Ashland Global Holdings Inc.
ASHLAND INC. (Form: 10-Q, Received: 05/01/2014 15:46:46)


 
 
 
 
 

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 March 31, 2014
 
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 March 31, 2014 , there were 77,931,564 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
 
Six months ended
 
March 31
 
March 31
(In millions except per share data - unaudited)
2014

 
2013

 
2014

 
2013

Sales
$
1,545

 
$
1,550

 
$
2,977

 
$
2,998

Cost of sales
1,168

 
1,124

 
2,216

 
2,176

Gross profit
377

 
426

 
761

 
822

 
 
 
 
 
 
 
 
Selling, general and administrative expense
370

 
228

 
605

 
466

Research and development expense
36

 
30

 
63

 
53

Equity and other income (loss)
(35
)
 
16

 
(14
)
 
29

Operating income (loss)
(64
)
 
184

 
79

 
332

 
 
 
 
 
 
 
 
Net interest and other financing expense
41

 
145

 
83

 
189

Net gain on divestitures
1

 
7

 
6

 
7

Income (loss) from continuing operations before
 
 
 
 
 
 
 
income taxes
(104
)
 
46

 
2

 
150

Income tax expense (benefit) - Note I
(43
)
 
(2
)
 
(25
)
 
21

Income (loss) from continuing operations
(61
)
 
48

 
27

 
129

Income from discontinued operations (net of tax) - Note C
17

 
5

 
39

 
25

Net income (loss)
$
(44
)
 
$
53

 
$
66

 
$
154

 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share - Note L
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
(0.78
)
 
$
0.61

 
$
0.35

 
$
1.63

Income from discontinued operations
0.21

 
0.06

 
0.50

 
0.32

Net income (loss)
$
(0.57
)
 
$
0.67

 
$
0.85

 
$
1.95

 
 
 
 
 
 
 
 
Diluted earnings per share - Note L
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
(0.78
)
 
$
0.61

 
$
0.35

 
$
1.60

Income from discontinued operations
0.21

 
0.05

 
0.49

 
0.32

Net income (loss)
$
(0.57
)
 
$
0.66

 
$
0.84

 
$
1.92

 
 
 
 
 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.340

 
$
0.225

 
$
0.680

 
$
0.450

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net income (loss)
$
(44
)
 
$
53

 
$
66

 
$
154

Other comprehensive income (loss), net of tax - Note M
 
 
 
 
 
 
 
Unrealized translation gain (loss)
(25
)
 
(66
)
 
14

 
(21
)
Pension and postretirement obligation adjustment
(5
)
 
(3
)
 
(9
)
 
(7
)
Net change in interest rate hedges

 
35

 

 
38

Other comprehensive income (loss)
(30
)
 
(34
)
 
5

 
10

Comprehensive income (loss)
$
(74
)
 
$
19

 
$
71

 
$
164







SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
March 31

 
September 30

(In millions - unaudited)
2014

 
2013

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
491

 
$
346

Accounts receivable  (a)
1,150

 
1,113

Inventories - Note F
773

 
758

Deferred income taxes
108

 
107

Other assets
121

 
62

Held for sale - Note C
499

 
487

Total current assets
3,142

 
2,873

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
4,222

 
4,181

Accumulated depreciation
1,756

 
1,674

Net property, plant and equipment
2,466

 
2,507

Goodwill - Note G
2,717

 
2,709

Intangibles - Note G
1,388

 
1,437

Asbestos insurance receivable - Note K
432

 
437

Equity and other unconsolidated investments
174

 
213

Other assets
533

 
552

Held for sale - Note C
1,336

 
1,360

Total noncurrent assets
9,046

 
9,215

Total assets
$
12,188

 
$
12,088

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note H
$
401

 
$
308

Current portion of long-term debt - Note H

 
12

Trade and other payables
646

 
714

Accrued expenses and other liabilities
521

 
499

Held for sale - Note C
186

 
194

Total current liabilities
1,754

 
1,727

Noncurrent liabilities
 

 
 

Long-term debt - Note H
2,949

 
2,947

Employee benefit obligations - Note J
1,215

 
1,110

Asbestos litigation reserve - Note K
708

 
735

Deferred income taxes
363

 
369

Other liabilities
550

 
548

Held for sale - Note C
79

 
99

Total noncurrent liabilities
5,864

 
5,808

 
 
 
 
Stockholders’ equity
4,570

 
4,553

 
 
 
 
Total liabilities and stockholders’ equity
$
12,188

 
$
12,088

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $12 million at March 31, 2014 and September 30, 2013 .



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

(a)
Total

BALANCE AT SEPTEMBER 30, 2013
$
1

 
$
506

 
$
3,758

 
$
288


$
4,553

Total comprehensive income
 

 
 
 
66

 
5


71

Regular dividends, $.68 per common share
 

 
 

 
(53
)
 
 

 
(53
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 

   incentive and other plans (b)
 

 
(1
)
 
 

 
 

 
(1
)
BALANCE AT MARCH 31, 2014
$
1

 
$
505

 
$
3,771

 
$
293


$
4,570

 
 
 
 
 
 
 
 
 
 
(a)
At March 31, 2014 and September 30, 2013 , the after-tax accumulated other comprehensive income of $293 million and $288 million , respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $71 million and $80 million , respectively, and net unrealized translation gains of $222 million and $208 million , respectively.
(b)
Common shares issued were 438,924 for the six months ended March 31, 2014 .
















































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)
2014

 
2013

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
66

 
$
154

Income from discontinued operations (net of tax)
(39
)
 
(25
)
Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
183

 
178

Debt issuance cost amortization
7

 
57

Purchased in-process research and development impairment
9

 
4

Deferred income taxes
(4
)
 
(5
)
Equity income from affiliates
(14
)
 
(13
)
Distributions from equity affiliates
6

 
5

Gain from sale of property and equipment

 
(1
)
Stock based compensation expense
17

 
16

Net gain on divestitures
(6
)
 
(7
)
Impairment of equity method investment
46

 

Losses on pension plan remeasurement
105

 

Change in operating assets and liabilities (a)
(182
)
 
(160
)
Total cash flows provided by operating activities from continuing operations
194

 
203

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Additions to property, plant and equipment
(96
)
 
(94
)
Proceeds from disposal of property, plant and equipment
4

 
3

Purchase of operations - net of cash acquired
(2
)
 

Proceeds (uses) from sale of operations or equity investments
6

 
(2
)
Total cash flows used by investing activities from continuing operations
(88
)
 
(93
)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Proceeds from issuance of long-term debt

 
2,320

Repayment of long-term debt
(12
)
 
(2,518
)
Proceeds from short-term debt
93

 
113

Debt issuance costs

 
(36
)
Cash dividends paid
(53
)
 
(36
)
Proceeds from exercise of stock options
1

 
1

Excess tax benefits related to share-based payments
6

 
4

Total cash flows provided (used) by financing activities from continuing operations
35

 
(152
)
CASH PROVIDED (USED) BY CONTINUING OPERATIONS
141

 
(42
)
Cash provided (used) by discontinued operations
 

 
 

Operating cash flows
20

 
5

Investing cash flows
(15
)
 
(21
)
Effect of currency exchange rate changes on cash and cash equivalents
(1
)
 
3

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
145

 
(55
)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
346

 
523

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
491

 
$
468

 
 
 
 
(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, 2013 .  Results of operations for the period ended March 31, 2014 are not necessarily indicative of results to be expected for the year ending September 30, 2014 .  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 three reportable segments:  Ashland Specialty Ingredients (Specialty Ingredients), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets). On February 18, 2014 , Ashland signed a definitive agreement to sell substantially all of the assets and liabilities of Ashland Water Technologies (Water Technologies). As a result of this expected sale, the operating results and cash flows related to Water Technologies have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows, while assets and liabilities that are to be sold have been classified within the Condensed Consolidated Balance Sheet as held for sale. In addition to the sale of Water Technologies, Ashland is currently realigning certain components remaining in its portfolio of businesses. See Notes B, C, D and O for additional information on the Water Technologies divestiture and its reported results as well as Ashland’s current reportable segment results and ongoing business realignment.
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 accounting standards issued and adopted during the current year is required in interim financial reporting.  As of March 31, 2014 , no new standards applicable to Ashland have been issued since Ashland’s most recent Form 10-K filing. 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, 2013 . The following standards became effective as of October 1, 2013.

6

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

 
 
 
NOTE A   SIGNIFICANT ACCOUNTING POLICIES (continued)
 

In February 2013, the FASB issued accounting guidance related to the reporting of amounts reclassified out of accumulated other comprehensive income (ASC 220 Comprehensive Income). This guidance sets forth new disclosure requirements for items reclassified from accumulated other comprehensive income by requiring disclosures for both the changes in accumulated other comprehensive income by component and where the significant items reclassified from accumulated other comprehensive income are classified in the Statements of Consolidated Comprehensive Income. This guidance became effective for Ashland on October 1, 2013 and impacted Ashland’s disclosure of the reclassifications from accumulated other comprehensive income.
In December 2011, the FASB issued accounting guidance related to the offsetting of certain assets and liabilities on the balance sheet (ASC 210 Balance Sheet). The new guidance requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP and IFRS. This guidance became effective for Ashland on October 1, 2013. The adoption of this guidance did not have a material impact on the Condensed Consolidated Financial Statements.
NOTE B - DIVESTITURES
Water Technologies
On February 18, 2014 , Ashland entered into a definitive agreement to sell the Water Technologies segment to a fund managed by Clayton, Dubilier & Rice (CD&R) in a transaction valued at approximately $1.8 billion . The transaction is expected to close by September 30, 2014 , contingent on certain customary regulatory approvals and standard closing conditions. Ashland expects after-tax net proceeds from the sale to total approximately $1.4 billion , which primarily will be used to return capital to shareholders in the form of share repurchases. Water Technologies recorded sales of $1.7 billion during the most recently completed fiscal year ended September 30, 2013 and employs approximately 3,000 employees throughout the Americas, Europe and Asia Pacific.
Since this transaction signifies Ashland’s exit from the Water Technologies business, Ashland has classified Water Technologies’ results of operations and cash flows within the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows as discontinued operations for all periods presented. Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income that were previously allocated to the Water Technologies segment do not qualify for classification within discontinued operations and are now reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were $9 million and $8 million during the three months ended March 31, 2014 and 2013 , respectively, and $18 million during the six months ended March 31, 2014 and 2013 . Ashland is currently implementing plans to eliminate these costs as part of the global restructuring program.
Ashland will retain and has agreed to indemnify CD&R for certain liabilities of the Water Technologies business arising prior to the closing of the sale, including certain pension and postretirement liabilities, environmental remediation liabilities and certain legacy liabilities relating to businesses disposed or discontinued by the Water Technologies business. Costs directly related to these retained liabilities have been included within the discontinued operations caption of the Statements of Consolidated Comprehensive Income during the three and six months ended March 31, 2014 and 2013, respectively.
Subsequent to the completion of the sale, Ashland expects to provide certain transition services to CD&R for a fee. While the transition services 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 C for further information on the results of operations of Water Technologies for all periods presented.

7

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

 
NOTE B – DIVESTITURES (continued)



Held for sale classification
The assets and liabilities of Water Technologies for current and 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:
 
March 31

 
September 30

(In millions)
2014

 
2013

Accounts receivable (a)
$
330

 
$
332

Inventories
150

 
141

Other assets
19

 
14

Current assets held for sale
$
499

 
$
487

 
 
 
 
Net property, plant and equipment
$
333

 
$
335

Goodwill
645

 
657

Intangibles
344

 
354

Equity and other unconsolidated investments
5

 
5

Other assets
8

 
8

Noncurrent assets held for sale
$
1,335

 
$
1,359

 
 
 
 
Trade and other payables
$
163

 
$
171

Accrued expenses and other liabilities
23

 
23

Current liabilities held for sale
$
186

 
$
194

 
 
 
 
Employee benefit obligations
$
63

 
$
64

Deferred income taxes
13

 
32

Other liabilities
3

 
3

Noncurrent liabilities held for sale
$
79

 
$
99

 
 
 
 
(a)    Accounts receivable includes an allowance for doubtful accounts of $5 million at March 31, 2014 and September 30, 2013 .
In addition to the Water Technologies assets and liabilities identified above as held for sale, Ashland held other noncurrent assets for sale of $1 million as of March 31, 2014 and September 30, 2013 related to nonoperational properties and certain Valvoline Instant Oil Change SM locations. The noncurrent assets held for sale are required to be measured at the lower of carrying value or fair value less costs to sell. Fair values are based on definitive agreements or sale or other market quotes which would be considered significant unobservable market inputs (Level 3) within the fair value hierarchy. See also Note E for further information on the fair value hierarchy.
Casting Solutions joint venture
Ashland, in conjunction with its partner, initiated a process to sell the ASK Chemicals GmbH (ASK) joint venture, in which Ashland has 50% ownership. As part of the ongoing sale process, Ashland determined during March 2014 that the fair value of its investment in the ASK joint venture was less than the carrying value and that an other than temporary impairment had occurred. As a result, Ashland recognized an impairment charge of $46 million related to its investment in the ASK joint venture during the three and six months ended March 31, 2014 . The charge was recognized within the equity and other income (loss) caption of the Statements of Consolidated Comprehensive Income.
In April 2014, Ashland announced that it had entered into a definitive agreement to sell its 50% ownership in the ASK joint venture to investment funds affiliated with Rhône Capital, LLC (Rhône), a London and New

8

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

 
NOTE B – DIVESTITURES (continued)



York-based private equity investment firm. Total pre-tax proceeds to the sellers will be $205 million , which includes $176 million in cash and a $29 million note from Rhône. Proceeds will be split evenly between Ashland and its partner under terms of the 50 / 50 joint venture. The transaction is expected to close prior to the end of Ashland’s fiscal fourth quarter on September 30, 2014 and is subject to customary closing conditions, including regulatory approvals. Any additional gain or loss recognized as a result of the transaction is expected to be nominal and would be recognized in the period that the transaction closes.
NOTE C – DISCONTINUED OPERATIONS
In the current and previous periods, Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses during the reporting periods prior to divestiture 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.
As previously described in Note B, Ashland signed a definitive agreement with CD&R on February 18, 2014 to sell substantially all of the assets and liabilities of Water Technologies. Ashland has determined that this expected sale qualifies as a discontinued operation, in accordance with U.S. GAAP, since Ashland will not have significant continuing involvement in the Water Technologies business upon closing of the transaction. As a result, the previous operating results and cash flows related to Water Technologies have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows, while assets and liabilities that are to be sold have been classified within the Condensed Consolidated Balance Sheet as held for sale. Sales for the three months ended March 31, 2014 and 2013 were $431 million and $424 million , respectively, and were $867 million and $845 million for the six months ended March 31, 2014 and 2013 , respectively.
Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, and from businesses previously divested by Hercules, a wholly-owned subsidiary of Ashland that was acquired in 2009.  Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations.  See Note K for more information related to the adjustments on asbestos liabilities and receivables.
On March 31, 2011 , Ashland completed the sale to Nexeo Solutions, LLC of substantially all of the assets and certain liabilities of its global distribution business which previously comprised the Ashland Distribution (Distribution) segment.  Ashland determined that this sale qualified as a discontinued operation, in accordance with U.S. GAAP, since Ashland does not have significant continuing involvement in the distribution business.  Ashland has made subsequent adjustments to the gain on sale of Distribution, primarily relating to the tax effects of the sale. 
Components of amounts reflected in the Statements of Consolidated Comprehensive Income related to discontinued operations are presented in the following table for the three and six months ended March 31, 2014 and 2013 .

9

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

 
 
 
NOTE C – DISCONTINUED OPERATIONS (continued)

 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2014

 
2013

 
2014

 
2013

Income (loss) from discontinued operations (net of tax)
 
 
 
 
 
 
 
Water Technologies (a)
$
17

 
$
7

 
$
40

 
$
28

Distribution

 
(2
)
 

 
(2
)
Asbestos-related litigation

 

 
(1
)
 
(1
)
Total income from discontinued operations (net of tax)
$
17

 
$
5

 
$
39

 
$
25

 
 
 
 
 
 
 
 
(a)
For the three months ended March 31, 2014 and 2013 , pretax income recorded for Water Technologies was $19 million and $20 million , respectively, and for the six months ended March 31, 2014 and 2013 , pretax income recorded for Water Technologies was $55 million and $49 million , respectively.
NOTE D – RESTRUCTURING ACTIVITIES
Ashland periodically implements corporate 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.
During the December 2013 quarter, Ashland announced a global restructuring program to streamline the resources used across the organization. As part of this global restructuring program, Ashland announced a voluntary severance offer (VSO) in January 2014 to certain U.S. employees. As of March 31, 2014 , approximately 400 employees were formally approved for the VSO. All payments related to the VSO are expected to be paid out from May through December 31, 2014. The first phase of an involuntary program for employees was also initiated as part of the global restructuring program during the current quarter and will continue in subsequent quarters. The VSO and involuntary programs resulted in expense of $75 million being recognized, $13 million within the cost of sales caption and $62 million within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income during the three and six months ended March 31, 2014 . In addition, the employee reductions resulted in a pension curtailment being recorded during the current quarter. See Note J for further information. As of March 31, 2014 , the remaining restructuring reserve for the global restructuring program was $75 million .
During the March 2014 quarter, Ashland incurred an additional $3 million lease abandonment charge 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 March 31, 2014 and 2013 , the remaining restructuring reserve for the facility costs totaled $10 million and $9 million , respectively.
As of March 31, 2014 and 2013 , the remaining $7 million and $19 million , respectively, in restructuring reserves for other previously announced programs principally consisted of expected future severance payments for programs implemented during 2011.
The following table summarizes the related activity in these reserves for the six months ended March 31, 2014 and 2013 .  The severance reserves are included in accrued expenses and other liabilities while facility costs reserves are primarily within other noncurrent liabilities in the Condensed Consolidated Balance Sheets.

10

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

 
 
 
NOTE D – RESTRUCTURING ACTIVITIES (continued)

 
 
 
Facility

 
 
(In millions)
Severance

 
costs

 
Total

Balance as of September 30, 2013
$
17

 
$
8

 
$
25

Restructuring reserve
75

 
3

 
78

Utilization (cash paid or otherwise settled)
(10
)
 
(1
)
 
(11
)
Balance at March 31, 2014
$
82

 
$
10

 
$
92

 
 
 
 
 
 
Balance as of September 30, 2012
$
29

 
$
15

 
$
44

Reserve adjustments
1

 

 
1

Utilization (cash paid or otherwise settled)
(11
)
 
(6
)
 
(17
)
Balance at March 31, 2013
$
19

 
$
9

 
$
28

NOTE E – FAIR VALUE MEASUREMENTS
As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value.  Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement.  
For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets (market approach), adjusted for any terms specific to that asset or liability.  For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.
The following table summarizes financial instruments subject to recurring fair value measurements as of March 31, 2014 .

11

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

 
 
 
NOTE E – 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
$
491

 
$
491

 
$
491

 
$

 
$

Deferred compensation investments (a)
185

 
185

 
48

 
137

 

Investments of captive insurance company (a)
3

 
3

 
3

 

 

Foreign currency derivatives
1

 
1

 

 
1

 

Total assets at fair value
$
680

 
$
680

 
$
542

 
$
138

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
1

 
$
1

 
$

 
$
1

 
$

 
 
 
 
 
 
 
 
 
 
(a)
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, 2013 .
(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
$
346

 
$
346

 
$
346

 
$

 
$

Deferred compensation investments (a)
181

 
181

 
50

 
131

 

Investments of captive insurance company (a)
3

 
3

 
3

 

 

Foreign currency derivatives
1

 
1

 

 
1

 

Total assets at fair value
$
531

 
$
531

 
$
399

 
$
132

 
$

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

12

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

recognized during the three and six months ended March 31, 2014 and 2013 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2014

 
2013

 
2014

 
2013

Foreign currency derivative gain (loss)
$
2

 
$
(2
)
 
$
5

 
$
(1
)
The following table summarizes the fair values of the outstanding foreign currency derivatives as of March 31, 2014 and September 30, 2013 included in other current assets and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.
 
March 31

 
September 30

(In millions)
2014

 
2013

Foreign currency derivative assets
$
1

 
$
1

Notional contract values
356

 
312

 
 
 
 
Foreign currency derivative liabilities (a)
$
1

 
$

Notional contract values
118

 
246

 
 
 
 
(a)
Fair values of liabilities of $0 denote values less than $1 million.
Interest rate hedges
During 2011, Ashland entered into interest rate swap agreements in order to manage the variable interest rate risk associated with term loans A and B that were borrowed in conjunction with the August 2011 acquisition of International Specialty Products Inc. (ISP). These instruments qualified for hedge accounting treatment and were designated as cash flow hedges whereby Ashland recorded these hedges at fair value, with the effective portion of the gain or loss reported as a component of accumulated other comprehensive income (AOCI) and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affected net income.  There was no hedge ineffectiveness with these instruments during the three and six months ended March 31, 2013 . Ashland terminated the interest rate swap agreements in conjunction with the repayment of term loans A and B during the March 2013 quarter, resulting in a charge of $52 million included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three and six months ended March 31, 2013 .  
The fair value of Ashland’s interest rate swap assets and liabilities were calculated using standard pricing models. These models utilized inputs derived from observable market data such as interest rate spot rates and forward rates, and were deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these interest rate swap agreements were highly rated financial institutions which Ashland believed carry only a minimal risk of nonperformance.
During the three and six months ended March 31, 2013 , Ashland reclassified losses of $60 million and $65 million , respectively, from AOCI to the Statements of Consolidated Comprehensive Income. The losses reclassified to the Statements of Consolidated Comprehensive Income were recorded in the net interest and other financing expense caption. Additionally, an unrealized loss of $3 million on interest rate hedges was recognized in AOCI during the three and six months ended March 31, 2013 .



13

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

Other financial instruments
At March 31, 2014 and September 30, 2013 , Ashland’s long-term debt had a carrying value of $2,949 million and $2,959 million , respectively, compared to a fair value of $3,095 million and $3,003 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 F – INVENTORIES
Inventories are carried at the lower of cost or market.  Certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.  The remaining inventories are stated at cost using the weighted-average cost method or the first-in, first-out method.  
During the six months ended March 31, 2013 , the Specialty Ingredients business incurred a $31 million loss on straight guar, $28 million of which related to a lower of cost or market charge that was recognized within the cost of sales caption on the Statements of Consolidated Comprehensive Income. This charge was due to the identifiable market price of certain guar inventories, which fell below the cost of the product.
The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
March 31

 
September 30

(In millions)
2014

 
2013

Finished products
$
544

 
$
518

Raw materials, supplies and work in process
251

 
261

LIFO reserve
(22
)
 
(21
)
 
$
773

 
$
758

NOTE G – GOODWILL AND OTHER INTANGIBLES
Goodwill
In accordance with U.S. GAAP, Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually and when events and circumstances indicate an impairment may have occurred.  The annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value.  Ashland has determined that its reporting units for allocation of goodwill include the Specialty Ingredients and Consumer Markets segments and the Composites and Adhesives and Elastomers reporting units within the Performance Materials segment. Prior to its sale, Water Technologies was treated as a separate reporting unit for allocation of goodwill. Ashland performed its most recent annual goodwill impairment test as of July 1, 2013 and determined at that time that no impairment existed.
The following is a progression of goodwill by segment for the six months ended March 31, 2014 .

14

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

 
Specialty

 
Performance

 
Consumer

 
 

(In millions)
Ingredients

 
Materials

(a)
Markets

 
Total

Balance at September 30, 2013
$
2,231

 
$
311

 
$
167

 
$
2,709

Other (b)
(7
)
 

 

 
(7
)
Currency translation adjustment
13

 
1

 
1

 
15

Balance at March 31, 2014
$
2,237

 
$
312

 
$
168

 
$
2,717

 
 
 
 
 
 
 
 
(a)
Goodwill consisted of $10 million for the Elastomers reporting unit as of March 31, 2014 and September 30, 2013 , as well as $302 million and $301 million for the Composites and Adhesives reporting unit as of March 31, 2014 and September 30, 2013 , respectively.
(b)
Other caption represents the adjustment of certain items identified from previous acquisitions that were corrected within the Condensed Consolidated Balance Sheet.

Other intangible assets
Other intangible assets principally consist of trademarks and trade names, intellectual property, customer relationships, in-process research and development (IPR&D) and sale contracts and those classified as finite are amortized on a straight-line basis over their estimated useful lives.  The cost of definite-lived trademarks and trade names is amortized principally over 4 to 25 years, intellectual property over 5 to 20 years, customer relationships over 3 to 24 years and other intangibles over 2 to 50 years.
IPR&D and certain intangible assets within trademarks and trade names have been classified as indefinite-lived and had a balance of $326 million and $335 million as of March 31, 2014 and September 30, 2013 , respectively. The $9 million decrease in indefinite-lived intangible assets resulted from an impairment charge related to certain IPR&D assets associated with the acquisition of ISP. This charge was included in the research and development expense caption of the Statements of Consolidated Comprehensive Income for the three and six months ended March 31, 2014 . In accordance with U.S. GAAP, Ashland annually reviews indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.  
Intangible assets were comprised of the following as of March 31, 2014 and September 30, 2013 .
 
 
March 31, 2014
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Trademarks and trade names
$
375

 
$
(47
)
 
$
328

Intellectual property
827

 
(200
)
 
627

Customer relationships
511

 
(101
)
 
410

IPR&D
23

 

 
23

Total intangible assets
$
1,736

 
$
(348
)
 
$
1,388


15

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

 
September 30, 2013
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Trademarks and trade names
$
375

 
$
(45
)
 
$
330

Intellectual property
827

 
(175
)
 
652

Customer relationships
507

 
(84
)
 
423

IPR&D
32

 

 
32

Total intangible assets
$
1,741

 
$
(304
)
 
$
1,437

Amortization expense recognized on intangible assets was $22 million for the three months ended March 31, 2014 and 2013 and $44 million for the six months ended March 31, 2014 and 2013 and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income.  Estimated amortization expense for future periods is $89 million in 2014 (includes six months actual and six months estimated), $87 million in 2015 , $87 million in 2016 , $87 million in 2017 and $86 million in 2018 .
NOTE H – 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)
2014

 
2013

4.750% notes, due 2022
$
1,120

 
$
1,119

3.875% notes, due 2018
700

 
700

3.000% notes, due 2016
600

 
600

6.875% notes, due 2043
376

 
376

Accounts receivable securitization
325

 
270

6.50% junior subordinated notes, due 2029  
133

 
131

Revolving credit facility (a)
35

 

Other international loans, interest at a weighted-
 

 
 

average rate of 6.9% at March 31, 2014 (5.3% to 11.5%)
41

 
44

Medium-term notes, due 2015-2019, interest at a weighted-
 

 
 

average rate of 8.7% at March 31, 2014 (8.4% to 9.4%)
14

 
14

Other
6

 
13

Total debt
3,350

 
3,267

Short-term debt
(401
)
 
(308
)
Current portion of long-term debt

 
(12
)
Long-term debt (less current portion)
$
2,949

 
$
2,947

 
 
 
 
(a)    2013 Senior Credit Facility

The scheduled aggregate maturities of debt by year are as follows:   $33 million remaining in 2014 , $342 million in 2015 , $600 million in 2016 , none in 2017 and $735 million in 2018 .  The borrowing capacity remaining under the $1.2 billion senior unsecured revolving credit facility (the 2013 Senior Credit Facility) was $1,084 million , due to an outstanding balance of $35 million , as well as a reduction of $81 million for letters of credit

16

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

 
 
 
NOTE H – DEBT (continued)

outstanding at March 31, 2014 . In total, Ashland’s total borrowing capacity at March 31, 2014 was $1,109 million , which includes $25 million from the accounts receivable securitization facility.
Covenant restrictions
The 2013 Senior Credit Facility contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional indebtedness, further negative pledges, investments, mergers, sale of assets and restricted payments and other customary limitations.   As of March 31, 2014 , Ashland is in compliance with all debt agreement covenant restrictions.
Financial covenants
The maximum consolidated leverage ratio permitted under the 2013 Senior Credit Facility during its entire duration is 3.25 .  At March 31, 2014 , Ashland’s calculation of the consolidated leverage ratio was 2.5 , which is below the maximum consolidated leverage ratio of 3.25 .
The minimum required consolidated interest coverage ratio under the 2013 Senior Credit Facility during its entire duration is 3.00 .  At March 31, 2014 , Ashland’s calculation of the interest coverage ratio was 7.4 , which exceeds the minimum required consolidated ratio of 3.00 .
NOTE I – 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, 2014 is 21.1% . 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 benefit rate was 41.3% for the three months ended March 31, 2014 and includes $80 million of discrete tax benefits recorded to the quarter on pretax charges of $247 million related to pension charges, global restructuring program costs and impairments related to the investment in the ASK joint venture and certain IPR&D assets. In addition, the rate was impacted by net charges for discrete items of $7 million , which consisted of $15 million in a foreign income tax rate change and other divestiture-related deferred tax adjustments, partially offset by $8 million for the reversal of unrecognized tax benefits.
The overall effective tax benefit rate of 1,250.0% for the six months ended March 31, 2014 includes certain discrete items such as the current quarter discrete items discussed previously, as well as a net benefit for discrete items of $5 million primarily related to the release of a foreign valuation allowance and certain non-taxable pretax income amounts.
Prior 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, 2013 was 24.9% . The overall effective tax benefit rate was 4.3% for the three months ended March 31, 2013 and was impacted by a $33 million tax benefit related to the $99 million charge from interest rate swap terminations and accelerated debt issuance and other costs and a $6 million tax benefit for fiscal year 2012 research and development credits as a result of updated tax legislation. These discrete tax benefits were partially offset by a discrete tax charge of $7 million , primarily related to a foreign tax audit.
The overall effective tax rate of 14.0% for the six months ended March 31, 2013 includes the discrete items in the prior year quarter discussed previously as well as two net discrete tax benefit adjustments of $6 million

17

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

 
 
 
NOTE I – INCOME TAXES (continued)

and $4 million , respectively, related to the reversal of an unrecognized tax benefit and a foreign income tax rate change.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the six months ended March 31, 2014 .
 (In millions)
 

Balance at October 1, 2013
$
133

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
12

Lapse of the statute of limitations
(9
)
Balance at March 31, 2014
$
137

In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $4 million for continuing operations and $2 million for discontinued operations, respectively, related primarily to 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 J – EMPLOYEE BENEFIT PLANS
For the six months ended March 31, 2014 , Ashland contributed $14 million to its U.S. pension plans and $8 million to its non-U.S. pension plans.  Ashland expects to make additional contributions to the U.S. plans of approximately $9 million and to the non-U.S. plans of approximately $10 million during the remainder of 2014 .  
Due to the global restructuring plan initiated during the current quarter, Ashland was required to remeasure certain pension plan obligations, which includes updating assumptions related to these plans such as the discount rate, asset values and demographic data that were last updated at Ashland’s fiscal year end. As a result of the remeasurement, Ashland recognized a curtailment loss of $7 million and actuarial loss of $83 million during the three and six months ended March 31, 2014 . In accordance with U.S. GAAP, $14 million of the actuarial loss was attributable to the Water Technologies business and included in the discontinued operations caption of the Statements of Consolidated Comprehensive Income for the three and six months ended March 31, 2014 .
During the current quarter, Ashland also settled a non-U.S. pension plan, which in accordance with U.S. GAAP requires the plan to be remeasured. The remeasurement resulted in Ashland recognizing a settlement loss of $21 million and an actuarial loss of $13 million during the three and six months ended March 31, 2014 . Of these amounts, $3 million of the settlement loss and $2 million of the actuarial loss were attributable to the Water Technologies business and therefore included in the discontinued operations caption of the Statements of Consolidated Comprehensive Income for the three and six months ended March 31, 2014 .
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. In accordance with U.S. GAAP, a portion of the other components of pension and other postretirement benefit costs (i.e. interest cost, expected return on assets, and amortization of prior service credit) related to Water Technologies has been reclassified from the Unallocated

18

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

 
 
 
NOTE J – EMPLOYEE BENEFIT PLANS (continued)

and other segment to the discontinued operations caption of the Statements of Consolidated Comprehensive Income. For the three months ended March 31, 2014 and 2013, income of $2 million and $3 million , respectively, and for the six months ended March 31, 2014 and 2013, income of $4 million and $6 million , respectively, were classified within discontinued operations.
The following table details the components of pension and other postretirement benefit costs for both continuing and discontinued operations.
 
 
 
 
 
Other postretirement
 
Pension benefits
 
benefits
(In millions)
2014

 
2013

 
2014

 
2013

Three months ended March 31
 
 
 
 
 
 
 
Service cost
$
10

 
$
11

 
$

 
$
1

Interest cost
50

 
44

 
2

 
2

Expected return on plan assets
(60
)
 
(60
)
 

 

Amortization of prior service credit
(1
)
 
(1
)
 
(5
)
 
(5
)
Curtailment, settlement and other
28

 

 

 

Actuarial loss
96

 

 

 

 
$
123

 
$
(6
)
 
$
(3
)
 
$
(2
)
 
 
 
 
 
 
 
 
Six months ended March 31
 

 
 

 
 

 
 

Service cost
$
21

 
$
23

 
$
1

 
$
1

Interest cost
99

 
88

 
4

 
4

Expected return on plan assets
(119
)
 
(119
)
 

 

Amortization of prior service credit
(1
)
 
(1
)
 
(11
)
 
(11
)
Curtailment, settlement and other
28

 

 

 

Actuarial loss
96

 

 

 

 
$
124

 
$
(9
)
 
$
(6
)
 
$
(6
)

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


19

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

 
 
 
NOTE K – 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, 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)
2014

 
2013

 
2013

 
2012

 
2011

Open claims - beginning of period
65

 
66

 
66

 
72

 
83

New claims filed
1

 
1

 
2

 
2

 
2

Claims settled

 

 
(1
)
 
(1
)
 
(1
)
Claims dismissed

 
(1
)
 
(2
)
 
(7
)
 
(12
)
Open claims - end of period
66

 
66

 
65

 
66

 
72

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 2013 quarter, it was determined that the liability for asbestos claims should be decreased by $28 million .  Total reserves for asbestos claims were $447 million at March 31, 2014 compared to $463 million at September 30, 2013 .
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)
2014

 
2013

 
2013

 
2012

 
2011

Asbestos reserve - beginning of period
$
463

 
$
522

 
$
522

 
$
543

 
$
537

Reserve adjustment

 

 
(28
)
 
11

 
41

Amounts paid
(16
)
 
(17
)
 
(31
)
 
(32
)
 
(35
)
Asbestos reserve - end of period
$
447

 
$
505

 
$
463

 
$
522

 
$
543

Ashland asbestos-related receivables
Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed.  As a result, any 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 65% of the estimated receivables from insurance companies are expected to be due

20

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


from domestic insurers. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of March 31, 2014 .  The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings, and from Underwriters at Lloyd’s, whose insurance policy obligations have been transferred to a Berkshire Hathaway entity.  Ashland discounts this piece of the receivable based upon the projected timing of the receipt of cash from those insurers unless likely settlement amounts can be determined.
In October 2012, Ashland initiated arbitration proceedings against Underwriters at Lloyd’s, certain London companies and Chartis (AIG member) companies seeking to enforce these insurers’ contractual obligations to provide indemnity for asbestos liabilities and defense costs under existing coverage-in-place agreements. In addition, Ashland has initiated a lawsuit in Kentucky state court against certain Berkshire Hathaway entities (National Indemnity Company and Resolute Management Inc.) on grounds that these Berkshire entities have wrongfully interfered with these insurers' performance of their respective contractual obligations to provide asbestos coverage by directing the insurers to reduce and delay certain claim payments. While Ashland anticipates its position will be supported by the proceedings, an adverse resolution of these proceedings could have a significant effect on the timing of loss reimbursement and the amount of Ashland’s recorded insurance receivables from these insurers.
At March 31, 2014 , Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $403 million , of which $98 million relates to costs previously paid.  Receivables from insurers amounted to $408 million at September 30, 2013 .  During the June 2013 quarter, the annual update of the model used for purposes of valuing the asbestos reserve described above, and its impact on valuation of future recoveries from insurers, was completed.  This model update resulted in 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.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
Years ended September 30
(In millions)
2014

 
2013

 
2013

 
2012

 
2011

Insurance receivable - beginning of period
$
408

 
$
423

 
$
423

 
$
431

 
$
421

Receivable adjustment

 

 
(3
)
 
19

 
42

Amounts collected
(5
)
 
(7
)
 
(12
)
 
(27
)
 
(32
)
Insurance receivable - end of period
$
403

 
$
416

 
$
408

 
$
423

 
$
431

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

21

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


 
Six months ended
 
 
 
 
 
 
 
March 31
 
    Years ended September 30
(In thousands)
2014

 
2013

 
2013

 
2012

 
2011

Open claims - beginning of period
21

 
21

 
21

 
21

 
20

New claims filed

 
1

 
1

 
1

 
2

Claims dismissed

 
(1
)
 
(1
)
 
(1
)
 
(1
)
Open claims - end of period
21

 
21

 
21

 
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 2013 quarter, it was determined that the liability for Hercules asbestos-related claims should be increased by $46 million .  Total reserves for asbestos claims were $331 million at March 31, 2014 compared to $342 million at September 30, 2013 .
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)
2014

 
2013

 
2013

 
2012

 
2011

Asbestos reserve - beginning of period
$
342

 
$
320

 
$
320

 
$
311

 
$
375

Reserve adjustment

 

 
46

 
30

 
(48
)
Amounts paid
(11
)
 
(14
)
 
(24
)
 
(21
)
 
(16
)
Asbestos reserve - end of period
$
331

 
$
306

 
$
342

 
$
320

 
$
311

Hercules asbestos-related receivables
For the Hercules asbestos-related obligations, certain reimbursements pursuant to coverage-in-place agreements with insurance carriers exist.  As a result, 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. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of March 31, 2014 .
As of March 31, 2014 and September 30, 2013 , the receivables from insurers amounted to $74 million and $75 million , respectively.  As previously mentioned, during the June 2013 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed.  This model update caused a $19 million increase in the receivable for probable insurance recoveries.

22

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


A progression of activity in the Hercules insurance receivable is presented in the following table.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
Years ended September 30
(In millions)
2014

 
2013

 
2013

 
2012

 
2011

Insurance receivable - beginning of period
$
75

 
$
56

 
$
56

 
$
48

 
$
68

Receivable adjustment

 

 
19

 
9

 
(20
)
Amounts collected
(1
)
 
(1
)
 

 
(1
)
 

Insurance receivable - end of period
$
74

 
$
55

 
$
75

 
$
56

 
$
48

Asbestos liability projection
Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict.  In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards.  Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens.  In light of these inherent uncertainties, Ashland believes that the asbestos reserves for Ashland and