Ashland Global Holdings Inc.
ASHLAND INC. (Form: 10-Q, Received: 05/04/2011 16:00:25)



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

 
 
FORM 10-Q

 
 
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,  2011
 
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 ¨
 
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 ¨   No þ 
 
At March 31, 2011, there were 79,136,699 shares of Registrant’s Common Stock outstanding.
 
 
 


 
 
 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
                         
                         
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
STATEMENTS OF CONSOLIDATED INCOME
               
                         
   
Three months ended
   
Six months ended
 
   
March 31
   
March 31
 
(In millions except per share data - unaudited)
 
2011
   
2010
   
2011
   
2010
 
                         
SALES
  $ 1,557     $ 1,423     $ 2,989     $ 2,748  
                                 
COSTS AND EXPENSES
                               
Cost of sales
    1,135       992       2,174       1,899  
Selling, general and administrative expense
    292       293       577       577  
Research and development expense
    22       20       43       40  
      1,449       1,305       2,794       2,516  
EQUITY AND OTHER INCOME
    14       14       26       27  
                                 
OPERATING INCOME
    122       132       221       259  
Net interest and other financing expense (a)
    (39 )     (103 )     (66 )     (145 )
Net gain (loss) on acquisitions and divestitures
    -       (5 )     21       (5 )
Other income
    -       -       -       1  
INCOME FROM CONTINUING OPERATIONS
                               
BEFORE INCOME TAXES
    83       24       176       110  
Income tax benefit (expense) - Note K
    13       (18 )     (18 )     (40 )
INCOME FROM CONTINUING OPERATIONS
    96       6       158       70  
Income from discontinued operations (net of income taxes) - Note E (b)     257       16       282       38  
NET INCOME
  $ 353     $ 22     $ 440     $ 108  
                                 
BASIC EARNINGS PER SHARE - Note N
                               
Income from continuing operations
  $ 1.22     $ .07     $ 2.01     $ .90  
Income from discontinued operations
    3.25       .21       3.57       .50  
Net income
  $ 4.47     $ .28     $ 5.58     $ 1.40  
                                 
DILUTED EARNINGS PER SHARE - Note N
                               
Income from continuing operations
  $ 1.20     $ .07     $ 1.97     $ .88  
Income from discontinued operations
    3.19       .20       3.50       .49  
Net income
  $ 4.39     $ .27     $ 5.47     $ 1.37  
                                 
DIVIDENDS PAID PER COMMON SHARE
  $ .15     $ .075     $ .30     $ .15  
                                 
 
(a)
The three and six months ended March 31, 2011 and 2010 include a $12 million and $66 million charge, respectively, related to the significant extinguishment of debt completed during these periods.
 
(b)
Includes income of $23 million and $46 million for the three and six months ended March 31, 2011, respectively, and $14 million and $25 million for the three and six months ended March 31, 2010, respectively, related to the direct results of the Distribution business.  Due to its sale, the direct results of this business have been presented as discontinued operations for each period presented in accordance with U.S. GAAP.  In addition, the three and six months ended March 31, 2011 include an after-tax gain of $231 million related to Ashland's sale of its Distribution business.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
2
 
 
 
             
             
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
   
CONDENSED CONSOLIDATED BALANCE SHEETS
           
             
   
March 31
   
September 30
 
(In millions - unaudited)
 
2011
   
2010
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,129     $ 417  
Accounts receivable   (a)
    1,142       1,115  
Inventories - Note H
    534       447  
Deferred income taxes
    112       112  
Other assets
    57       49  
Held for sale - Note D (b)
    -       693  
      2,974       2,833  
NONCURRENT ASSETS
               
Auction rate securities - Note G
    22       22  
Goodwill - Note I
    2,142       2,148  
Intangibles - Note I
    1,088       1,111  
Asbestos insurance receivable (noncurrent portion) - Note M
    440       459  
Deferred income taxes
    336       336  
Other assets
    640       514  
Held for sale - Note D (b)
    2       270  
      4,670       4,860  
PROPERTY, PLANT AND EQUIPMENT
               
Cost
    3,079       3,096  
Accumulated depreciation and amortization
    (1,311 )     (1,258 )
      1,768       1,838  
                 
TOTAL ASSETS
  $ 9,412     $ 9,531  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
Short-term debt - Note J
  $ 42     $ 71  
Current portion of long-term debt - Note J
    19       45  
Trade and other payables
    708       727  
Accrued expenses and other liabilities
    541       523  
Held for sale - Note D (b)
    -       321  
      1,310       1,687  
NONCURRENT LIABILITIES
               
Long-term debt (noncurrent portion) - Note J
    846       1,108  
Employee benefit obligations - Note L
    1,191       1,372  
Asbestos litigation reserve (noncurrent portion) - Note M
    813       841  
Deferred income taxes
    173       145  
Other liabilities
    582       575  
      3,605       4,041  
                 
STOCKHOLDERS’ EQUITY
    4,497       3,803  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 9,412     $ 9,531  
                 
   
(a)
Accounts receivable includes an allowance for doubtful accounts of $20 million and $21 million at March 31, 2011 and September 30, 2010, respectively.
 
(b)
September 30, 2010 primarily relates to assets and liabilities of the Distribution business that qualified for held for sale classification in accordance with U.S. GAAP. 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
 
3
 
 
 
 
 
                               
                                 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
                     
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
                     
                                 
                     
Accumulated
         
                     
other
         
   
Common
   
Paid-in
   
Retained
   
comprehensive
         
(In millions - unaudited)
 
stock
   
capital
   
earnings
   
loss
 
(a)
 
Total
 
                                 
BALANCE AT SEPTEMBER 30, 2010
  $ 1     $ 665     $ 3,482     $ (345 )     $ 3,803  
Total comprehensive income (b)
                    440       254         694  
Dividend on common stock, $.30 per share
                (24 )               (24 )
Common shares issued under stock
                                         
   incentive and other plans (c)
            24                         24  
BALANCE AT MARCH 31, 2011
  $ 1     $ 689     $ 3,898     $ (91 )     $ 4,497  
                                           
 
(a)
At March 31, 2011, the after-tax accumulated other comprehensive loss of $91 million was comprised of pension and postretirement obligations of $480 million and net unrealized translation gains of $389 million.
 
(b)
Reconciliations of net income to total comprehensive income (loss) follow.
                           
     Three months ended       Six months ended  
    March 31       March 31  
(In millions)
  2011     2010    
2011
   
2010
 
                           
Net income
  353     22     440     $ 108  
Pension and postretirement obligation adjustments, net of tax
    140       10       140       10  
Unrealized translation gain (loss), net of tax
    132       (104     114       (123 )
Total comprehensive income (loss)     $ 625      $ (72 )   $ 694     (5 )
                                 
                                 
(c)  
Common shares issued were 327,905 for the six months ended March 31, 2011.
 
 
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
 
4
 
 
 
             
             
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
           
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
           
             
   
Six months ended
 
   
March 31
 
(In millions - unaudited)
 
2011
   
2010
 
CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES FROM
           
CONTINUING OPERATIONS
           
Net income
  $ 440     $ 108  
Income from discontinued operations (net of income taxes)
    (282 )     (38 )
Adjustments to reconcile income from continuing operations to
               
  cash flows from operating activities
               
Depreciation and amortization
    143       141  
Debt issuance cost amortization
    19       74  
Deferred income taxes
    (34 )     54  
Equity income from affiliates
    (7 )     (12 )
Distributions from equity affiliates
    3       6  
Gain from sale of property and equipment
    (2 )     (3 )
Stock based compensation expense
    9       7  
Stock contributions to qualified savings plans
    13       13  
Net (gain) loss on acquisitions and divestitures
    (21 )     5  
Loss on early retirement of debt
    -       4  
Gain on auction rate securities
    -       (1 )
Change in operating assets and liabilities   (a)
    (204 )     (110 )
      77       248  
CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES FROM
               
CONTINUING OPERATIONS
               
Additions to property, plant and equipment
    (52 )     (59 )
Proceeds from disposal of property, plant and equipment
    4       11  
Purchase of operations - net of cash acquired
    (5 )     -  
Proceeds from sale of operations or equity investments
    40       60  
Proceeds from sales and maturities of available-for-sale securities
    -       85  
      (13 )     97  
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES FROM
               
CONTINUING OPERATIONS
               
Proceeds from issuance of long-term debt
    11       300  
Repayment of long-term debt
    (299 )     (773 )
    (Repayment of)/proceeds from short-term debt
    (29 )     317  
Debt issuance costs
    -       (12 )
Cash dividends paid
    (24 )     (12 )
Proceeds from exercise of stock options
    2       4  
Excess tax benefits related to share-based payments
    1       1  
      (338 )     (175 )
CASH (USED) PROVIDED BY CONTINUING OPERATIONS
    (274 )     170  
Cash (used) provided by discontinued operations
               
Operating cash flows
    5       (17 )
Investing cash flows (b)
    979       (4 )
Effect of currency exchange rate changes on cash and cash equivalents
    2       (2 )
INCREASE IN CASH AND CASH EQUIVALENTS
    712       147  
                 
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
    417       352  
                 
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 1,129     $ 499  
                 
 
(a) 
Excludes changes resulting from operations acquired or sold.
 
(b) 
Includes proceeds from the divestiture of the Distribution business on March 31, 2011. 


SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
5
 
 
 

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


NOTE A   BASIS OF PRESENTATION
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  These 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, 2010.  Results of operations for the period ended March 31, 2011 are not necessarily indicative of results to be expected for the year ending September 30, 2011.  Certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.
 
Ashland is composed of four reporting segments:  Ashland Aqualon Functional Ingredients (Functional Ingredients), Ashland Hercules Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets).  On March 31, 2011, Ashland completed the sale of substantially all of the assets and certain liabilities of Ashland Distribution (Distribution).  As a result of this sale, the prior period operating results and cash flows related to Distribution have been reflected as discontinued operations, while the assets and liabilities have been classified as held for sale.  See Notes D, E and Q for additional information on the Distribution divestiture and reporting segment results.
 
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, 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’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions.  Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, and changes in the prices of hydrocarbon-based products and other raw materials, can have a significant effect on operations.  While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.

 
NOTE B – NEW ACCOUNTING STANDARDS
 
Changes to estimates of financial statement impacts due to the adoption of new accounting standards and new accounting standards issued during the current fiscal year are included 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, 2010.
 
In October 2009, the Financial Accounting Standards Board (FASB) issued accounting guidance related to separating consideration in multiple-deliverable revenue arrangements (ASC 605-25 Revenue Recognition – Multiple-Element Arrangements).  Under this guidance, multiple-deliverable arrangements will be accounted for separately (rather than as a combined unit) by selecting the best evidence of selling price among vendor-specific objective evidence, third-party evidence or estimated selling price.  Additionally, this guidance eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  This guidance became effective for Ashland on October 1, 2010.  The adoption of this guidance did not have a material impact on the Condensed Consolidated Financial Statements.


 
6
 
 

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

 
NOTE C – ACQUISITIONS
 
Ara Quimica
 
In April 2010, Ashland acquired the remaining 50% interest in Ara Quimica S.A. (Ara Quimica), a leading producer of custom unsaturated polyester resin formulations for the composites industry in South America, for $28 million.  Prior to the acquisition, Ashland owned a 50% interest in Ara Quimica, which it recorded as an equity method investment within the Performance Materials reporting segment.  Ara Quimica recorded sales of approximately $56 million for its most recent fiscal year ended September 30, 2010.  As a result of this transaction, Ashland recorded $19 million of current assets and $61 million of long-term assets, which included $55 million of goodwill and intangible assets.  In addition, Ashland recorded $18 million of current liabilities and $6 million of noncurrent liabilities.
 
Hercules
 
On November 13, 2008, Ashland completed its acquisition of Hercules Incorporated (Hercules).  The total merger consideration for outstanding Hercules Common Stock was $2,594 million, including $2,096 million in cash, $450 million in Ashland Common Stock with the remaining value of the transaction related to cash consideration and value for restricted stock units, stock options and transaction costs.  In addition, Ashland assumed $798 million in debt as a part of the transaction.  The acquired businesses of Hercules now comprise the Functional Ingredients reporting segment, as well as a significant portion of the Water Technologies reporting segment.  The total debt borrowed upon the closing of the merger was approximately $2,300 million with the remaining cash consideration for the transaction paid from Ashland’s existing cash at the date of the transaction. 
 
 
NOTE D – DIVESTITURES
 
Ashland Distribution
 
On March 31, 2011, Ashland completed a sale to Nexeo Solutions, LLC (formerly known as TPG Accolade, LLC (Nexeo)) of substantially all of the assets and certain liabilities of its global distribution business conducted by the Ashland Distribution (Distribution) segment.  The transaction is an asset sale with the total cash proceeds received by Ashland of $979 million, before transaction fees and taxes, which includes $49 million in estimated working capital adjustments.  Final settlements related to post-closing working capital adjustments and certain other adjustments, as specified in the definitive agreement, are expected to occur in upcoming periods.  Ashland recognized an after-tax gain of $231 million.  The tax effects on the gain were partially offset by a $68 million release of tax valuation allowances on a capital loss carry-forward generated from the December 2008 divestiture of Ashland’s interest in FiberVisions Holdings LLC.  The gain was included within the discontinued operations caption in the Statement of Consolidated Income for the three months and six months ended March 31, 2011.  Ashland Distribution recorded sales of $3,419 million during the most recently completed fiscal year ended September 30, 2010 and employed approximately 2,000 employees across North America and Europe. 
 
Because this transaction signifies Ashland’s exit from the Distribution business, the results of operations and cash flows of Distribution have been classified as discontinued operations for all periods presented.  Certain indirect corporate costs included within selling, general and administrative expense that were previously allocated to the Distribution reporting segment that do not qualify for discontinued operations accounting classification are now reported as costs within the Unallocated and other section of continuing operations, and equaled $8 million and $6 million for the three months ended March 31, 2011 and 2010, respectively, and $15 million for both the six months ended March 31, 2011 and 2010, respectively.  Ashland is currently analyzing and developing plans to reduce these stranded costs.
 
Ashland will retain and has agreed to indemnify Nexeo for certain liabilities of the Distribution business arising prior to the closing of the sale.  This includes pension and other postretirement benefits, as well as certain other liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in

 
7
 
 


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

 
NOTE D – DIVESTITURES (continued)

 
the definitive agreement.  Costs directly related to these expenses have been included within the discontinued operations caption for the three and six months ended March 31, 2011 and 2010.  In accordance with U.S. GAAP, the ongoing effects of the pension and postretirement plans for Distribution employees will be reported within the Unallocated and other section of continuing operations subsequent to March 31, 2011.
 
As part of this sale, Ashland expects to receive transition service fees for ongoing administrative and other services to be provided to Nexeo in upcoming periods.  While the transition service agreements are expected to vary in duration depending upon the type of service provided, Ashland expects to reduce costs as the transition services are completed.  See Note E – Discontinued Operations for further information on the results of operations of Distribution for all periods presented.
 
As a result of this divestiture, the assets and liabilities of Distribution for prior periods have been reflected as assets and liabilities held for sale within the Condensed Consolidated Balance Sheets and are comprised of the following components:
       
   
September 30
 
(In millions - unaudited)
 
2010
 
Accounts receivable
  $ 494  
Inventories
    197  
Other current assets
    2  
Current assets held for sale
  $ 693  
         
Property, plant and equipment, net
  $ 179  
Goodwill and intangible assets
    82  
Noncurrent assets held for sale
  $ 261  
         
Trade payables
  $ 315  
Accrued expenses and other liabilities
    6  
Current liabilities held for sale
  $ 321  
 
In addition to the Distribution assets and liabilities identified above as held for sale, Ashland held other noncurrent assets for sale of $2 million and $9 million as of March 31, 2011 and September 30, 2010, respectively, primarily related to non-operational properties and certain Valvoline Instant Oil Change TM locations.  The noncurrent assets held for sale are recorded at the lower of carrying value or below this level if an impairment is indicated.  The fair values were based on definitive agreements of sale or other market quotes which would be considered significant unobservable market inputs (Level 3) within the fair value hierarchy.  See also Note G – Fair Value Measurements for further information on the fair value hierarchy.
 
Castings Solutions Joint Venture
 
In July 2010, Ashland and Süd-Chemie AG (Süd-Chemie) signed an agreement for the formation of an expanded global joint venture serving the foundry chemical sector.  The transaction closed on November 30, 2010 and combined three businesses:  (i) Ashland’s Castings Solutions business group, (ii) Süd-Chemie’s Foundry-Products and Specialty Resins business unit, and (iii) Ashland-Südchemie-Kernfest GmbH (ASK), the existing fifty-percent owned European-based joint venture between Ashland and Süd-Chemie, for which Ashland historically only recognized equity income of the joint venture within its consolidated results.  Ashland’s Castings Solutions and ASK businesses recorded sales of $279 million and $145 million, respectively, during each businesses’ most recently completed fiscal year.  The Foundry-Products and Specialty Resins business unit of Süd-Chemie contributed to the joint venture generated sales of approximately $146 million for its most recently completed fiscal year.
 
 
8
 
 


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


NOTE D – DIVESTITURES (continued)

 
D uring the fifth year of the joint venture’s operations, Ashland will have the option to sell its shares in the expanded global joint venture to Süd-Chemie under mutually agreed terms.  If Ashland does not execute this option by the end of the sixth year of the joint venture’s operations, Süd-Chemie will have the option to acquire Ashland’s shares under mutually agreed terms.  Under both options, if mutually agreed terms cannot be reached, then the fair market value of the shares will be determined through an appraisal process set forth in the agreement.
 
Upon closing of the transaction, the joint venture distributed a $21 million net payment to Ashland in accordance with the agreement.  During the March 2011 quarter, Ashland received an additional $8 million cash payment from the joint venture, resulting from post-closing activities and measurements set forth in the agreement.  Ashland anticipates receiving an additional cash payment from the joint venture of approximately $20 million during the June 2011 quarter, resulting from the finalization of the remaining post-closing activities and measurements.  
 
Ashland recognized pretax gains of $5 million and $23 million during the three and six months ended March 31, 2011, respectively, attributable to the fair market value of the net assets contributed to the joint venture.  For the majority of the valuation of the contributed assets and liabilities, Ashland utilized the discounted cash flow method; however, the adjusted book value method was also used in some areas of the valuation.  The gains were included in the Net gain (loss) on acquisitions and divestitures caption in the Statement of Consolidated Income.   The recorded values of assets and liabilities contributed on the closing date by Ashland to the expanded joint venture, excluding equity interests were as follows:  
       
   
Assets
 
(In millions)
 
(liabilities)
 
Cash
  $ 9  
Accounts receivable
    52  
Inventories
    21  
Property, plant and equipment
    34  
Goodwill
    52  
Trade and other payables
    (24 )
Other noncurrent assets (liabilities) - net
    11  
    $ 155  
 
Ashland’s equity interest in the expanded joint venture qualifies for equity method accounting treatment under U.S. GAAP.  As a result, beginning on December 1, 2010, the reported results of the Castings Solutions business will no longer include the sales, cost of sales or selling, general and administrative expense related to this business; however, Ashland will include the financial effects of the joint venture within Performance Materials’ equity and other income caption of the Statements of Consolidated Income.  In addition, the expanded joint venture has left certain stranded costs that Ashland is currently analyzing and developing plans to reduce.
 
Pinova divestiture
 
In January 2010, Ashland sold its refined wood rosin and natural wood terpenes business, formerly known as Pinova, a business unit of Functional Ingredients, to TorQuest Partners in a transaction valued at approximately $75 million before tax, which was comprised of $60 million in cash and a $15 million five-year promissory note from TorQuest Partners.  The Pinova business, with annual sales of approximately $85 million per year, had approximately 200 employees along with an associated manufacturing facility located in Brunswick, Georgia.  As part of this transaction, TorQuest Partners has agreed to continue to manufacture certain products on behalf of Ashland.  
 
 
 
9
 
 
 

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


NOTE E – DISCONTINUED OPERATIONS
 
As previously described in Note D, on March 31, 2011 Ashland completed the sale of substantially all of the assets and certain liabilities of Distribution.  Ashland has determined that this sale qualifies as a discontinued operation, in accordance with U.S. GAAP, since Ashland does not have significant continuing involvement in the distribution business.  As a result, operating results and cash flows related to Distribution have been reflected as discontinued operations in the Statement of Consolidated Income and Statement of Condensed Consolidated Cash Flows, while assets and liabilities that were sold have been classified within the September 30, 2010 Condensed Consolidated Balance Sheet as held for sale.  Sales for the three month periods ended March 31, 2011 and 2010 were $1,013 million and $857 million, respectively.  Sales for the six month periods ended March 31, 2011 and 2010 were $1,868 million and $1,586 million, respectively.  The results of operations for the three and six month periods ended March 31, 2011 and 2010 are included in the table below.
 
Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, and from the acquisition of Hercules during fiscal 2009, a wholly-owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables continue periodically and primarily reflect updates to the estimates.  See Note M for more information related to the adjustments on asbestos liabilities and receivables.
 
Ashland’s divestiture of Ashland Paving And Construction (APAC) during 2006 qualified as a discontinued operation.  As a result, the previous operating results, assets and liabilities related to APAC have been reflected as discontinued operations in the Condensed Consolidated Financial Statements.  Ashland has made subsequent adjustments to the gain on the sale of APAC, primarily relating to the tax effects of the sale, during the three and six month periods ended March 31, 2011 and 2010.  Such adjustments to these and other divested businesses may continue to occur in future periods and are reflected in the period they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.
 
Components of amounts reflected in the Statements of Consolidated Income related to discontinued operations are presented in the following table for the three and six months ended March 31, 2011 and 2010.
 
             
   
Three months ended
   
Six months ended
 
   
March 31
   
March 31
 
(In millions)
 
2011
   
2010
   
2011
   
2010
 
Income from discontinued operations (net of tax)
                       
Distribution (a)
  $ 23     $ 14     $ 46     $ 25  
Asbestos-related litigation reserves and receivables
    -       -       1       9  
Gain on disposal of discontinued operations (net of tax)
                               
Distribution (b)
    231       -       231       -  
APAC
    3       -       4       2  
Electronic Chemicals
    -       2       -       2  
Total income from discontinued operations (net of tax)
  $ 257     $ 16     $ 282     $ 38  
                                 
 
(a)     
For the three and six month periods ended March 31, the pretax income reported for Distribution was $28 million and $54 million for 2011 and $19 million and $38 million for 2010, respectively.
 
(b)     
For the three and six months ended March 31, 2011, the pretax gain reported for Distribution was $314 million. 
 
 
NOTE F – RESTRUCTURING ACTIVITIES
 
Ashland periodically implements restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business.  The total restructuring cost incurred for these programs for the three and six months ended March 31, 2010 was $1 million and $3 million, respectively, and was classified within the selling, general and administrative expenses caption.  Additional costs from reductions in resources, facilities and business realignment
 
 
 
10
 
 


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


NOTE F – RESTRUCTURING ACTIVITIES (continued)
 

or divestitures may occur in future periods, which could include charges related to additional severance, plant closings, reassessed pension plan valuations or other items.
 
As of March 31, 2011, the remaining restructuring reserves for these programs principally consisted of severance payments from the Hercules Integration Plan and the recent Performance Materials restructuring, which consisted of several plant closings and operational redesign to eliminate excess capacity that was announced during the prior fiscal year.
 
The following table details at March 31, 2011 and 2010, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves for the six months ended March 31, 2011 and 2010.  The reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet and are expected to be fully utilized by the end of fiscal 2011.
 
       
       
(In millions)
 
Severance
 
Balance as of September 30, 2009
  $ 38  
Restructuring reserve
    3  
Utilization (cash paid or otherwise settled)
    (23 )
Balance at March 31, 2010
  $ 18  
         
Balance as of September 30, 2010
  $ 26  
Utilization (cash paid or otherwise settled)
    (8 )
Balance at March 31, 2011
  $ 18  
 
 
NOTE G – 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 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.
 
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 occasional market quotes or sales of similar instruments or 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
 
 

 
11
 
 

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

 
NOTE G – FAIR VALUE MEASUREMENTS (continued)

 
quoted prices of similar assets or liabilities in active markets (market approach), adjusted for any terms specific to that asset or liability.  For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.
 
The following table summarizes financial asset instruments subject to recurring fair value measurements as of March 31, 2011.  Ashland did not have any financial liability instruments subject to recurring fair value measurements as of March 31, 2011.
 
                               
               
Quoted prices
             
               
in active
   
Significant
       
               
markets for
   
other
   
Significant
 
         
Total
   
identical
   
observable
   
unobservable
 
   
Carrying
   
fair
   
assets
   
inputs
   
inputs
 
(In millions)
 
value
   
value
   
Level 1
   
Level 2
   
Level 3
 
Assets
                             
Cash equivalents
  $ 1,129     $ 1,129     $ 1,129     $ -     $ -  
Auction rate securities
    22       22       -       -       22  
Deferred compensation investments (a)
    176       176       62       114       -  
Investments of captive insurance company (a)
  2       2       2       -       -  
Total assets at fair value
  $ 1,329     $ 1,329     $ 1,193     $ 114     $ 22  
                                         
   
(a)     Included in other noncurrent assets in the Condensed Consolidated Balance Sheet.
 
The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2010.  Ashland did not have any financial liability instruments subject to recurring fair value measurements as of September 30, 2010.

                               
               
Quoted prices
             
               
in active
   
Significant
       
               
markets for
   
other
   
Significant
 
         
Total
   
identical
   
observable
   
unobservable
 
   
Carrying
   
fair
   
assets
   
inputs
   
inputs
 
(In millions)
 
value
   
value
   
Level 1
   
Level 2
   
Level 3
 
Assets
                             
Cash equivalents
  $ 417     $ 417     $ 417     $ -     $ -  
Auction rate securities
    22       22       -       -       22  
Deferred compensation investments (a)
  169       169       62       107       -  
Investments of captive insurance company (a)
  2       2       2       -       -  
Total assets at fair value
  $ 610     $ 610     $ 481     $ 107     $ 22  
                                         
        
(a)     Included in other noncurrent assets in the Condensed Consolidated Balance Sheet.
 
Level 3 instruments
 
Auction rate securities
 

At March 31, 2011 and September 30, 2010, Ashland held at par value $25 million of 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
 

 
12
 
 


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


NOTE G – FAIR VALUE MEASUREMENTS (continued)
 
failed to achieve equilibrium.  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, these instruments have been classified as noncurrent assets in the Condensed Consolidated Balance Sheet.
 
During 2010, Ashland liquidated $95 million par value auction rate securities for $85 million in cash proceeds, which approximated book value.  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, 2010
  $ 22  
Sales of auction rate securities
    -  
Balance as of March 31, 2011
  $ 22  
         
Balance as of October 1, 2009
  $ 170  
Sales of auction rate securities
    (85 )
Realized gain recognized in the Consolidated Statement of Income
    1  
Balance as of March 31, 2010
  $ 86  
 
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 the earnings volatility effects of short-term assets and liabilities denominated in currencies other than the functional currency of an entity.
 
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 future date and generally have maturities of less than twelve months.  All contracts are marked-to-market with net changes in fair value recorded within the selling, general and administrative expense caption.  For the three and six months ended March 31, 2011, losses of less than $1 million and $1 million, respectively, were recorded in the Statement of Consolidated Income for these contracts.  For the three and six months ended March 31, 2010, losses of less than $1 million for each period 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. 
 
Ashland’s net loss position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of March 31, 2011 was less than $1 million, consisting of a gain of less than $1 million with a notional amount of $139 million offset by a loss of less than $1 million with a notional amount of $81 million, and was included in other noncurrent assets and liabilities, respectively.  The net gain position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of September 30, 2010 was $1 million, consisting of a gain of $2 million with a notional amount of $86 million offset by a loss of $1 million with a notional amount of $41 million, and was included in other noncurrent assets and liabilities, respectively.  As of March 31, 2011, there were no open foreign currency derivatives which qualified for hedge accounting treatment.
 
 
 
13
 
 


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


NOTE G – FAIR VALUE MEASUREMENTS (continued)
 
 
Interest rate hedges
 
During 2009, 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.  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 Statements of Consolidated Income within the net interest and other financing expense caption.  As of March 31, 2011 and September 30, 2010, 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.
 
Other financial instruments
 
At March 31, 2011 and September 30, 2010, Ashland’s long-term debt had a carrying value of $865 million and $1,153 million, respectively, compared to a fair value of $1,132 million and $1,402 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.

 
 
NOTE H – INVENTORIES
 
Inventories are carried at the lower of cost or market.  Certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.  The remaining inventories are stated at cost using the average cost method.  The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
             
   
March 31
   
September 30
 
(In millions)
 
2011
   
2010
 
Finished products
  $ 395     $ 326  
Raw materials, supplies and work in process
    195       175  
LIFO carrying values
    (56 )     (54 )
    $ 534     $ 447  
 
 
NOTE I – GOODWILL AND OTHER INTANGIBLES  
 

In accordance with U.S. GAAP, Ashland reviews goodwill and other intangible assets for impairment annually and when events and circumstances indicate an impairment may have occurred.  The annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value.  Ashland has determined its reporting units for allocation of goodwill include the Functional Ingredients, Water Technologies, Performance Materials and Consumer Markets reportable segments.  Prior to its sale to Nexeo, Distribution was treated as a separate reporting unit for allocation of goodwill.  Ashland performed its most recent annual goodwill impairment test as of July 1, 2010, and determined at that time, that no impairment existed.

 
14
 
 

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

 
NOTE I – GOODWILL AND OTHER INTANGIBLES (continued)
 
The following is a progression of goodwill by segment for the period ended March 31, 2011.
 
                                 
   
Functional
   
Water
   
Performance
     
Consumer
       
(In millions)
 
Ingredients
   
Technologies
   
Materials
 
(a)
 
Markets
   
Total
 
Balance at September 30, 2010
  $ 1,080     $ 620     $ 333       $ 115     $ 2,148  
Divestitures
    -       -       (52 )       -       (52 )
Currency translation adjustment
    18       22       6         -       46  
Balance at March 31, 2011
  $ 1,098     $ 642     $ 287       $ 115     $ 2,142  
                                           
  
(a)   
Within the Performance Materials reportable segment as of September 30, 2010, because further discrete financial information is provided and management regularly reviews this information, this reportable segment was further broken down into the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units.  Goodwill consisted of $52 million and $281 million, respectively, for the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units as of September 30, 2010.  The reduction of $52 million of goodwill is related to the contribution of Ashland’s Castings Solutions business to the expanded global joint venture with Süd-Chemie .

 

Intangible assets principally consist of trademarks and trade names, intellectual property, customer lists and sale contracts.  Intangible assets are amortized on a straight-line basis over their estimated useful lives.  The cost of trademarks and trade names is amortized principally over 15 to 25 years, intellectual property over 5 to 20 years, customer relationships over 3 to 24 years and other intangibles over 2 to 50 years.
 
Certain intangible assets within trademarks and trade names have been classified as indefinite-lived and had a balance of $290 million as of March 31, 2011 and September 30, 2010.  In accordance with U.S. GAAP, Ashland annually reviews these intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.  In conjunction with the July 1 annual assessment of indefinite-lived intangible assets, Ashland’s models did not indicate any impairment.  Intangible assets were comprised of the following as of March 31, 2011 and September 30, 2010.

     
 
March 31, 2011
 
   
Gross
         
Net
 
   
carrying
   
Accumulated
   
carrying
 
(In millions)
 
amount
   
amortization
   
amount
 
Trademarks and trade names
  $ 353     $ (29 )   $ 324  
Intellectual property
    331       (73 )     258  
Customer relationships
    595       (96 )     499  
Other intangibles
    35       (28 )     7  
Total intangible assets
  $ 1,314     $ (226 )   $ 1,088  
                         
     
 
September 30, 2010
 
   
Gross
           
Net
 
   
carrying
   
Accumulated
   
carrying
 
(In millions)
 
amount
   
amortization
   
amount
 
Trademarks and trade names
  $ 353     $ (27 )   $ 326  
Intellectual property
    331       (63 )     268  
Customer relationships
    583       (78 )     505  
Other intangibles
    39       (27 )     12  
Total intangible assets
  $ 1,306     $ (195 )   $ 1,111  

 
Amortization expense recognized on intangible assets for the six months ended March 31 was $34 million for both 2011 and 2010 and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Income.  Estimated amortization expense for future periods is $68 million in 2011 (includes six months actual and six months estimated), $67 million in 2012, $66 million in 2013, $64 million in 2014 and $62 million in 2015.
 
15
 
 

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

 
NOTE J – DEBT
 
The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.
 
             
   
March 31
   
September 30
 
(In millions)
 
2011
   
2010
 
Term Loan A, due 2014 (a)
  $ -     $ 293  
6.60% notes, due 2027
    12       12  
Accounts receivable securitization
    -       40  
9.125% notes, due 2017
    631       630  
Medium-term notes, due 2013-2019, interest at a weighted-
               
average rate of  8.4% at March 31, 2011 (7.7% to 9.4%)
    21       21  
8.80% debentures, due 2012
    20       20  
6.50% junior subordinated notes, due 2029
    127       126  
Hercules Tianpu - term notes, due through 2011
    7       14  
Hercules Nanjing - term notes, due  2013
    46       34  
Other international loans, interest at a weighted-average
               
rate of  5.7% at March 31, 2011 (1.6% to 11.3%)
    41       30  
Other
    2       4  
Total debt
    907       1,224  
Short-term debt
    (42 )     (71 )
Current portion of long-term debt
    (19 )     (45 )
Long-term debt (less current portion)
  $ 846     $ 1,108  
                 
 
(a)
Senior credit facilities.
 

The scheduled aggregate maturities of debt by fiscal year are as follows:  $45 million remaining in 2011, $26 million in 2012, $40 million in 2013, $11 million in 2014, $9 million in 2015 and $0 million in 2016.  Total borrowing capacity remaining under the $550 million revolving credit facility was $448 million, representing a reduction of $102 million for letters of credit outstanding at March 31, 2011.

 
During the March 2011 quarter, Ashland terminated its accounts receivable securitization facility.  In conjunction with the termination, Ashland expensed the remaining debt issuance costs associated with the accounts receivable securitization facility, which were less than $1 million.  
 
On March 31, 2011, Ashland terminated its Term Loan A facility, paying off the outstanding balance of $289 million with funds received from the sale of Distribution.  As a result of this termination of the Term Loan A facility, Ashland recognized an $11 million charge for the remaining debt issuance costs related to the loan fees paid to originate the loan.  
 
During the March 2010 quarter, Ashland refinanced its then-existing senior credit facilities.  As part of the refinancing activities, Ashland expensed $62 million of debt issuance costs and incurred an additional $4 million of prepayment penalties, which are included in the net interest and other financing expense caption in the Statements of Consolidated Income for the three and six months ended March 31, 2010.  
 
Covenant restrictions
 
The Senior Credit Facilities (revolving credit and repaid Term Loan A facilities), refinanced during the March 2010 quarter, include less restrictive covenants than the previous credit facility and no longer contain covenants associated with minimum consolidated net worth and capital expenditure limits.  The covenants contain certain usual and customary representations and warranties, and usual and customary affirmative and negative covenants which include financial covenants, limitations on liens, additional indebtedness, further negative pledges, investments, payment of dividends, mergers, sale of assets and restricted payments, and other customary limitations.  As of March 31, 2011, Ashland is in compliance with all debt agreement covenant restrictions.  
 

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


NOTE J – DEBT (continued)
 
 
The maximum consolidated leverage ratios permitted under the Senior Credit Facilities are as follows:  3.00 from the period March 31, 2011 through September 30, 2011 and 2.75 from March 31, 2012 and each fiscal quarter thereafter.  The permitted consolidated fixed charge coverage ratio under the Senior Credit Facility is 1.50 from March 31, 2011 and for each fiscal quarter thereafter.
 
At March 31, 2011, Ashland’s cash exceeded debt outstanding therefore the consolidated leverage ratio was negative when compared to the maximum consolidated leverage ratio permitted under Ashland’s Senior Credit Agreement of 3.0.  At March 31, 2011, Ashland’s calculation of the fixed charge coverage ratio was 6.1 compared to the permitted consolidated ratio of 1.5.  

 
NOTE K – INCOME TAXES
 

 
Ashland’s effective tax rate is generally subjected to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations.  The overall effective tax benefit rate was 15.7% for the three months ended March 31, 2011 and includes certain discrete items that had a significant impact to the rate, including favorable adjustments for state deferred tax asset valuation allowance releases (net of FIN 48 reserves) of $45 million and an unfavorable adjustment of $6 million for additional taxes associated with the expected repatriation of proceeds generated from the sale of Ashland’s Distribution business.  Ashland determined that there was sufficient evidence to reverse the state tax valuation allowances during the March 2011 quarter based on the cumulative effect of the gain on the sale of Distribution, reduced interest expense and forecasted future operating results.
 
The overall effective tax rate of 10.2% for the six months ended March 31, 2011 includes certain discrete items such as the current quarter discrete items discussed previously, as well as a $15 million tax expense from the gain associated with the fair market value of the Castings Solutions contribution and a $4 million tax benefit associated with research and development tax credits for the 2010 fiscal year.

 
The overall effective tax expense rate was 75.0% for the three months ended March 31, 2010 and includes certain discrete items that had a significant impact to the rate, including an unfavorable adjustment of $14 million for a deferred tax accrual for the Patient Protection and Affordable Care Act and a favorable adjustment of $5 million for the release of valuation allowance reserves related to the sale of auction rate securities.  The overall effective tax rate of 36.4% for the six months ended March 31, 2010 also includes a benefit of $6 million associated with the reversal of certain foreign tax reserves.

 
Changes in unrecognized tax benefits are summarized as follows for the six months ended March 31, 2011.
       
       
(In millions)
     
Balance at October 1, 2010
  $ 116  
Increases related to positions taken on items from prior years
    9  
Decreases related to positions taken on items from prior years
    (2 )
Increases related to positions taken in the current year
    13  
Lapse of statute of limitations
    (7 )
Balance at March 31, 2011
  $ 129  
 
It is reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next twelve months as the result of settlements from ongoing audits, which may have a material affect on the Condensed Consolidated Financial Statements.

 
17
 
 

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

 
NOTE L – EMPLOYEE BENEFIT PLANS
 
 
For the six months ended March 31, 2011, Ashland contributed $10 million to the U.S. benefit plans and $16 million to the non-U.S. benefit plans.  Ashland expects to make additional contributions to the U.S. plans of approximately $5 million and to the non-U.S. plans of $14 million during the remainder of fiscal year 2011.  The following table details the components of pension and other postretirement benefit costs.

                   
               
Other postretirement
 
   
Pension benefits
 
benefits
(In millions)
 
2011
   
2010
   
2011
   
2010
 
Three months ended March 31
                       
Service cost
  $ 12     $ 13     $ 1     $ 2  
Interest cost
    48       50       4       4  
Curtailment
    -       -       (4 )     -  
Expected return on plan assets
    (56 )     (53 )     -       -  
Amortization of prior service credit
    -       -       (1 )     (1 )
Amortization of net actuarial loss
    19       12       -       -  
    $ 23     $ 22     $ -     $ 5  
                                 
Six months ended March 31
                               
Service cost
  $ 25     $ 26     $ 2     $ 3  
Interest cost
    98       101       8       9  
Curtailment
    -       -       (4 )     -  
Expected return on plan assets
    (113 )     (107 )     -       -  
Amortization of prior service credit
    (1 )     -       (2 )     (2 )
Amortization of net actuarial loss
    38       25       -       -  
    $ 47     $ 45     $ 4     $ 10  
 


The Distribution divestiture resulted in a curtailment gain of $4 million, which was recognized as part of the $231 million gain on the sale of Distribution recorded within the discontinued operations caption of the Consolidated Statements of Income during the March 2011 quarter.  As a result of the curtailment, Ashland was required to remeasure its obligations for the pension and other postretirement benefit plans based on updated actuarial assumptions.   This remeasurement resulted in a decrease in pension and postretirement expense for the remainder of fiscal 2011 of approximately $10 million as well as a reduction to the U.S. pension and postretirement liability of approximately $140 million and $40 million.  
 
 
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES
 
Asbestos litigation
 
Ashland and Hercules, a wholly-owned subsidiary of Ashland, 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.
 
 
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES  (continued)
 
 
Ashland asbestos-related litigation
 
The claims alleging personal injury caused by exposure to asbestos asserted against Ashland result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation, a former subsidiary.
 
The amount and timing of settlements and number of open claims can fluctuate significantly from period to period.  A summary of Ashland asbestos claims activity, excluding those related to Hercules, follows.
 
                             
 
Six months ended
                         
 
March 31
 
Years ended September 30
(In thousands)
   
2011
     
2010
     
2010
     
2009
     
2008
 
Open claims - beginning of period
   
       83
     
     100
     
     100
     
     115
     
     134
 
New claims filed
   
1
     
         1
     
         2
     
         2
     
         4
 
Claims settled
   
(1
)    
       (1
   
       (1
   
       (1
   
       (2
Claims dismissed
   
(7
   
     (11
   
     (18
   
     (16
   
     (21
Open claims - end of period
   
76
     
       89
     
       83
     
     100
     
     115
 
 
A progression of activity in the asbestos reserve is presented in the following table.
 
                         
   
Six months ended
                 
   
March 31
 
Years ended September 30
(In millions)
 
2011
   
2010
   
2010
   
2009
   
2008
 
Asbestos reserve - beginning of period
  $ 537     $ 543     $ 543     $ 572     $ 610  
Reserve adjustment
    -       -       28       5       2  
Amounts paid
    (20 )     (18 )     (34 )     (34 )     (40 )
Asbestos reserve - end of period
  $ 517     $ 525     $ 537     $ 543     $ 572  
 

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.  Total reserves for asbestos claims were $517 million at March 31, 2011 compared to $537 million at September 30, 2010.
 
Excluding the Hercules asbestos claims further described below, Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed.  As a result, increases in the asbestos reserve have been largely offset by probable insurance recoveries.  The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland’s insurance coverage.
 
For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent.  Approximately 70% of the estimated receivables from insurance companies are expected to be due from domestic insurers, of which approximately 84% have a credit rating of B+ or higher by A. M. Best, as of March 31, 2011.  The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings, and from Underwriters at Lloyd’s, whose insurance policy obligations have been transferred to a Berkshire Hathaway entity.  During the December 2009 quarter, Ashland entered into a new agreement with a
 
 
 
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 


NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
 
number of London market insurance companies with respect to coverage for asbestos-related insurance claims.  As a result, a $12 million increase to the Ashland asbestos receivable was recorded within the Condensed Consolidated Balance Sheet as of December 31, 2009, which had a $9 million (after-tax) effect on the Statement of Consolidated Income for the December 2009 quarter within the discontinued operations caption.  As a result of this agreement and other revised estimates, Ashland no longer discounts any portion of the asbestos receivable at this time.
 
At March 31, 2011, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $402 million (excluding the Hercules receivable for asbestos claims), of which $54 million relates to costs previously paid.  Receivables from insurers amounted to $421 million at September 30, 2010.  During the June 2010 quarter, the model used for purposes of valuing the asbestos reserve described above, and its impact on valuation of future recoveries from insurers, was updated.  This model update, along with likely settlement adjustments, caused an additional $24 million net increase in the receivable for probable insurance recoveries.
 
Hercules asbestos-related litigation
 
Hercules, a wholly-owned subsidiary of Ashland, has liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of Hercules’ former subsidiaries to a limited industrial market.  The amount and timing of settlements and number of open claims can fluctuate significantly from period to period.  A summary of Hercules’ asbestos claims activity follows.
           
   
Six months ended
 
Years ended
   
March 31
 
September 30
(In thousands)
   
2011
     
2010
     
2010
     
   2009 (a)
Open claims - beginning of period
   
       20
     
       21
     
21
     
27
 
New claims filed
   
2
     
-
     
-
     
1
 
Claims dismissed/settled
   
-
     
(1
)    
(1
)    
(7
)
Open claims - end of period
   
22
     
       20
     
       20
     
       21
 
                                 
 
(a)      Beginning of period represents acquisition date of November 13, 2008.
 
A progression of activity in the asbestos reserve is presented in the following table.
           
   
Six months ended
   
Years ended
   
March 31
   
September 30
(In millions)
 
2011
   
2010
   
2010
   
2009 (a)
Asbestos reserve - beginning of period
  $ 375     $ 484     $ 484     $ 233  
Reserve adjustments (b)
    -       (35 )     (93 )     261  
Amounts paid
    (8 )     (4 )     (16 )     (10 )
Asbestos reserve - end of period
  $ 367     $ 445     $ 375     $ 484  
                                 
   
(a) 
Beginning of period represents acquisition date of November 13, 2008.
 
(b) 
Includes purchase accounting adjustments recorded during 2010 and 2009 as part of purchase price allocations for the Hercules acquisition.
 
During the December 2009 quarter, Ashland essentially completed the final valuation assessment of the Hercules asbestos claims liability existing as of the acquisition date and underlying claim files as part of transitioning to a standardized claims management approach.  This assessment resulted in a $35 million and $22 million reduction to the asbestos liability and receivable, respectively, which was accounted for as an adjustment to Hercules’ opening balance sheet since the adjustment related to claims that had been incurred as of the acquisition date.  During the most recent annual update of this estimate, completed during the June 2010 quarter, it was determined that the
 
20
 
 

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

 
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
 
 
liability for asbestos claims should be reduced by $58 million.  Based upon review of the assumptions underlying the asbestos valuation model and the most recent claim filing and settlement trend rates for both pre- and post-acquisition periods, Ashland determined that $14 million of the $58 million adjustment should be recorded to goodwill, which was partially offset by $6 million for an increase in probable insurance recoveries, totalling to a net $8 million adjustment to goodwill.  Total reserves for Hercules asbestos claims were $367 million at March 31, 2011 compared to $375 million at September 30, 2010.
 
For the Hercules 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.  The estimated receivable consists exclusively of domestic insurers, of which approximately 98% have a credit rating of B+ or higher by A.M. Best, as of March 31, 2011.
 
As of March 31, 2011 and September 30, 2010, the receivables from insurers amounted to $67 million and $68 million, respectively.  As previously mentioned, during the June 2010 quarter, the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was updated.  This model update along with likely settlement adjustments caused a $28 million reduction in the receivable for probable insurance recoveries, $6 million of which was recorded to goodwill.  For the Hercules asbestos-related obligations, certain reimbursements pursuant to coverage-in-place agreements with insurance carriers exist.  As a result, increases in the asbestos reserve are partially offset by probable insurance recoveries.