Ashland Global Holdings Inc.
ASHLAND INC. (Form: 10-Q, Received: 04/30/2015 16:15:21)


 
 
 
 
 

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, 2015
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934
 
For the transition period from _________ to ___________

Commission file number 1-32532

ASHLAND INC.

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

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

Indicate by check mark whether the Registrant: (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ No  o     
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.  (Check One):
 
 Large Accelerated Filer þ
 
 Accelerated Filer o   
 
 Non-Accelerated Filer o
 
Smaller Reporting Company o   
 
 (Do not check if a smaller reporting company.)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No þ
At March 31, 2015 , there were 67,576,297 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)
2015

 
2014

 
2015

 
2014

Sales
$
1,350

 
$
1,545

 
$
2,741

 
$
2,977

Cost of sales
925

 
1,168

 
1,906

 
2,216

Gross profit
425

 
377

 
835

 
761

 
 
 
 
 
 
 
 
Selling, general and administrative expense
203

 
370

 
429

 
605

Research and development expense
25

 
36

 
50

 
63

Equity and other income (loss)
(4
)
 
(35
)
 
6

 
(14
)
Operating income (loss)
193

 
(64
)
 
362

 
79

 
 
 
 
 
 
 
 
Net interest and other financing expense
40

 
41

 
81

 
83

Net gain (loss) on divestitures
(33
)
 
1

 
(118
)
 
6

Income (loss) from continuing operations before
 
 
 
 
 
 
 
income taxes
120

 
(104
)
 
163

 
2

Income tax expense (benefit) - Note I
25

 
(43
)
 
27

 
(25
)
Income (loss) from continuing operations
95

 
(61
)
 
136

 
27

Income from discontinued operations (net of tax) - Note C
129

 
17

 
121

 
39

Net income (loss)
$
224

 
$
(44
)
 
$
257

 
$
66

 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share - Note L
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.40

 
$
(0.78
)
 
$
1.97

 
$
0.35

Income from discontinued operations
1.90

 
0.21

 
1.76

 
0.50

Net income (loss)
$
3.30

 
$
(0.57
)
 
$
3.73

 
$
0.85

 
 
 
 
 
 
 
 
Diluted earnings per share - Note L
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.39

 
$
(0.78
)
 
$
1.95

 
$
0.35

Income from discontinued operations
1.87

 
0.21

 
1.73

 
0.49

Net income (loss)
$
3.26

 
$
(0.57
)
 
$
3.68

 
$
0.84

 
 
 
 
 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.34

 
$
0.34

 
$
0.68

 
$
0.68

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net income (loss)
$
224

 
$
(44
)
 
$
257

 
$
66

Other comprehensive income (loss), net of tax - Note M
 
 
 
 
 
 
 
Unrealized translation gain (loss)
(255
)
 
(25
)
 
(382
)
 
14

Pension and postretirement obligation adjustment
(6
)
 
(5
)
 
(11
)
 
(9
)
Other comprehensive income (loss)
(261
)
 
(30
)
 
(393
)
 
5

Comprehensive income (loss)
$
(37
)
 
$
(74
)
 
$
(136
)
 
$
71








SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
March 31

 
September 30

(In millions - unaudited)
2015

 
2014

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
911

 
$
1,393

Accounts receivable  (a)
1,046

 
1,202

Inventories - Note F
714

 
765

Deferred income taxes
121

 
118

Other assets
110

 
83

Total current assets
2,902

 
3,561

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
4,061

 
4,275

Accumulated depreciation
1,898

 
1,861

Net property, plant and equipment
2,163

 
2,414

Goodwill - Note G
2,480

 
2,643

Intangibles - Note G
1,188

 
1,309

Restricted investments - Note A
300

 

Asbestos insurance receivable - Note K
193

 
433

Equity and other unconsolidated investments
69

 
81

Other assets
501

 
510

Total noncurrent assets
6,894

 
7,390

Total assets
$
9,796

 
$
10,951

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note H
$
233

 
$
329

Current portion of long-term debt - Note H
9

 
9

Trade and other payables
500

 
674

Accrued expenses and other liabilities
508

 
675

Total current liabilities
1,250

 
1,687

Noncurrent liabilities
 

 
 

Long-term debt - Note H
2,943

 
2,942

Employee benefit obligations - Note J
1,415

 
1,468

Asbestos litigation reserve - Note K
677

 
701

Deferred income taxes
51

 
110

Other liabilities
441

 
460

Total noncurrent liabilities
5,527

 
5,681

Commitments and contingencies - Note K


 


Stockholders’ equity
3,019

 
3,583

 
 
 
 
Total liabilities and stockholders’ equity
$
9,796

 
$
10,951

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $13 million at March 31, 2015 and September 30, 2014 , respectively.







SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS EQUITY

 
 
 

(In millions - unaudited)
Common
stock

 
Paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income (loss)

(a)
Total

BALANCE AT SEPTEMBER 30, 2014
$
1

 
$

 
$
3,475

 
$
107


$
3,583

Total comprehensive income (loss)
 

 
 
 
257

 
(393
)

(136
)
Regular dividends, $.68 per common share
 

 
 

 
(46
)
 
 

 
(46
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 

   incentive and other plans (b)
 

 
23

 
(8
)
 
 

 
15

Repurchase of common shares (c)
 
 


 
(397
)
 
 
 
(397
)
BALANCE AT MARCH 31, 2015
$
1

 
$
23

 
$
3,281

 
$
(286
)

$
3,019

 
 
 
 
 
 
 
 
 
 
(a)
At March 31, 2015 and September 30, 2014 , the after-tax accumulated other comprehensive loss of $286 million and gain of $107 million , respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $48 million and $59 million , respectively, and net unrealized translation loss of $334 million and gain of $48 million , respectively.
(b)
Common shares issued were 359,086 for the six months ended March 31, 2015 and includes the impact of the modification of certain performance shares. See Note N of the Notes to Condensed Consolidated Financial Statements for further information.
(c)
Common shares repurchased were 3,078,136 for the six months ended March 31, 2015 . See Note M of the Notes to Condensed Consolidated Financial Statements.











































SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
Six months ended
 
March 31
(In millions - unaudited)
2015

 
2014

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
257

 
$
66

Income from discontinued operations (net of tax)
(121
)
 
(39
)
Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
170

 
183

Debt issuance cost amortization
7

 
7

Purchased in-process research and development impairment

 
9

Deferred income taxes
(13
)
 
(4
)
Equity income from affiliates
(7
)
 
(14
)
Distributions from equity affiliates
10

 
6

Stock based compensation expense
15

 
17

Net loss (gain) on divestitures
118

 
(6
)
Impairment of equity investments
14

 
46

Losses on pension plan remeasurements
9

 
105

Change in operating assets and liabilities (a)
(363
)
 
(182
)
Total cash flows provided by operating activities from continuing operations
96

 
194

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Additions to property, plant and equipment
(86
)
 
(96
)
Proceeds from disposal of property, plant and equipment
1

 
4

Purchase of operations - net of cash acquired

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

 
6

Funds restricted for specific transactions
(320
)
 

Total cash flows used by investing activities from continuing operations
(299
)
 
(88
)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Repayment of long-term debt

 
(12
)
Proceeds (repayment) from short-term debt
(96
)
 
93

Repurchase of common stock
(397
)
 

Cash dividends paid
(46
)
 
(53
)
Excess tax benefits related to share-based payments
7

 
7

Total cash flows provided (used) by financing activities from continuing operations
(532
)
 
35

CASH PROVIDED (USED) BY CONTINUING OPERATIONS
(735
)
 
141

Cash provided (used) by discontinued operations
 

 
 

Operating cash flows
277

 
20

Investing cash flows
10

 
(15
)
Total cash provided by discontinued operations
287

 
5

Effect of currency exchange rate changes on cash and cash equivalents
(34
)
 
(1
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(482
)
 
145

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
1,393

 
346

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
911

 
$
491

 
 
 
 
(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, 2014 .  Results of operations for the period ended March 31, 2015 are not necessarily indicative of the expected results for the remaining quarters in the fiscal year.  
Ashland is composed of three reportable segments:  Ashland Specialty Ingredients (Specialty Ingredients), Ashland Performance Materials (Performance Materials) and Valvoline. On July 31, 2014, Ashland completed the sale of the assets and liabilities of Ashland Water Technologies (Water Technologies). As a result of this sale, all prior period 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. In addition to the sale of Water Technologies, Ashland sold certain components remaining in its portfolio of businesses, which includes divesting its Casting Solutions joint venture on June 30, 2014 and the Elastomers division within the Performance Materials reportable segment on December 1, 2014. See Notes B, C, D and O for additional information on this activity and related results as well as Ashland’s current reportable segment results.
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.
Restricted investments
On January 13, 2015, Ashland and Hercules entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). During the March 2015 quarter, Ashland placed $335 million of the settlement funds into a renewable annual trust restricted for the purpose of paying ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims. These funds are presented primarily as noncurrent

6

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

 
 
 
NOTE A   SIGNIFICANT ACCOUNTING POLICIES (continued)
 

assets, with $35 million classified within other current assets in the Condensed Consolidated Balance Sheets. As of March 31, 2015, these assets are currently invested in cash equivalents but are expected to be diversified in future periods. See Note K for additional information regarding the January 2015 asbestos insurance settlement.
New accounting standards
A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. As of March 31, 2015 , no new standards significant 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, 2014 . The following standards were either adopted in the current period or will become effective in a subsequent period.
In May 2014, the FASB issued accounting guidance outlining a single comprehensive five step model for entities to use in accounting for revenue arising from contracts with customers (ASC 606 Revenue from Contracts with Customers). The new guidance supersedes most current revenue recognition guidance, in an effort to converge the revenue recognition principles within U.S. GAAP. This new guidance also requires entities to disclose certain quantitative and qualitative information regarding the nature, amount, timing and uncertainty of qualifying revenue and cash flows arising from contracts with customers. Entities have the option of using a full retrospective or a modified retrospective approach to adopt the new guidance. Currently, this guidance will become effective for Ashland on October 1, 2017. However, in April 2015 the FASB proposed a one-year deferral of the effective date, which is currently going through the comment period process. Ashland is currently evaluating the new accounting standard and the available implementation options the standard allows as well as the impact this new guidance will have on Ashland's Condensed Consolidated Financial Statements.
In April 2014, the FASB issued accounting guidance amending the requirements for reporting discontinued operations (ASC 205 Presentation of Financial Statements and ASC 360 Property, Plant and Equipment). This guidance limits the requirement for discontinued operations treatment to the disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Additionally, this new guidance no longer precludes discontinued operations presentation based on continuing involvement or cash flows following the disposal. Ashland adopted this guidance on October 1, 2014, which is applicable only to divestitures subsequent to the adoption date, and has evaluated each divestiture under this new guidance during the current year.
NOTE B - DIVESTITURES
Valvoline Car Care Products
In April 2015, Ashland entered into a definitive sale agreement to sell Valvoline's car care product assets, including Car Brite™ and Eagle One™ automotive appearance products. The asset values were recorded at $32 million , which primarily included property, plant, and equipment, goodwill and other intangible assets. Ashland recognized a loss of $26 million before tax in the quarter ended March 31, 2015 to recognize the assets at fair value less cost to sell since the assets met the U.S. GAAP held for sale criteria at March 31, 2015 . The loss is reported within the net gain (loss) on divestitures caption within the Statements of Consolidated Comprehensive Income.
The sale of Valvoline's car care product assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results. 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.

7

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

 
NOTE B – DIVESTITURES (continued)



Valvoline Joint Venture
During April 2015, Ashland sold a Valvoline joint venture equity investment in Venezuela. During the current quarter, Ashland recognized a $14 million impairment, for which there was no tax effect, within the equity and other income (loss) caption of the Statements of Consolidated Comprehensive Income.
Ashland’s decision to sell the equity investment and the resulting charge recorded in the current quarter is reflective of the continued devaluation of the Venezuelan currency (bolivar) based on changes to the Venezuelan currency exchange rate mechanisms during the current quarter. In addition, the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar had restricted the joint venture’s ability to pay dividends and obligations denominated in U.S. dollars. These exchange regulations and cash flow limitations, combined with other recent Venezuelan regulations and the impact of declining oil prices on the Venezuelan economy, had significantly restricted Ashland’s ability to conduct normal business operations through the joint venture arrangement. Ashland determined this divestiture does not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results, and thus it does not qualify for discontinued operations treatment.
MAP Transaction
As part of the 2005 transfer of Ashland's 38% interest in the Marathon Ashland Petroleum joint venture and two other small businesses to Marathon Oil Corporation (Marathon) (the MAP Transaction), Marathon is entitled to the tax deductions for Ashland's future payments of certain contingent liabilities, including asbestos liabilities, related to previously owned businesses of Ashland. Marathon agreed to compensate Ashland for these tax deductions and Ashland established a discounted receivable, which represented the estimated present value of probable recoveries from Marathon for the portion of their future tax deductions. As a result of the January 2015 asbestos insurance settlement, Ashland recorded a $7 million charge within the net gain (loss) on divestitures caption of the Statements of Consolidated Comprehensive Income and accordingly reduced the discounted receivable by the same amount. The total MAP receivable remaining as of March 31, 2015 was $10 million . See Note K for more information related to the January 2015 asbestos insurance settlement.
Elastomers
On October 9, 2014, Ashland entered into a definitive agreement to sell the Elastomers division of the Performance Materials reportable segment, which operated a 250 -person manufacturing facility in Port Neches, Texas, to Lion Copolymer Holdings, LLC. The Elastomers division, which primarily served the North American replacement tire market, accounted for approximately 5% of Ashland's 2014 sales of $6.1 billion and 18% of Ashland Performance Materials' $1.6 billion in sales in 2014. The sale was completed on December 1, 2014 in a transaction valued at approximately $120 million which was subject to working capital adjustments. The total post-closing adjusted cash proceeds received before taxes by Ashland during the six months ended March 31, 2015 was $106 million , which includes estimates for working capital adjustments and transaction costs, as defined in the definitive agreement.
Elastomers' net assets as of November 30, 2014 were $191 million which primarily included accounts receivable, inventory, property, plant and equipment, non-deductible goodwill and other intangibles and payables. Since the net proceeds received were less than book value, Ashland recorded a loss of $86 million pre-tax within the net gain (loss) on divestiture caption within the Statements of Consolidated Comprehensive Income during the six months ended March 31, 2015 . The related tax effect was a benefit of $28 million included in the income tax expense (benefit) caption within the Statements of Consolidated Comprehensive Income.

8

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

 
NOTE B – DIVESTITURES (continued)



As part of this definitive agreement, Ashland will provide certain transition services to Lion Copolymer Holdings, LLC for a fee. While the transition services vary in duration depending upon the type of service provided, Ashland expects to reduce any legacy costs as the transition services are completed.
As a result of the adoption of the new discontinued operations accounting guidance discussed in Note A, Ashland determined that the sale of Elastomers did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results. As such, Elastomers' results were included in the Performance Materials reportable segment results of operations and financial position within the Statements of Consolidated Comprehensive Income and Condensed Consolidated Balance Sheet, respectively, until its December 1, 2014 sale. 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 Elastomers division are now reported as selling, general and administrative expense within continuing operations on a consolidated basis within the Unallocated and other segment. These costs were $3 million and $4 million during the three and six months ended March 31, 2015 , respectively.
Water Technologies
On July 31, 2014, Ashland sold the Water Technologies business to a fund managed by Clayton, Dubilier & Rice (CD&R) in a transaction valued at approximately $1.8 billion . The total post-closing adjusted cash proceeds received by Ashland during 2014, before taxes, was $1.6 billion , which includes estimates for certain working capital and other post-closing adjustments, as defined in the definitive agreement. During the three months ended March 31, 2015 , Ashland received approximately $30 million of the $48 million of delayed purchase price funds related to a foreign entity which completed certain regulatory closing requirements during the current quarter. Ashland expects to receive the remainder of these funds in the third quarter of fiscal 2015. Final settlement of working capital and other post-closing adjustments occurred during the three months ended March 31, 2015 resulting in a payment of approximately $20 million to CD&R.
Since this transaction signified 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 reportable 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 $18 million during the three and six months ended March 31, 2014 , respectively.
Ashland retained and 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 . The ongoing effects of the pension and postretirement plans for former Water Technologies employees are reported within the Unallocated and other segment.
Ashland provides certain transition services to CD&R for a fee. During the three and six months ended March 31, 2015 , Ashland recognized transition service fees of $8 million and $18 million , respectively, which offset costs within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. While the transition services vary in duration depending upon the type of service provided, Ashland will continue 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.

9

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

 
NOTE B – DIVESTITURES (continued)



Casting Solutions joint venture
During 2014, Ashland, in conjunction with its partner, initiated a process to sell the ASK Chemicals GmbH (ASK) joint venture, in which Ashland had 50% ownership. As part of the sale process, Ashland determined 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 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.
On June 30, 2014, Ashland, in conjunction with its partner, sold the ASK joint venture to investment funds affiliated with Rhône Capital, LLC (Rhône), a London and New York-based private equity investment firm. From the sale, total pre-tax proceeds to the sellers, which were split evenly between Ashland and its partner under the terms of the 50 / 50 joint venture, were $205 million , which included $176 million in cash and a $29 million note from Rhône due in calendar year 2022.
NOTE C – DISCONTINUED OPERATIONS
In previous periods, Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income for all periods presented and are discussed further within this note.
Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, which qualified as a discontinued operation, and from the 2009 acquisition of Hercules, a wholly-owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations. During the three and six months ended March 31, 2015 , Ashland recorded an after-tax gain of $120 million within discontinued operations due to the January 2015 asbestos insurance settlement.  See Note K for more information related to the adjustments on asbestos liabilities and receivables.
As previously described in Note B, on July 31, 2014, Ashland completed the sale of the Water Technologies business to CD&R. Sales for the three and six months ended March 31, 2014 were $431 million and $867 million , respectively. The results of operations for the three and six months ended March 31, 2014 are included in the table below. Ashland has made post-closing adjustments, including the pension plan remeasurement discussed in Note J, as defined by the definitive agreement during the three and six months ended March 31, 2015 .
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, 2015 and 2014 .

10

 
 
 
 
 
 
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)
2015

 
2014

 
2015

 
2014

Income (loss) from discontinued operations (net of tax)
 
 
 
 
 
 
 
Asbestos-related litigation
$
122

 
$

 
$
120

 
$
(1
)
Water Technologies (a)

 
17

 
(2
)
 
40

Gain on disposal of discontinued operations (net of tax)
 

 
 

 
 

 
 

Water Technologies
7

 

 
3

 

Total income from discontinued operations (net of tax)
$
129

 
$
17

 
$
121

 
$
39

 
 
 
 
 
 
 
 
(a)
For the three and six months ended March 31, 2014 , pretax operating income recorded for Water Technologies was $19 million and $55 million , respectively.
NOTE D – RESTRUCTURING ACTIVITIES
Ashland periodically implements company-wide restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business.
During 2014, 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) to certain U.S. employees. Approximately 400 employees were formally approved for the VSO. Additionally, during 2014, an involuntary program for employees was also initiated as part of the global restructuring program. Substantially all payments related to the VSO and involuntary programs will be paid by the end of fiscal 2015. The VSO and involuntary programs resulted in $75 million of expense being recognized during the three and six months ended March 31, 2014 , $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. In addition, the employee reductions resulted in a pension curtailment being recorded during the prior year quarter. See Note J for further information. As of March 31, 2015 and September 30, 2014 , the remaining restructuring reserve for this global restructuring program was $14 million and $53 million , respectively.
As of March 31, 2015 and September 30, 2014 , the remaining $2 million and $3 million , respectively, in restructuring reserves for other previously announced programs principally consisted of expected future severance payments for programs implemented during 2011.
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, 2015 and September 30, 2014 , the remaining restructuring reserve for all qualifying facility costs totaled $7 million and $9 million , respectively.
The following table summarizes the related activity in these reserves for the six months ended March 31, 2015 and 2014 .  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.

11

 
 
 
 
 
 
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, 2014
$
56

 
$
9

 
$
65

Reserve adjustments
(2
)
 

 
(2
)
Utilization (cash paid or otherwise settled)
(38
)
 
(2
)
 
(40
)
Balance at March 31, 2015
$
16

 
$
7

 
$
23

 
 
 
 
 
 
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

Specialty Ingredients Restructuring
During the March 2015 quarter, Specialty Ingredients committed to a restructuring plan within an existing manufacturing facility. As a result, during the current quarter, restructuring charges of $18 million were recorded within the cost of sales caption of the Statements of Consolidated Comprehensive Income. The restructuring plan is expected to be implemented during fiscal 2015 and completed during fiscal 2016.
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. During the March 2015 quarter, Ashland recorded two impairments which represent nonrecurring fair value measurements relating to Valvoline assets using observable inputs considered Level 2 fair values within the fair value hierarchy.
The following table summarizes financial instruments subject to recurring fair value measurements as of March 31, 2015 .

12

 
 
 
 
 
 
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
$
911

 
$
911

 
$
911

 
$

 
$

Restricted investments (a)
335

 
335

 
335

 

 

Deferred compensation investments (b)
187

 
187

 
43

 
144

 

Investments of captive insurance company (b)
3

 
3

 
3

 

 

Foreign currency derivatives
15

 
15

 

 
15

 

Total assets at fair value
$
1,451

 
$
1,451

 
$
1,292

 
$
159

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
13

 
$
13

 
$

 
$
13

 
$

 
 
 
 
 
 
 
 
 
 
(a)
Included in restricted investments and $35 million within other current assets in the Condensed Consolidated Balance Sheets.
(b)
Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.
The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2014 .
(In millions)
Carrying
value

 
Total
fair
value

 
Quoted prices
in active
markets for
identical
assets
Level 1

 
Significant
other
observable
inputs
Level 2

 
Significant
unobservable
inputs
Level 3

Assets
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
1,393

 
$
1,393

 
$
1,393

 
$

 
$

Deferred compensation investments (a)
184

 
184

 
45

 
139

 

Investments of captive insurance company (a)
3

 
3

 
3

 

 

Foreign currency derivatives
11

 
11

 

 
11

 

Total assets at fair value
$
1,591

 
$
1,591

 
$
1,441

 
$
150

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
9

 
$
9

 
$

 
$
9

 
$

 
 
 
 
 
 
 
 
 
 
(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

13

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

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 recognized during the three and six months ended March 31, 2015 and 2014 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2015

 
2014

 
2015

 
2014

Foreign currency derivative gain (loss)
$
(12
)
 
$
2

 
$
(16
)
 
$
5

The following table summarizes the fair values of the outstanding foreign currency derivatives as of March 31, 2015 and September 30, 2014 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.
 
March 31

 
September 30

(In millions)
2015

 
2014

Foreign currency derivative assets
$
6

 
$
2

Notional contract values
183

 
88

 
 
 
 
Foreign currency derivative liabilities
$
9

 
$
4

Notional contract values
341

 
281

Net investment hedges
During 2014, Ashland entered into foreign currency contracts in order to manage the foreign currency exposure of the net investment in certain foreign operations, as a result of certain proceeds from the sale of Water Technologies being received in non-U.S. denominated currencies. During the six months ended March 31, 2015 , these foreign currency contracts were settled and Ashland entered into new foreign currency contracts. Ashland designated the foreign currency contracts as hedges of net investment in its foreign subsidiaries. As a result, Ashland records these hedges at fair value using forward rates, with the effective portion of the gain or loss reported as a component of the cumulative translation adjustment within accumulated other comprehensive income (AOCI) and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affects net income. There was no hedge ineffectiveness with these instruments during the three and six months ended March 31, 2015 .
As of March 31, 2015 and September 30, 2014 , the total notional value of foreign currency contracts equaled $190 million and $206 million , respectively. The fair value of Ashland's net investment hedge assets and liabilities are calculated using forward rates. Accordingly, these instruments are deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these net investment hedges are highly rated financial institutions which Ashland believes carry only a nominal risk of nonperformance. The following table summarizes the fair value of the outstanding net investment hedge instruments as of March 31, 2015 and September 30, 2014 .
 
 
March 31

 
September 30

(In millions)
Consolidated balance sheet caption
2015

 
2014

Net investment hedge assets
Accounts receivable
$
9

 
$
9

Net investment hedge liabilities
Accrued expenses and other liabilities
4

 
5


14

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

The following table summarizes the unrealized gain on the net investment hedge instruments recognized within the cumulative translation adjustment within AOCI during the three and six months ended March 31, 2015 . No portion of the gain was reclassified to income during the quarter.
 
Three months ended
 
 
Six months ended
 
 
 
March 31

 
 
March 31

(In millions)
 
2015

 
 
2015

Change in unrealized gain in AOCI
 
$
5

 
 
$
5

Tax impact of change in unrealized gain in AOCI
 
(3
)
 
 
(4
)
Other financial instruments
At March 31, 2015 and September 30, 2014 , Ashland’s long-term debt had a carrying value of $2,952 million and $2,951 million , respectively, compared to a fair value of $3,179 million and $3,102 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.  Inventories are primarily stated at cost using the weighted-average cost method. In addition, certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.  
The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
March 31

 
September 30

(In millions)
2015

 
2014

Finished products
$
545

 
$
557

Raw materials, supplies and work in process
212

 
239

LIFO reserve
(43
)
 
(31
)
 
$
714

 
$
765

NOTE G – GOODWILL AND OTHER INTANGIBLES
Goodwill
Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually or when events and circumstances indicate an impairment may have occurred.  This annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value.  For its July 1, 2014 assessment, Ashland determined that its reporting units for allocation of goodwill included the Specialty Ingredients and Valvoline reportable segments, and the Composites, Intermediates/Solvents, and Elastomers reporting units within the Performance Materials reportable segment, and determined at that time that no impairment existed. As discussed in Note B, Ashland sold the Elastomers division on December 1, 2014 and as a result, Elastomers is no longer a reporting unit as of March 31, 2015 .
The following is a progression of goodwill by reportable segment for the six months ended March 31, 2015 .

15

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

 
Specialty

 
Performance

 
 
 
 

(In millions)
Ingredients

 
Materials

(a)
Valvoline

 
Total

Balance at September 30, 2014
$
2,129

 
$
346

 
$
168

 
$
2,643

Divestiture  (b)

 
(10
)
 
(1
)
 
(11
)
Currency translation adjustment
(136
)
 
(16
)
 

 
(152
)
Balance at March 31, 2015
$
1,993

 
$
320

 
$
167

 
$
2,480

 
 
 
 
 
 
 
 
(a)
As of March 31, 2015 , goodwill consisted of $172 million for the Intermediates/Solvents reporting unit and $148 million for the Composites reporting unit.
(b)
Divestiture caption represents the amounts of goodwill for the sale of Elastomers and Valvoline car care products. See Note B for additional information.
Other intangible assets
Intangible assets principally consist of trademarks and trade names, intellectual property, customer relationships, and in-process research and development (IPR&D). Intangible assets classified as finite are amortized on a straight-line basis over their estimated useful lives.  The cost of trademarks and trade names is amortized principally over 4 to 25 years, intellectual property over 5 to 20 years, and customer relationships over 3 to 24 years.
IPR&D and certain intangible assets within trademarks and trade names have been classified as indefinite-lived and had a balance of $322 million as of March 31, 2015 and September 30, 2014 . During the three and six months ended March 31, 2014 , Ashland incurred a $9 million impairment related to certain IPR&D assets associated with the acquisition of International Specialty Products Inc. (ISP). This charge was included in the research and development expense caption of the Statements of Consolidated Comprehensive Income. 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, 2015 and September 30, 2014 .
 
 
March 31, 2015
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names (a) (b)
$
59

 
$
(43
)
 
$
16

Intellectual property (a)
809

 
(244
)
 
565

Customer relationships (b)
418

 
(133
)
 
285

Total definite-lived intangible assets
1,286

 
(420
)
 
866

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
IPR&D
19

 

 
19

Trademarks and trade names
303

 

 
303

Total intangible assets
$
1,608

 
$
(420
)
 
$
1,188

 
 
 
 
 
 
(a)
Elastomers had a gross carrying amount for trademarks/trade names and intellectual property of $6 million and $18 million , respectively, with $5 million of accumulated amortization for each caption.
(b)
Valvoline car care products intangibles were included in the loss to recognize the fair value of assets less cost of sale during the March 2015 quarter. These intangibles included trademarks/trade names and customer relationships with gross carrying amounts of $7 million and $1 million , respectively, with $3 million and $1 million , respectively, of accumulated amortization. See Note B for additional information.

16

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

 
September 30, 2014
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
72

 
$
(49
)
 
$
23

Intellectual property
827

 
(226
)
 
601

Customer relationships
481

 
(118
)
 
363

Total definite-lived intangible assets
1,380

 
(393
)
 
987

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
IPR&D
19

 

 
19

Trademarks and trade names
303

 

 
303

Total intangible assets
$
1,702

 
$
(393
)
 
$
1,309

Amortization expense recognized on intangible assets was $20 million and $22 million for the three months ended March 31, 2015 and 2014 , respectively, and $41 million and $44 million for the six months ended March 31, 2015 and 2014 , respectively, and is included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. Estimated amortization expense for future periods is $80 million in 2015 (includes six months actual and six months estimated), $78 million in 2016 , $78 million in 2017 , $77 million in 2018 and $74 million in 2019 .
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)
2015

 
2014

4.750% notes, due 2022
$
1,120

 
$
1,120

3.875% notes, due 2018
700

 
700

3.000% notes, due 2016
600

 
600

6.875% notes, due 2043
376

 
376

Accounts receivable securitization (a)
165

 
255

6.50% junior subordinated notes, due 2029  
135

 
134

Revolving credit facility
40

 
45

Other international loans, interest at a weighted-
 

 
 

average rate of 6.7% at March 31, 2015 (5.9% to 10.0%)
28

 
29

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

 
 

average rate of 8.7% at March 31, 2015 (8.4% to 9.4%)
14

 
14

Other
7

 
7

Total debt
3,185

 
3,280

Short-term debt
(233
)
 
(329
)
Current portion of long-term debt
(9
)
 
(9
)
Long-term debt (less current portion)
$
2,943

 
$
2,942

 
 
 
 
(a)
During the December 2014 quarter, the potential funding for qualified receivables was reduced from $275 million to $250 million .

17

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

 
 
 
NOTE H – DEBT (continued)

The scheduled aggregate maturities of debt by year are as follows:  $194 million remaining in 2015 , $608 million in 2016 , none in 2017 , $740 million in 2018 and $5 million in 2019 .  The borrowing capacity remaining under the $1.2 billion senior unsecured revolving credit facility (the 2013 Senior Credit Facility) was $1,088 million , due to an outstanding balance of $40 million , as well as a reduction of $72 million for letters of credit outstanding at March 31, 2015 . Ashland's total borrowing capacity at March 31, 2015 was $1,156 million , which includes $68 million from the accounts receivable securitization facility.
Covenant restrictions
Ashland's debt contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional indebtedness, further negative pledges, investments, mergers, sale of assets and restricted payments and other customary limitations.   As of March 31, 2015 , 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, 2015 , Ashland’s calculation of the consolidated leverage ratio was 2.2 , 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 3.0 .  At March 31, 2015 , Ashland’s calculation of the interest coverage ratio was 6.9 , which exceeds the minimum required consolidated ratio of 3.0 .
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, 2015 is 24% . Ashland’s effective tax rate in any interim period is subject to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations.  The overall effective tax rate was 21% for the three months ended March 31, 2015 and includes $15 million of discrete tax benefits on pretax charges of $58 million , primarily related to the loss of the Valvoline car care product assets, restructuring charges relating to a manufacturing facility, impairment of the Valvoline joint venture equity investment within Venezuela, the loss on the pension plan remeasurement, and MAP Transaction receivable adjustment related to the January 2015 asbestos insurance settlement. These charges are partially offset by the non taxable benefit of recording a $16 million tax indemnity from a third party. In addition, the tax rate was impacted by net favorable items of $4 million , primarily related to release of a valuation reserve on certain deferred taxes.
The overall effective tax rate of 17% for the six months ended March 31, 2015 includes certain discrete items such as the current quarter discrete items discussed previously, as well as $31 million discrete tax benefits on pretax charges of $93 million , primarily related to the sale of the Elastomers division.
Prior fiscal year
Ashland’s annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2014 was 21% . The overall effective tax rate was 41% 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

18

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

 
 
 
NOTE I – INCOME TAXES (continued)

and other divestiture-related deferred tax adjustments, partially offset by $8 million for the reversal of unrecognized tax benefits.
The overall effective tax rate of negative 1,250% 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.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the six months ended March 31, 2015 .
 (In millions)
 

Balance at October 1, 2014
$
155

Increases related to positions taken on items from prior years
5

Decreases related to positions taken on items from prior years (a)
(15
)
Increases related to positions taken in the current year
11

Lapse of the statute of limitations
(1
)
Settlement of uncertain tax positions with tax authorities
(8
)
Balance at March 31, 2015
$
147

 
 
(a)
Includes $4 million of currency translation adjustment.
In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $10 million for continuing operations and $8 million for discontinued operations related primarily to audit settlements and statute of limitations expirations in various tax jurisdictions. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.
As of March 31, 2015 , Ashland has recorded valuation allowances related to state net operating loss carry forwards and other state deferred tax asset balances. Ashland will continue to assess, based upon all available evidence both positive and negative, whether the valuation allowances are supportable and it is possible that an amount equal to $20 million to $30 million could be reversed in fiscal year 2015.
Other matters
During the March 2015 quarter, Ashland received funds as a result of a tax indemnity settlement. As a result, Ashland recognized $16 million of income during the three months ended March 31, 2015 within selling, general and administrative expenses in the Statements of Consolidated Comprehensive Income.
NOTE J – EMPLOYEE BENEFIT PLANS
For the six months ended March 31, 2015 , Ashland contributed $19 million to its U.S. pension plans and $10 million to its non-U.S. pension plans.  Ashland expects to make additional contributions to the U.S. plans of approximately $63 million and to the non-U.S. plans of approximately $6 million during the remainder of 2015 .
During the three and six months ended March 31, 2015 , Ashland was required to remeasure a non-U.S. pension plan due to the exit of Water Technologies' employees from the plan. As a result of the remeasurement, Ashland recognized a curtailment gain of $7 million and actuarial loss of $11 million during the three and six months

19

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

 
 
 
NOTE J – EMPLOYEE BENEFIT PLANS (continued)

ended March 31, 2015 . Of these amounts, all of the curtailment gain 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, 2015 .
During 2014, due to the global restructuring plan, Ashland was required to remeasure certain pension plan obligations, which included updating assumptions related to these plans such as the discount rate, asset values and demographic data. 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 .
Also during 2014, Ashland settled a non-U.S. pension plan, which in accordance with U.S. GAAP required 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, during 2014, 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 was reclassified from the Unallocated and other segment to the discontinued operations caption of the Statements of Consolidated Comprehensive Income. For the three and six months ended March 31, 2014 , income of $2 million and $4 million , respectively, was classified within discontinued operations.
The following table details the components of pension and other postretirement benefit costs for both continuing and discontinued operations.


20

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

 
 
 
NOTE J – EMPLOYEE BENEFIT PLANS (continued)

 
 
 
 
 
Other postretirement
 
Pension benefits
 
benefits
(In millions)
2015

 
2014

 
2015

 
2014

Three months ended March 31
 
 
 
 
 
 
 
Service cost (a)
$
6

 
$
10

 
$

 
$

Interest cost
44

 
50

 
2

 
2

Expected return on plan assets
(55
)
 
(60
)
 

 

Amortization of prior service credit
(1
)
 
(1
)
 
(4
)
 
(5
)
Curtailment, settlement and other
(7
)
 
28

 

 

Actuarial loss
11

 
96

 

 

 
$
(2
)
 
$
123

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

 
 

 
 

 
 

Service cost
$
13

 
$
21

 
$
1

 
$
1

Interest cost
88

 
99

 
3

 
4

Expected return on plan assets
(109
)
 
(119
)
 

 

Amortization of prior service credit
(1
)
 
(1
)
 
(8
)
 
(11
)
Curtailment, settlement and other
(7
)
 
28

 

 

Actuarial loss
11

 
96

 

 

 
$
(5
)
 
$
124

 
$
(4
)
 
$
(6
)
 
 
 
 
 
 
 
 
(a)
Service cost and net pension benefit costs of $0 denote values less than $1 million.
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 on an after-tax basis within the discontinued operations caption in the Statements of Consolidated Comprehensive Income.
Ashland asbestos-related litigation
The claims alleging personal injury caused by exposure to asbestos asserted against Ashland result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley, a former subsidiary.  The amount and timing of settlements and number of open claims can fluctuate from period to period.  A summary of Ashland asbestos claims activity, excluding Hercules claims, follows.

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)
2015

 
2014

 
2014

 
2013

 
2012

Open claims - beginning of period
65

 
65

 
65

 
66

 
72

New claims filed
1

 
1

 
2

 
2

 
2

Claims settled

 

 
(1
)
 
(1
)
 
(1
)
Claims dismissed
(1
)
 

 
(1
)
 
(2
)
 
(7
)
Open claims - end of period
65

 
66

 
65

 
65

 
66

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 2014 quarter, it was determined that the liability for asbestos claims should be increased by $4 million .  Total reserves for asbestos claims were $422 million at March 31, 2015 compared to $438 million at September 30, 2014 .
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)
2015

 
2014

 
2014

 
2013

 
2012

Asbestos reserve - beginning of period
$
438

 
$
463

 
$
463

 
$
522

 
$
543

Reserve adjustment

 

 
4

 
(28
)
 
11

Amounts paid
(16
)
 
(16
)
 
(29
)
 
(31
)
 
(32
)
Asbestos reserve - end of period
$
422

 
$
447

 
$
438

 
$
463

 
$
522

Ashland asbestos-related receivables
Ashland has insurance coverage for certain litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed.  
For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent.  Substantially all of the estimated receivables from insurance companies are expected to be due from domestic insurers. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of March 31, 2015 .  The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings.
In October 2012, Ashland and Hercules initiated various arbitration proceedings against Underwriters at Lloyd’s, certain London companies and/or Chartis (AIG) member companies seeking to enforce these insurers’ contractual obligations to provide indemnity for asbestos liabilities and defense costs under existing coverage-in-place agreements. In addition, Ashland and Hercules initiated a lawsuit in Kentucky state court against certain Berkshire Hathaway entities (National Indemnity Company and Resolute Management, Inc.) on grounds that these Berkshire entities wrongfully interfered with Underwriters' and Chartis' performance of their

22

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


respective contractual obligations to provide asbestos coverage by directing the insurers to reduce and delay certain claim payments.
On January 13, 2015, Ashland and Hercules entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million . In exchange, all claims were released against these entities for past, present and future coverage obligations arising out of the asbestos coverage-in-place agreements that were the subject of the pending arbitration proceedings. In addition, as part of this settlement, Ashland and Hercules released all claims against National Indemnity and Resolute Management, Inc. in the Kentucky state court action. As a result, the arbitration proceedings and the Kentucky state court action have been terminated.
As a result of this settlement, Ashland recorded an after-tax gain of $120 million within the discontinued operations caption of the Statements of Consolidated Comprehensive Income during the three months ended March 31, 2015 . The Ashland insurance receivable balance was also reduced as a result of this settlement by $227 million within the Condensed Consolidated Balance Sheets.
In addition, Ashland placed $335 million of the settlement funds received into a renewable annual trust restricted for the purpose of paying for ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims.
At March 31, 2015 , Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $162 million , of which $18 million relates to costs previously paid.  Receivables from insurers amounted to $402 million at September 30, 2014 .  During the June 2014 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 updated.  This model update resulted in a $7 million increase in the receivable for probable insurance recoveries. In 2014 , subsequent to the model update, a $15 million increase to the receivable was recorded to reflect a change to certain model assumptions related to the timing of receipts.
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)
2015

 
2014

 
2014

 
2013

 
2012

Insurance receivable - beginning of period
$
402

 
$
408

 
$
408

 
$
423

 
$
431

Receivable adjustment

 

 
22

 
(3
)
 
19

Insurance settlement
(227
)
 

 

 

 

Amounts collected
(13
)
 
(5
)
 
(28
)
 
(12
)
 
(27
)
Insurance receivable - end of period
$
162

 
$
403

 
$
402

 
$
408

 
$
423

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

23

 
 
 
 
 
 
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)
2015

 
2014

 
2014

 
2013

 
2012

Open claims - beginning of period
21

 
21

 
21

 
21

 
21

New claims filed
1

 

 
1

 
1

 
1

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 2014 quarter, it was determined that the liability for Hercules asbestos-related claims should be increased by $10 million .  Total reserves for asbestos claims were $320 million at March 31, 2015 compared to $329 million at September 30, 2014 .
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)
2015

 
2014

 
2014