments received from the January 2015 asbestos insurance settlement into primarily equity and corporate bond mutual funds that are designated as available-for-sale securities, classified as Level 1 measurements within the fair value hierarchy. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in the stockholders' equity section of the Condensed Consolidated Balance Sheets as a component of accumulated other comprehensive income (AOCI). Investment income and realized gains and losses on the available-for-sale securities are reported in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income. The following table provides a summary of the available-for-sale securities portfolio as of December 31, 2015 and September 30, 2015:

12

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

 
 
 
Investment

 
Unrealized

 
Unrealized

 
 
 
Fair

(In millions)
Cost (a)

 
Income (b)

 
gain

 
loss

 
Disbursements

 
Value

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Demand deposit
$
17

 
$
2

 
$

 
$

 
$
(7
)
 
$
12

Equity mutual fund
195

 

 

 
(4
)
 

 
191

Corporate bond mutual fund
120

 

 

 
(4
)
 

 
116

Total
$
332


$
2


$


$
(8
)

$
(7
)

$
319

 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Demand deposit
$
20

 
$
3

 
$

 
$

 
$
(6
)
 
$
17

Equity mutual fund
195

 

 

 
(14
)
 

 
181

Corporate bond mutual fund
120

 

 

 
(3
)
 

 
117

Total
$
335

 
$
3

 
$

 
$
(17
)
 
$
(6
)
 
$
315

 
 
 
 
 
 
 
 
 
 
 
 
(a)
The cost of the demand deposit includes investment income and disbursements recognized in previous periods. The cost of the equity and corporate bond mutual funds includes realized gains and losses recorded in previous periods, if applicable.
(b)
Investment income for the demand deposit includes interest income as well as dividend income transferred from the equity and corporate bond mutual funds.
The unrealized losses as of December 31, 2015 and September 30, 2015 were recognized within AOCI. At December 31, 2015, Ashland considered the decline in market value of its restricted investment portfolio, which is less than twelve months in duration, to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. Ashland invests in highly-rated mutual funds comprised principally of investment grade securities. No realized gain or loss was reclassified out of AOCI and no other-than-temporary impairment was recognized in AOCI during the three months ended December 31, 2015.
The following table presents the investment income and disbursements related to the demand deposit for the three months ended December 31, 2015.
 
Three months ended
 
 
 
December 31

(In millions)
 
2015

Investment income
 
$
2

Disbursements
 
(7
)
Deferred compensation investments
Deferred compensation investments consist of Level 1 and Level 2 measurements within the fair value hierarchy. Level 1 investments consist primarily of fixed income U.S. government bonds while Level 2 investments are comprised primarily of a guaranteed interest fund, a common stock index fund and an intermediate government bond fund.
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 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

13

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

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, 2015 and 2014 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
December 31
(In millions)
2015

 
2014

Foreign currency derivative gain (loss)
$
3

 
$
(4
)
The following table summarizes the fair values of the outstanding foreign currency derivatives as of December 31, 2015 and September 30, 2015 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.
 
December 31

 
September 30

(In millions)
2015

 
2015

Foreign currency derivative assets
$
2

 
$
5

Notional contract values
219

 
192

 
 
 
 
Foreign currency derivative liabilities
$
2

 
$
16

Notional contract values
235

 
673

Net investment hedges
During 2015 and 2014, Ashland entered into foreign currency contracts in order to manage the foreign currency exposure of the net investment in certain foreign operations. These foreign currency contracts were primarily the result of certain proceeds from the sale of Water Technologies being received in non-U.S. denominated currencies during 2014 and ongoing management of the volatility in foreign currency exchange rates. Ashland designated the foreign currency contracts as hedges of net investments in its foreign subsidiaries. As a result, Ashland records these hedges at fair value using forward rates, with the effective portion of the gain or loss reported as a component of the cumulative translation adjustment within AOCI and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affects net income. During 2016, these foreign currency contracts were settled and Ashland entered into new foreign currency contracts designated as hedges of net investments in foreign subsidiaries. These settlements resulted in gains, within the cumulative translation adjustment within AOCI, of $7 million for the three months ended December 31, 2015.
As of December 31, 2015 and September 30, 2015, the total notional value of foreign currency contracts equaled $95 million and $175 million, respectively. The fair value of Ashland's net investment hedge assets and liabilities are calculated using forward rates. Accordingly, these instruments are deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these net investment hedges are highly rated financial institutions which Ashland believes carry only a nominal risk of nonperformance. The following table summarizes the fair value of the outstanding net investment hedge instruments as of December 31, 2015 and September 30, 2015.

14

 
 
 
 
 
 
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
2015

 
2015

Net investment hedge assets (a)
Accounts receivable
$

 
$
8

Net investment hedge liabilities (a)
Accrued expenses and other liabilities

 

 
 
 
 
 
(a)
Fair value of $0 denotes a value less than $1 million.
The following table summarizes the change in the unrealized gain on the net investment hedge instruments recognized within the cumulative translation adjustment within AOCI during the three months ended December 31, 2015 and 2014. No portion of the gain was reclassified to income during the three months ended December 31, 2015 and 2014. There was no hedge ineffectiveness with these instruments during the three months ended December 31, 2015 and 2014.
 
Three months ended
 
 
Three months ended
 
 
 
December 31

 
 
December 31

(In millions)
 
2015

 
 
2014

Change in unrealized gain in AOCI (a)
 
$

 
 
$

Tax impact of change in unrealized gain in AOCI (a)
 

 
 
(1
)
 
 
 
 
 
 
(a)
Zero value denotes a value that nets to less than $1 million.
Other financial instruments
At December 31, 2015 and September 30, 2015, Ashland’s long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $3,419 million and $3,431 million, respectively, compared to a fair value of $3,513 million and $3,484 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.  Inventories are primarily stated at cost using the weighted-average cost method. In addition, certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.  
The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
December 31

 
September 30

(In millions)
2015

 
2015

Finished products
$
552

 
$
542

Raw materials, supplies and work in process
202

 
198

LIFO reserve
(31
)
 
(34
)
 
$
723

 
$
706


15

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE H – GOODWILL AND OTHER INTANGIBLES


Goodwill
Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually or when events and circumstances indicate an impairment may have occurred.  This 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.  For its July 1, 2015 assessment, Ashland determined that its reporting units for allocation of goodwill included the Specialty Ingredients and Valvoline reportable segments, and the Composites and Intermediates/Solvents reporting units within the Performance Materials reportable segment, and determined at that time that no impairment existed.
The following is a progression of goodwill by reportable segment for the three months ended December 31, 2015.
 
Specialty

 
Performance

 
 
 
 

(In millions)
Ingredients

 
Materials

(a)
Valvoline

 
Total

Balance as of September 30, 2015
$
2,004

 
$
313

 
$
169

 
$
2,486

Acquisitions (b)

 

 
1

 
1

Currency translation adjustment
(24
)
 
(1
)
 

 
(25
)
Balance as of December 31, 2015
$
1,980

 
$
312

 
$
170

 
$
2,462

 
 
 
 
 
 
 
 
(a)
As of December 31, 2015, goodwill consisted of $171 million for the Intermediates/Solvents reporting unit and $141 million for the Composites reporting unit.
(b)
Relates to Valvoline Instant Oil ChangeSM center acquisitions during the December 31, 2015 quarter.
Other intangible assets
Intangible assets principally consist of trademarks and trade names, intellectual property and customer relationships. Intangible assets classified as finite are amortized on a straight-line basis over their estimated useful lives.  The cost of trademarks and trade names is amortized principally over 4 to 25 years, intellectual property over 5 to 20 years, and customer relationships over 3 to 24 years.
As of September 30, 2015, in-process research and development (IPR&D) and certain intangible assets within trademarks and trade names were classified as indefinite-lived and had a balance of $311 million. During the three months ended December 31, 2015, Ashland started amortizing the remaining IPR&D assets since the technology was commercialized during this period. As a result, as of December 31, 2015, the indefinite-lived intangible assets consisted only of certain trademarks and trade names of $301 million. 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, 2015 and September 30, 2015.
 

16

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE H – GOODWILL AND OTHER INTANGIBLES (continued)

 
December 31, 2015
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
50

 
$
(42
)
 
$
8

Intellectual property
821

 
(277
)
 
544

Customer relationships
415

 
(154
)
 
261

Total definite-lived intangible assets
1,286

 
(473
)
 
813

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
301

 

 
301

Total intangible assets
$
1,587

 
$
(473
)
 
$
1,114


 
September 30, 2015
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
48

 
$
(41
)
 
$
7

Intellectual property
813

 
(266
)
 
547

Customer relationships
424

 
(147
)
 
277

Total definite-lived intangible assets
1,285

 
(454
)
 
831

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
IPR&D
8

 

 
8

Trademarks and trade names
303

 

 
303

Total intangible assets
$
1,596

 
$
(454
)
 
$
1,142

Amortization expense recognized on intangible assets was $19 million and $21 million for the three months ended December 31, 2015 and 2014, respectively, and is included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. Estimated amortization expense for future periods is $76 million in 2016 (includes three months actual and nine months estimated), $76 million in 2017, $76 million in 2018, $72 million in 2019 and $71 million in 2020. The amortization expense for future periods is an estimate. Actual amounts may change from such estimated amounts due to fluctuations in foreign currency exchange rates, additional intangible asset acquisitions and divestitures, potential impairment, accelerated amortization, or other events.
NOTE I – DEBT
The following table summarizes Ashland’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets.

17

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE I – DEBT (continued)

 
December 31

 
September 30

(In millions)
2015

 
2015

4.750% notes, due 2022
$
1,121

 
$
1,120

Term Loan, due 2020
1,073

 
1,086

3.875% notes, due 2018
700

 
700

6.875% notes, due 2043
376

 
376

Accounts receivable securitization
100

 
190

6.50% junior subordinated notes, due 2029 
137

 
136

Revolving credit facility
520

 
110

Other international loans, interest at a weighted-
 

 
 

average rate of 5.9% at December 31, 2015 (4.8% to 9.4%)
25

 
25

Medium-term notes, due 2019, interest of 9.4% at December 31, 2015
5

 
5

Other (a)
(20
)
 
(19
)
Total debt
4,037

 
3,729

Short-term debt
(645
)
 
(326
)
Current portion of long-term debt
(55
)
 
(55
)
Long-term debt (less current portion and debt issuance cost discounts)
$
3,337

 
$
3,348

 
 
 
 
(a)
Other includes $27 million and $28 million of debt issuance cost discounts as of December 31, 2015 and September 30, 2015, respectively.

The scheduled aggregate maturities of long-term debt by year (including the current portion and excluding debt issuance costs) are as follows: $41 million remaining in 2016, $69 million in 2017, $810 million in 2018, $143 million in 2019 and $715 million in 2020.  The borrowing capacity remaining under the $1.2 billion senior unsecured revolving credit facility (the 2015 revolving credit facility) was $605 million, due to an outstanding balance of $520 million, as well as a reduction of $75 million for letters of credit outstanding at December 31, 2015. Ashland's total borrowing capacity at December 31, 2015 was $700 million, which includes $95 million of available capacity from the accounts receivable securitization facility.
Accounts receivable securitization
During the current quarter, the Transfer and Administration Agreement was amended to extend the termination date of the accounts receivable securitization facility from December 31, 2015 to March 22, 2017. No other changes to the agreement within the amendment are expected to have a significant impact to Ashland's results of operations and financial position.
Covenant restrictions
Ashland's debt contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional subsidiary indebtedness, restrictions on subsidiary distributions, investments, mergers, sale of assets and restricted payments and other customary limitations.  As of December 31, 2015, Ashland is in compliance with all debt agreement covenant restrictions.
Financial covenants
The maximum consolidated leverage ratios permitted under Ashland's most recent credit agreement (the 2015 Senior Credit Agreement) are as follows: 3.75 from June 30, 2015 through December 31, 2016 and 3.5 from March 31, 2017 and each fiscal quarter thereafter.  At December 31, 2015, Ashland’s calculation of the consolidated leverage ratio was 3.1, which is below the maximum consolidated leverage ratio of 3.75.

18

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE I – DEBT (continued)

The minimum required consolidated interest coverage ratio under the 2015 Senior Credit Agreement during its entire duration is 3.0.  At December 31, 2015, Ashland’s calculation of the interest coverage ratio was 6.2, which exceeds the minimum required consolidated ratio of 3.0.
NOTE J – INCOME TAXES
Current fiscal year
Ashland’s estimated annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2016 is 25%. Ashland’s effective tax rate in any interim period 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 18% for the three months ended December 31, 2015 and was impacted by net favorable discrete items of $7 million, primarily related to the law change from the reinstatement of the research and development credit and certain global restructuring steps.
Prior fiscal year
Ashland’s annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2015 was 25%. The overall effective tax rate was 7% for the three months ended December 31, 2014. The prior year quarter tax rate was impacted by net favorable discrete items of $8 million, primarily related to the disposition of the Elastomers division.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2015.
 (In millions)
 

Balance at October 1, 2015
$
144

Increases related to positions taken on items from prior years
2

Decreases related to positions taken on items from prior years
(1
)
Increases related to positions taken in the current year
4

Settlement of uncertain tax positions with tax authorities
(2
)
Balance at December 31, 2015
$
147

In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $3 million for continuing operations and zero for discontinued operations related primarily to audit settlements and statute of limitations expirations in various tax jurisdictions. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; 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, 2015, Ashland contributed $2 million to its non-qualified U.S. pension plans and $2 million to its non-U.S. pension plans. No contributions were made to Ashland's qualified U.S. pension plans during the three months ended December 31, 2015. Ashland expects to make additional contributions to the non-qualified U.S. plans of approximately $13 million and to the non-U.S. plans of approximately $13 million during the remainder of 2016.

19

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE K – EMPLOYEE BENEFIT PLANS (continued)

For segment reporting purposes, service cost for continuing operations is proportionately allocated to each segment, excluding the Unallocated and other segment, while all other costs for continuing operations are recorded within the Unallocated and other segment.
The following table details the components of pension and other postretirement benefit costs.
 
 
 
 
 
Other postretirement
 
Pension benefits
 
benefits
(In millions)
2015

 
2014

 
2015

 
2014

Three months ended December 31
 

 
 

 
 

 
 

Service cost (a)
$
6

 
$
7

 
$

 
$

Interest cost
31

 
44

 
2

 
2

Expected return on plan assets
(47
)
 
(54
)
 

 

Amortization of prior service credit
(1
)
 
(1
)
 
(4
)
 
(4
)
 
$
(11
)
 
$
(4
)
 
$
(2
)
 
$
(2
)
 
 
 
 
 
 
 
 
(a)
Service cost of $0 denote values less than $1 million.
Change in Applying Discount Rate to Measure Benefit Costs
During the three months ended December 31, 2015, Ashland changed the method used to estimate the service and interest cost components of net periodic benefit cost for pension and other postretirement benefits. This change compared to the previous method resulted in a decrease in the service and interest cost components for pension and other postretirement benefit costs during the quarter. Historically, Ashland estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Ashland has elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Ashland has made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of Ashland's total benefit obligations or annual net periodic benefit costs as the change in the service and interest costs will be offset in the actuarial gain or loss reported, which typically occurs during the fourth fiscal quarter. Ashland has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has accounted for it prospectively.
The impact of this discount rate change compared to the previous method will decrease estimated pension and other postretirement benefits service and interest cost by approximately $33 million for the full year 2016. The decrease in the first quarter is approximately $8 million, with substantially all of the decrease attributable to interest cost. The lesser impact on service cost is primarily due to the nature of Ashland’s largest U.S. pension plan, which is closed to new entrants and has curtailed other benefits. Of this incremental decrease and based on plan demographics, approximately $13 million will be reported in cost of sales and approximately $20 million will be reported in selling, general, and administrative expense on a full year basis, or approximately $3 million and $5 million on a quarterly basis, respectively, within the Statements of Consolidated Comprehensive Income in the Unallocated and other segment. Service and interest cost, as well as the other components of net periodic benefit costs, are subject to change for such reasons as an event requiring a remeasurement. Ashland's total projected benefit obligations will not be impacted by these reductions in service and interest costs as the decrease will be substantially offset within the actuarial gain or loss caption when the plans are remeasured during the fiscal year.

20

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
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 on an after-tax basis 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, a former subsidiary.  The amount and timing of settlements and number of open claims can fluctuate from period to period.  A summary of Ashland asbestos claims activity, excluding Hercules claims, follows.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
  Years ended September 30
(In thousands)
2015

 
2014

 
2015

 
2014

 
2013

Open claims - beginning of period
60

 
65

 
65

 
65

 
66

New claims filed
1

 
1

 
2

 
2

 
2

Claims settled

 

 

 
(1
)
 
(1
)
Claims dismissed
(2
)
 

 
(7
)
 
(1
)
 
(2
)
Open claims - end of period
59

 
66

 
60

 
65

 
65

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.  As a result of the most recent annual update of this estimate, completed during the June 2015 quarter, it was determined that the liability total for asbestos claims did not need to be adjusted.  Total reserves for asbestos claims were $401 million at December 31, 2015 compared to $409 million at September 30, 2015.
A progression of activity in the asbestos reserve is presented in the following table.

21

 
 
 
 
 
 
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 millions)
2015

 
2014

 
2015

 
2014

 
2013

Asbestos reserve - beginning of period
$
409

 
$
438

 
$
438

 
$
463

 
$
522

Reserve adjustment

 

 

 
4

 
(28
)
Amounts paid
(8
)
 
(7
)
 
(29
)
 
(29
)
 
(31
)
Asbestos reserve - end of period
$
401

 
$
431

 
$
409

 
$
438

 
$
463

Ashland asbestos-related receivables
Ashland has insurance coverage for certain 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 substantially all of the coverage that will be accessed.  
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.  Substantially all of the estimated receivables from insurance companies are expected to be due from domestic insurers. Approximately 40% of the receivable is from insurance companies rated by A. M. Best, all of which have a credit rating of A- or higher as of December 31, 2015.  
In October 2012, Ashland and Hercules initiated various arbitration proceedings against Underwriters at Lloyd’s, certain London companies and/or 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 and Hercules initiated a lawsuit in Kentucky state court against certain Berkshire Hathaway entities (National Indemnity Company and Resolute Management, Inc.) on grounds that these Berkshire Hathaway entities had 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.
On January 13, 2015, Ashland and Hercules entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London companies and Chartis (AIG) member companies, along with National Indemnity Company and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million. In exchange, all claims were released against these entities for past, present and future coverage obligations arising out of the asbestos coverage-in-place agreements that were the subject of the pending arbitration proceedings. In addition, as part of this settlement, Ashland and Hercules released all claims against National Indemnity Company and Resolute Management, Inc. in the Kentucky state court action. As a result, the arbitration proceedings and the Kentucky state court action have been terminated.
As a result of this settlement, Ashland recorded an after-tax gain of $120 million within the discontinued operations caption of the Statements of Consolidated Comprehensive Income during the March 2015 quarter. The Ashland insurance receivable balance was also reduced as a result of this settlement by $227 million within the Condensed Consolidated Balance Sheets.
In addition, during 2015, Ashland placed $335 million of the settlement funds received into a renewable annual trust restricted for the purpose of paying for ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims.
At December 31, 2015, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $145 million, of which $9 million relates to costs previously paid.  Receivables

22

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


from insurers amounted to $150 million at September 30, 2015.  During the June 2015 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 resulted in a $3 million decrease 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)
2015

 
2014

 
2015

 
2014

 
2013

Insurance receivable - beginning of period
$
150

 
$
402

 
$
402

 
$
408

 
$
423

Receivable adjustment

 

 
(3
)
 
22

 
(3
)
Insurance settlement

 

 
(227
)
 

 

Amounts collected
(5
)
 
(10
)
 
(22
)
 
(28
)
 
(12
)
Insurance receivable - end of period
$
145

 
$
392

 
$
150

 
$
402

 
$
408

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 from period to period.  A summary of Hercules’ asbestos claims activity follows.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
  Years ended September 30
(In thousands)
2015

 
2014

 
2015

 
2014

 
2013

Open claims - beginning of period
20

 
21

 
21

 
21

 
21

New claims filed

 

 
1

 
1

 
1

Claims dismissed

 

 
(2
)
 
(1
)
 
(1
)
Open claims - end of period
20

 
21

 
20

 
21

 
21

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.  As a result of the most recent annual update of this estimate, completed during the June 2015 quarter, it was determined that the liability for Hercules asbestos-related claims should be increased by $4 million.  Total reserves for asbestos claims were $306 million at December 31, 2015 compared to $311 million at September 30, 2015.
A progression of activity in the asbestos reserve is presented in the following table.

23

 
 
 
 
 
 
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 millions)
2015

 
2014

 
2015

 
2014

 
2013

Asbestos reserve - beginning of period
$
311

 
$
329

 
$
329

 
$
342

 
$
320

Reserve adjustment

 

 
4

 
10

 
46

Amounts paid
(5
)
 
(5
)
 
(22
)
 
(23
)
 
(24
)
Asbestos reserve - end of period
$
306

 
$
324

 
$
311

 
$
329

 
$
342

Hercules asbestos-related receivables
For the Hercules asbestos-related obligations, certain reimbursement obligations pursuant to coverage-in-place agreements with insurance carriers exist.  As a result, any increases in the asbestos reserve have been 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. Approximately 40% of the receivable is from insurance companies rated by A. M. Best, all of which have a credit rating of A+ or higher as of December 31, 2015.
As of December 31, 2015 and September 30, 2015, the receivables from insurers amounted to $56 million. During the June 2015 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 resulted in a $1 million increase in the receivable for probable insurance recoveries.
As a result of the January 2015 asbestos insurance settlement previously described, Hercules has resolved all disputes with Chartis (AIG) member companies under their existing coverage-in-place agreement for past, present and future Hercules asbestos claims. As a result, during the March 2015 quarter, a $22 million reduction in the insurance receivable balance within the Condensed Consolidated Balance Sheets was recorded.
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)
2015

 
2014

 
2015

 
2014

 
2013

Insurance receivable - beginning of period
$
56

 
$
77

 
$
77

 
$
75

 
$
56

Receivable adjustment

 

 
1

 
3

 
19

Insurance settlement

 

 
(22
)
 

 

Amounts collected

 

 

 
(1
)
 

Insurance receivable - end of period
$
56

 
$
77

 
$
56

 
$
77

 
$
75

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, mortality rates, 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

24

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


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 $880 million for the Ashland asbestos-related litigation (current reserve of $401 million) and approximately $560 million for the Hercules asbestos-related litigation (current reserve of $306 million), 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, or actuarial refinements or improvements to the assumptions used within these models are initiated, 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, 2015, such locations included 84 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 134 current and former operating facilities (including certain operating facilities conveyed to Marathon Ashland Petroleum LLC (MAP) in 2005) and about 1,225 service station properties, of which 64 are being actively remediated.
Ashland’s reserves for environmental remediation and related environmental litigation amounted to $180 million at December 31, 2015 compared to $186 million at September 30, 2015, of which $134 million at December 31, 2015 and $139 million at September 30, 2015 were classified in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.
The following table provides a reconciliation of the changes in the environmental remediation reserves during the three months ended December 31, 2015 and 2014.
 
Three months ended
 
December 31
(In millions)
2015

 
2014

Reserve - beginning of period
$
186

 
$
197

Disbursements
(10
)
 
(8
)
Revised obligation estimates and accretion
4

 
6

Reserve - end of period
$
180

 
$
195

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, 2015 and September 30, 2015, Ashland’s recorded receivable for these probable insurance

25

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


recoveries was $22 million and $23 million, respectively, of which $16 million was classified in other noncurrent assets on the Condensed Consolidated Balance Sheets.
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, 2015 and 2014.
 
Three months ended
 
December 31
(In millions)
2015

 
2014

Environmental expense
$
4

 
$
5

Accretion (a)

 
1

Legal expense
2

 
1

Total expense
6

 
7

 
 
 
 
Insurance receivable (a)

 

Total expense, net of receivable activity
$
6

 
$
7

 
 
 
 
(a)
Activity of $0 denotes value less than $1 million.
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 $365 million.  No individual remediation location is significant, as the largest reserve for any site is 14% or less of the remediation reserve.
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 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, 2015 and September 30, 2015.  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, 2015.
NOTE M  EARNINGS PER SHARE
The following is the computation of basic and diluted earnings per share (EPS) from