Ashland Global Holdings Inc.
ASHLAND INC. (Form: 10-Q, Received: 08/08/2016 08:30:11)


 
 
 
 
 

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 June 30, 2016
 
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 August 2, 2016, there were 62,100,839 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
 
Nine months ended
 
June 30
 
June 30
(In millions except per share data - unaudited)
2016

 
2015

 
2016

 
2015

Sales
$
1,290

 
$
1,367

 
$
3,700

 
$
4,107

Cost of sales
854

 
939

 
2,449

 
2,845

Gross profit
436

 
428

 
1,251

 
1,262

 
 
 
 
 
 
 
 
Selling, general and administrative expense
244

 
216

 
726

 
645

Research and development expense
25

 
24

 
75

 
74

Equity and other income
8

 
8

 
23

 
16

Operating income
175

 
196

 
473

 
559

 
 
 
 
 
 
 
 
Net interest and other financing expense
40

 
54

 
125

 
136

Net gain (loss) on divestitures
3

 

 
3

 
(118
)
Income from continuing operations before income taxes
138

 
142

 
351

 
305

Income tax expense - Note J
41

 
27

 
76

 
55

Income from continuing operations
97

 
115

 
275

 
250

Income (loss) from discontinued operations
 
 
 
 
 
 
 
(net of tax) - Note D
(26
)
 
(8
)
 
(28
)
 
113

Net income
$
71

 
$
107

 
$
247

 
$
363

 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share - Note M
 

 
 

 
 

 
 

Income from continuing operations
$
1.57

 
$
1.70

 
$
4.35

 
$
3.66

Income (loss) from discontinued operations
(0.42
)
 
(0.12
)
 
(0.44
)
 
1.65

Net income
$
1.15

 
$
1.58

 
$
3.91

 
$
5.31

 
 
 
 
 
 
 
 
Diluted earnings per share - Note M
 

 
 

 
 

 
 

Income from continuing operations
$
1.55

 
$
1.68

 
$
4.31

 
$
3.61

Income (loss) from discontinued operations
(0.42
)
 
(0.12
)
 
(0.44
)
 
1.63

Net income
$
1.13

 
$
1.56

 
$
3.87

 
$
5.24

 
 
 
 
 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.39

 
$
0.39

 
$
1.17

 
$
1.07

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net income
$
71

 
$
107

 
$
247

 
$
363

Other comprehensive income (loss), net of tax - Note N
 
 
 
 
 
 
 
Unrealized translation gain (loss)
(46
)
 
68

 
(26
)
 
(314
)
Pension and postretirement obligation adjustment

 
(2
)
 
21

 
(13
)
Unrealized gain (loss) on available-for-sale securities
4

 
(3
)
 
13

 
(3
)
Other comprehensive income (loss)
(42
)
 
63

 
8

 
(330
)
Comprehensive income
$
29

 
$
170

 
$
255

 
$
33





SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
June 30

 
September 30

(In millions - unaudited)
2016

 
2015

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,215

 
$
1,257

Accounts receivable  (a)
908

 
961

Inventories - Note G
677

 
706

Other assets
111

 
169

Total current assets
2,911

 
3,093

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
4,228

 
4,144

Accumulated depreciation
2,058

 
1,962

Net property, plant and equipment
2,170

 
2,182

Goodwill - Note H
2,567

 
2,486

Intangibles - Note H
1,086

 
1,142

Restricted investments - Note F
292

 
285

Asbestos insurance receivable - Note L
197

 
180

Equity and other unconsolidated investments
62

 
65

Deferred income taxes
213

 
212

Other assets
414

 
409

Total noncurrent assets
7,001

 
6,961

Total assets
$
9,912

 
$
10,054

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note I
$
716

 
$
326

Current portion of long-term debt - Note I
55

 
55

Trade and other payables
477

 
573

Accrued expenses and other liabilities
423

 
488

Total current liabilities
1,671

 
1,442

Noncurrent liabilities
 

 
 

Long-term debt - Note I
3,316

 
3,348

Employee benefit obligations - Note K
989

 
1,076

Asbestos litigation reserve - Note L
696

 
661

Deferred income taxes
85

 
85

Other liabilities
421

 
405

Total noncurrent liabilities
5,507

 
5,575

Commitments and contingencies - Note L


 


Stockholders’ equity
2,734

 
3,037

 
 
 
 
Total liabilities and stockholders’ equity
$
9,912

 
$
10,054

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $12 million and $11 million at June 30, 2016 and September 30, 2015 , 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, 2015
$
1

 
$
46

 
$
3,281

 
$
(291
)

$
3,037

Total comprehensive income
 

 
 
 
247

 
8


255

Regular dividends, $1.17 per common share
 

 
 

 
(72
)
 
 

 
(72
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 

   incentive and other plans (b)
 

 
14

 
 
 
 

 
14

Repurchase of common shares (c)
 
 
(49
)
 
(451
)
 
 
 
(500
)
BALANCE AT JUNE 30, 2016
$
1

 
$
11

 
$
3,005

 
$
(283
)

$
2,734

 
 
 
 
 
 
 
 
 
 
(a)
At June 30, 2016 and September 30, 2015 , the after-tax accumulated other comprehensive loss of $283 million and $291 million , respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $62 million and $41 million , respectively, net unrealized translation loss of $347 million and $321 million , respectively, and net unrealized gain and loss on available-for-sale securities of $2 million and $11 million , respectively.
(b)
Common shares issued were 334,004 for the nine months ended June 30, 2016 .
(c)
Common shares repurchased were 5,049,911 for the nine months ended June 30, 2016 . See Note N of the Notes to Condensed Consolidated Financial Statements.










































SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
Nine months ended
 
June 30
(In millions - unaudited)
2016

 
2015

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
247

 
$
363

Loss (income) from discontinued operations (net of tax)
28

 
(113
)
Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
254

 
255

Debt issuance cost amortization
9

 
17

Deferred income taxes

 
(16
)
Equity income from affiliates
(12
)
 
(12
)
Distributions from equity affiliates
11

 
18

Stock based compensation expense
23

 
22

Loss on early retirement of debt

 
8

Gain on available-for-sale securities
(6
)
 
(1
)
Net loss (gain) on divestitures
(3
)
 
118

Impairment of equity investment

 
14

Pension contributions
(24
)
 
(592
)
Losses on pension and other postretirement plan remeasurements
23

 
9

Change in operating assets and liabilities (a)
(115
)
 
(249
)
Total cash flows provided (used) by operating activities from continuing operations
435

 
(159
)
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Additions to property, plant and equipment
(181
)
 
(147
)
Proceeds from disposal of property, plant and equipment
3

 
2

Purchase of operations - net of cash acquired
(70
)
 
(5
)
Proceeds from sale of operations or equity investments
15

 
133

Funds restricted for specific transactions
(4
)
 
(320
)
Reimbursements from restricted investments
24

 

Proceeds from sales of available-for-sale securities
4

 
315

Purchase of available-for-sale securities
(4
)
 
(315
)
Proceeds from the settlement of derivative instruments
8

 
17

Payments for the settlement of derivative instruments
(2
)
 
(5
)
Total cash flows used by investing activities from continuing operations
(207
)
 
(325
)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Proceeds from issuance of long-term debt

 
1,100

Repayment of long-term debt
(50
)
 
(559
)
Premium on long-term debt repayment

 
(8
)
Proceeds (repayment) from short-term debt
389

 
(98
)
Repurchase of common stock
(500
)
 
(397
)
Debt issuance costs
(2
)
 
(9
)
Cash dividends paid
(72
)
 
(72
)
Excess tax benefits related to share-based payments
1

 
9

Total cash flows used by financing activities from continuing operations
(234
)
 
(34
)
CASH USED BY CONTINUING OPERATIONS
(6
)
 
(518
)
Cash provided (used) by discontinued operations
 

 
 

Operating cash flows
(30
)
 
261

Investing cash flows

 
19

Total cash provided (used) by discontinued operations
(30
)
 
280

Effect of currency exchange rate changes on cash and cash equivalents
(6
)
 
(42
)
DECREASE IN CASH AND CASH EQUIVALENTS
(42
)
 
(280
)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
1,257

 
1,393

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
1,215

 
$
1,113

 
 
 
 
(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 (SEC) regulations.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 .  Results of operations for the period ended June 30, 2016 are not necessarily indicative of the expected results for the remaining quarter in the fiscal year. Additionally, certain prior period data has been reclassified in the Condensed Consolidated Financial Statements to conform to the current period presentation, including the adoption of new accounting guidance during the current period related to the classification as noncurrent of all deferred tax assets and liabilities in the Condensed Consolidated Balance Sheet.
Ashland is composed of three reportable segments:  Ashland Specialty Ingredients (Specialty Ingredients), Ashland Performance Materials (Performance Materials) and Valvoline.
Use of estimates, risks and uncertainties
The preparation of Ashland’s Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities as well as qualifying subsequent events.  Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and intangible assets), employee benefit obligations, income taxes and liabilities and receivables associated with asbestos litigation and environmental remediation.  Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
Ashland’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions.  Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of certain key raw materials, can have a significant effect on operations.  While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.
New accounting standards
A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting.  A detailed listing of new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2015 . The following standards relevant to Ashland were either issued or adopted in the current period, or will become effective in a subsequent period.
In March 2016, the FASB issued new accounting guidance for certain aspects of share-based payments to employees. This guidance requires all excess tax benefits and tax deficiencies related to share-based payments to be recognized as income tax expense in the income statement instead of additional paid in capital, and changes the classification of excess tax benefits from a financing activity to an operating activity within the statement of cash flows. This guidance also allows entities to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. Lastly, this guidance increases the amount an employer can withhold to cover income taxes on awards and still qualify for equity classification and requires that cash paid by an employer when directly withholding shares for tax-

6

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

 
 
 
NOTE A   SIGNIFICANT ACCOUNTING POLICIES (continued)
 

withholding purposes be classified as a financing activity within the statement of cash flows. The guidance will become effective for Ashland on October 1, 2017. Early adoption is permitted in any interim or annual period. Ashland is currently evaluating the impact this guidance may have on Ashland's Condensed Consolidated Financial Statements.
In February 2016, the FASB issued new accounting guidance related to lease transactions. The main objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. The presentation of the statements of comprehensive income and the statements of cash flows is largely unchanged under this guidance. This guidance retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The guidance will become effective for Ashland on October 1, 2019. Ashland is currently evaluating the impact this guidance may have on Ashland's Condensed Consolidated Financial Statements.
In January 2016, the FASB issued accounting guidance related to the recognition and measurement of financial assets and financial liabilities. The main objective of this guidance is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this guidance address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This guidance requires the following:
equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
a qualitative assessment to identify impairment of equity investments without readily determinable fair values;
the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.
The guidance also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The guidance will become effective for Ashland on October 1, 2018. Early application to financial statements of fiscal years or interim periods that have not yet been issued is permitted as of the beginning of the fiscal year of adoption. Ashland is currently evaluating the impact this guidance may have on Ashland's Condensed Consolidated Financial Statements.
In November 2015, the FASB issued accounting guidance requiring all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. During the March 2016 quarter, Ashland adopted this new guidance and applied it retrospectively to the September 30, 2015 Condensed Consolidated Balance Sheet. The impact of this new guidance within this statement resulted in the elimination of net current deferred taxes of $149 million with an increase to noncurrent deferred tax assets of $145 million and a decrease to noncurrent deferred tax liabilities of $4 million .

7

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

 
 
 
NOTE B – ACQUISITIONS


Oil Can Henry's
On December 11, 2015, Ashland announced that it signed a definitive agreement to acquire OCH International, Inc. (Oil Can Henry's), which was the 13 th  largest quick-lube network in the United States, servicing approximately 1 million vehicles annually with 89 quick-lube stores, consisting of 47 company-owned stores and 42 franchise locations, in Oregon, Washington, California, Arizona, Idaho and Colorado. On February 1, 2016, Ashland completed the acquisition.
The acquisition of Oil Can Henry's was valued at $72 million , which included acquired indebtedness of $11 million and other working capital adjustments. Net of acquired indebtedness and certain purchase price adjustments, the net cash outlay was $62 million during the nine months ended June 30, 2016 , including $2 million during the June 2016 quarter. The preliminary purchase price allocation primarily included $83 million of goodwill.
Zeta Fraction™
In September 2015, Specialty Ingredients completed the acquisition of the patented Zeta Fraction™ technology from AkzoNobel for $8 million . The acquisition broadens Ashland’s value-added portfolio in the personal care, pharmaceutical, food and beverage, and agriculture markets. The patented Zeta Fraction™ process and technology selectively isolates efficacious components from living plants and marine sources to produce a wide range of biofunctional ingredients. The purchase price allocation primarily included intellectual property and property, plant and equipment.
NOTE C - DIVESTITURES
Ashland Separation of Valvoline
On September 22, 2015, Ashland announced that the Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the new Ashland and Valvoline. The new Ashland will be a global leader in providing specialty chemical solutions to customers in a wide range of consumer and industrial markets. These markets are currently served by Specialty Ingredients and Performance Materials. Key markets and applications include pharmaceutical, personal care, food and beverage, architectural coatings, adhesives, automotive, construction and energy.
Ashland has filed a proxy statement/prospectus for a proposal to reorganize under a new public holding company, Ashland Global Holdings Inc. (Ashland Global), to facilitate reincorporation in the state of Delaware and to help facilitate the separation by allowing Ashland to organize and segregate the assets of its businesses in a tax-efficient manner. Upon completion of the reorganization, Ashland Global would replace Ashland as the publicly held corporation and, through its subsidiaries, would conduct all of the operations currently conducted by Ashland. Each outstanding share of Ashland common stock will automatically be converted into one share of Ashland Global common stock and current Ashland shareholders will become shareholders of Ashland Global. The reorganization is expected to be tax-free to shareholders and is subject to shareholder approval.
Valvoline Inc., a wholly owned subsidiary of Ashland, has filed a registration statement with the SEC for an initial public offering (IPO) of up to 20% of its common stock. Subject to market conditions, Ashland plans to complete the IPO during the fall of calendar year 2016. Ashland currently expects that it would distribute the remaining common stock of Valvoline Inc. to Ashland's shareholders upon expiration of a 180-day IPO lock-up period. For the three and nine months ended June 30, 2016 , Ashland recognized separation costs of $28 million and $46 million , respectively, which are primarily related to consulting and legal fees and employee retention awards. Separation costs are primarily recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income.

8

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

 
NOTE C – DIVESTITURES (continued)



During July 2016, certain financing related activities were executed for both Ashland and Valvoline in connection with the separation process. See further discussion in Note I.
Industrial Biocides
During May 2015, Ashland entered into a definitive sale agreement to sell the industrial biocides assets within Specialty Ingredients, which closed on July 1, 2015. As a result of the sale, Ashland received net cash proceeds of approximately $30 million and recognized a nominal gain before tax during the September 2015 quarter.
The sale of Specialty Ingredient's industrial biocides assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results.
Valvoline Car Care Products
In April 2015, Ashland entered into a definitive sale agreement to sell Valvoline's car care product assets for $24 million , which included Car Brite™ and Eagle One™ automotive appearance products. Prior to the sale, Ashland recognized a loss of $26 million before tax to recognize the assets at fair value less cost to sell, using Level 2 nonrecurring fair value measurements. The loss was reported within the net loss on divestitures caption within the Statements of Consolidated Comprehensive Income during the March 2015 quarter. The transaction closed on June 30, 2015 and Ashland received net proceeds of $19 million after adjusting for certain customary closing costs and final working capital totals during the June 2015 quarter.
The sale of Valvoline's car care product assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results.
Valvoline Joint Venture
During April 2015, Ashland sold a Valvoline joint venture equity investment in Venezuela. Prior to the sale, Ashland recognized a $14 million impairment in the March 2015 quarter, for which there was no tax effect, using Level 2 nonrecurring fair value measurements within the equity and other income (loss) caption of the Statements of Consolidated Comprehensive Income.
Ashland’s decision to sell the equity investment and the resulting charge recorded in the prior year was reflective of the continued devaluation of the Venezuelan currency (bolivar) based on changes to the Venezuelan currency exchange rate mechanisms. In addition, the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar had restricted the joint venture’s ability to pay dividends and obligations denominated in U.S. dollars. These exchange regulations and cash flow limitations, combined with other recent Venezuelan regulations and the impact of declining oil prices on the Venezuelan economy, had significantly restricted Ashland’s ability to conduct normal business operations through the joint venture arrangement. Ashland determined this divestiture did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results, and thus it did not qualify for discontinued operations treatment.
Elastomers
On October 9, 2014, Ashland entered into a definitive agreement to sell the Elastomers division of the Performance Materials reportable segment, which operated a 250 -person manufacturing facility in Port Neches, Texas, to Lion Copolymer Holdings, LLC. The Elastomers division, which primarily served the North American replacement tire market, accounted for approximately 5% of Ashland's 2014 sales of $6.1 billion and 18% of Ashland Performance Materials' $1.6 billion in sales in 2014. The sale was completed on December 1, 2014 in a transaction valued at approximately $120 million which was subject to working capital adjustments. The total post-closing adjusted cash proceeds received before taxes by Ashland during 2015 was $105 million , which included working capital adjustments and transaction costs, as defined in the definitive agreement.

9

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

 
NOTE C – DIVESTITURES (continued)



Elastomers' net assets as of November 30, 2014 were $191 million which primarily included accounts receivable, inventory, property, plant and equipment, non-deductible goodwill and other intangibles and payables. Since the net proceeds received were less than book value, Ashland recorded a loss of $86 million pre-tax, using Level 2 nonrecurring fair value measurements, within the net loss on divestitures caption within the Statements of Consolidated Comprehensive Income during 2015. The related tax effect was a benefit of $28 million included in the income tax expense caption within the Statements of Consolidated Comprehensive Income.
Ashland determined that the sale of Elastomers did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results. As such, Elastomers' results were included in the Performance Materials reportable segment results of operations and financial position within the Statements of Consolidated Comprehensive Income and Condensed Consolidated Balance Sheets, respectively, until its December 1, 2014 sale.
MAP Transaction
As part of the 2005 transfer of Ashland's 38% interest in the Marathon Ashland Petroleum LLC (MAP) 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. During January 2015, as a result of an asbestos settlement, Ashland recorded a $7 million charge within the net loss on divestitures caption of the Statements of Consolidated Comprehensive Income. See Note L for more information related to this asbestos insurance settlement.
NOTE D –   DISCONTINUED OPERATIONS
In previous periods, Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income for all periods presented and are discussed further within this note.
Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, which qualified as a discontinued operation, and from the 2009 acquisition of Hercules, a wholly-owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations. During the nine months ended June 30, 2015 , Ashland recorded an after-tax gain of $120 million within discontinued operations due to the January 2015 asbestos insurance settlement. See Note L for more information related to the adjustments on asbestos liabilities and receivables.
On July 31, 2014, Ashland completed the sale of the Ashland Water Technologies (Water Technologies) business to Clayton, Dubilier & Rice. Ashland has made certain post-closing adjustments as defined by the definitive agreement during the three and nine months ended June 30, 2016 and 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 nine months ended June 30, 2016 and 2015 .

10

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

 
 
 
NOTE D – DISCONTINUED OPERATIONS (continued)

 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2016

 
2015

 
2016

 
2015

Income (loss) from discontinued operations (net of tax)
 
 
 
 
 
 
 
Asbestos-related litigation
$
(30
)
 
$
(10
)
 
$
(30
)
 
$
110

Water Technologies
3

 
2

 
2

 

Gain on disposal of discontinued operations (net of tax)
 

 
 

 
 

 
 

Water Technologies
1

 

 

 
3

Total income (loss) from discontinued operations (net of tax)
$
(26
)
 
$
(8
)
 
$
(28
)
 
$
113

NOTE E – RESTRUCTURING ACTIVITIES
Ashland periodically implements company-wide restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business.
Severance costs
During 2014, Ashland announced a global restructuring program to streamline the resources used across the organization. As part of this global restructuring program, Ashland executed a voluntary severance offer (VSO) to certain U.S. employees and an involuntary program for certain employees. Substantially all payments related to the VSO and involuntary programs were paid by the end of fiscal year 2015. As of June 30, 2016 and September 30, 2015 , the remaining restructuring reserve for this global restructuring program was $1 million and $7 million , respectively. Additional restructuring reserves of $1 million for other previously announced programs also remained as of June 30, 2016 and September 30, 2015         
Facility costs
In prior years, Ashland incurred lease abandonment charges related to its exit from an office facility that was obtained as part of the Hercules acquisition. As of September 30, 2015 , the remaining restructuring reserve for all qualifying facility costs totaled $3 million . During the nine months ended June 30, 2016 , all remaining lease payments were made, reducing the reserve to zero as of June 30, 2016 .
The following table summarizes the related activity in these reserves for the nine months ended June 30, 2016 and 2015 .  The severance reserves and facility costs reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.
 
 
 
Facility

 
 
(In millions)
Severance

 
costs

 
Total

Balance as of September 30, 2015
$
8

 
$
3

 
$
11

Utilization (cash paid)
(6
)
 
(3
)
 
(9
)
Balance as of June 30, 2016
$
2

 
$

 
$
2

 
 
 
 
 
 
Balance as of September 30, 2014
$
56

 
$
9

 
$
65

Reserve adjustments
(2
)
 
(2
)
 
(4
)
Utilization (cash paid)
(41
)
 
(3
)
 
(44
)
Balance as of June 30, 2015
$
13

 
$
4

 
$
17


11

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

 
 
 
NOTE E – RESTRUCTURING ACTIVITIES (continued)

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 three and nine months ended June 30, 2015 , restructuring charges of $2 million and $20 million , respectively, were recorded within the cost of sales caption of the Statements of Consolidated Comprehensive Income. As of September 30, 2015 , the remaining restructuring reserve related to severance for the Specialty Ingredients manufacturing facility totaled $13 million . During the nine months ended June 30, 2016 , the severance reserve was reduced by a $5 million reversal of the accrual, as well as reclassifications of certain non-severance related costs, and was fully paid as of June 30, 2016 . The severance reserve was included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.
NOTE F – FAIR VALUE MEASUREMENTS
As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value.  Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement.  The three levels within the fair value hierarchy are described as follows.
Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date.  Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability.  The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.  For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.
The following table summarizes financial instruments subject to recurring fair value measurements as of June 30, 2016 .

12

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

(In millions)
Carrying
value

 
Total
fair
value

 
Quoted prices
in active
markets for
identical
assets
Level 1

 
Significant
other
observable
inputs
Level 2

 
Significant
unobservable
inputs
Level 3

Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,215

 
$
1,215

 
$
1,215

 
$

 
$

Restricted investments (a)
322

 
322

 
322

 

 

Deferred compensation investments (b)
186

 
186

 
38

 
148

 

Investments of captive insurance company (b)
4

 
4

 
4

 

 

Foreign currency derivatives
4

 
4

 

 
4

 

Total assets at fair value
$
1,731

 
$
1,731

 
$
1,579

 
$
152

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
4

 
$
4

 
$

 
$
4

 
$

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

 
Total
fair
value

 
Quoted prices
in active
markets for
identical
assets
Level 1

 
Significant
other
observable
inputs
Level 2

 
Significant
unobservable
inputs
Level 3

Assets
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
1,257

 
$
1,257

 
$
1,257

 
$

 
$

Restricted investments (a)
315

 
315

 
315

 

 

Deferred compensation investments (b)
180

 
180

 
40

 
140

 

Investments of captive insurance company (b)
4

 
4

 
4

 

 

Foreign currency derivatives
13

 
13

 

 
13

 

Total assets at fair value
$
1,769

 
$
1,769

 
$
1,616

 
$
153

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
16

 
$
16

 
$

 
$
16

 
$

 
 
 
 
 
 
 
 
 
 
(a)
Included in restricted investments and $30 million within other current assets in the Condensed Consolidated Balance Sheets.
(b)
Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.
Restricted investments
On January 13, 2015, Ashland and Hercules, a wholly owned subsidiary of Ashland that was acquired in 2009, entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity Company and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). During the March 2015

13

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

quarter, Ashland placed $335 million of the settlement funds from the January 2015 asbestos insurance settlement into a renewable annual trust restricted for the purpose of paying ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims. These funds were classified primarily as noncurrent restricted investment assets, with $30 million classified within other current assets, in the Condensed Consolidated Balance Sheets as of June 30, 2016 and September 30, 2015 .
During the June 2015 quarter, Ashland diversified the restricted investments received from the January 2015 asbestos insurance settlement into primarily equity and corporate bond mutual funds that are designated as available-for-sale securities, classified as Level 1 measurements within the fair value hierarchy. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in the stockholders' equity section of the Condensed Consolidated Balance Sheets as a component of accumulated other comprehensive income (AOCI). Investment income and realized gains and losses on the available-for-sale securities are reported in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income. The following table provides a summary of the available-for-sale securities portfolio as of June 30, 2016 and September 30, 2015 :
 
Demand

 
Equity

 
Corporate Bond

 
 
(In millions)
Deposit

 
Mutual Fund

 
Mutual Fund

 
Total

As of June 30, 2016
 
 
 
 
 
 
 
Original cost
$
20

 
$
195

 
$
120

 
$
335

Accumulated investment income
 
 
 
 
 
 


and disbursements, net
(3
)
 

 

 
(3
)
Adjusted cost (a)
17

 
195

 
120

 
332

Investment income (b)
6

 

 

 
6

Unrealized gain

 
1

 
3

 
4

Purchases (sales)
4

 
(4
)
 

 

Settlement funds
4

 

 

 
4

Disbursements
(24
)
 

 

 
(24
)
Fair value
$
7

 
$
192

 
$
123

 
$
322

 
 
 
 
 
 
 
 
As of September 30, 2015
 
 
 
 
 
 
 
Original cost
$
20

 
$
195

 
$
120

 
$
335

Investment income (b)
3

 

 

 
3

Unrealized loss

 
(14
)
 
(3
)
 
(17
)
Disbursements
(6
)
 

 

 
(6
)
Fair value
$
17

 
$
181

 
$
117

 
$
315

 
 
 
 
 
 
 
 
(a) The adjusted cost of the demand deposit includes accumulated investment income and disbursements recorded in previous periods.
(b)
Investment income for the demand deposit includes interest income as well as dividend income transferred from the equity and corporate bond mutual funds.
The unrealized gains and losses as of June 30, 2016 and September 30, 2015 were recognized within AOCI. Ashland invests in highly-rated investment grade mutual funds. No realized gain or loss was reclassified out of AOCI and no other-than-temporary impairment was recognized in AOCI during the three and nine months ended June 30, 2016 .
The following table presents the investment income and disbursements related to the demand deposit for the three and nine months ended June 30, 2016 and 2015 .

14

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2016

 
2015

 
2016

 
2015

Investment income
$
2

 
$
1

 
$
6

 
$
1

Disbursements
(1
)
 

 
(24
)
 

Deferred compensation investments
Deferred compensation investments consist of Level 1 and Level 2 measurements within the fair value hierarchy. Level 1 investments consist primarily of fixed income U.S. government bonds while Level 2 investments are comprised primarily of a guaranteed interest fund, a common stock index fund and an intermediate government bond fund. Gains and losses related to deferred compensation investments are immediately recognized within the Statements of Consolidated Comprehensive Income.
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 valued at fair value 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 nine months ended June 30, 2016 and 2015 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2016

 
2015

 
2016

 
2015

Foreign currency derivative gain (loss)
$
(3
)
 
$
9

 
$
1

 
$
(7
)
The following table summarizes the fair values of the outstanding foreign currency derivatives as of June 30, 2016 and September 30, 2015 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.
 
June 30

 
September 30

(In millions)
2016

 
2015

Foreign currency derivative assets
$
3

 
$
5

Notional contract values
225

 
192

 
 
 
 
Foreign currency derivative liabilities
$
4

 
$
16

Notional contract values
386

 
673

Net investment hedges
Since 2014, Ashland has entered into foreign currency contracts in order to manage the foreign currency exposure of the net investment in certain foreign operations. These foreign currency contracts were primarily

15

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

the result of certain proceeds from the sale of Water Technologies being received in non-U.S. denominated currencies during 2014 and ongoing management of the volatility in foreign currency exchange rates. Ashland designated the foreign currency contracts as hedges of net investments in its foreign subsidiaries. As a result, Ashland records these hedges at fair value using forward rates, with the effective portion of the gain or loss reported as a component of the cumulative translation adjustment within AOCI and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affects net income . During 2016 and 2015, these foreign currency contracts were settled and Ashland entered into new foreign currency contracts designated as hedges of net investments in foreign subsidiaries. These settlements resulted in net gains and losses recorded within the cumulative translation adjustment within AOCI, including a net loss of $1 million and a net gain of $6 million for the three and nine months ended June 30, 2016 , respectively, and a net gain of $12 million for the three and nine months ended June 30, 2015 .
As of June 30, 2016 and September 30, 2015 , the total notional value of foreign currency contracts equaled $95 million and $175 million , respectively. The fair value of Ashland's net investment hedge assets and liabilities are calculated using forward rates. Accordingly, these instruments are deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these net investment hedges are highly rated financial institutions which Ashland believes carry only a nominal risk of nonperformance. The following table summarizes the fair value of the outstanding net investment hedge instruments as of June 30, 2016 and September 30, 2015 .
 
 
June 30

 
September 30

(In millions)
Consolidated balance sheet caption
2016

 
2015

Net investment hedge assets
Accounts receivable
$
1

 
$
8

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

 

 
 
 
 
 
(a)
Fair value of $0 denotes a value less than $1 million.
The following table summarizes the change in the unrealized gain (loss) on the net investment hedge instruments recognized within the cumulative translation adjustment within AOCI during the three and nine months ended June 30, 2016 and 2015 . No portion of the gain or loss was reclassified to income during the three and nine months ended June 30, 2016 and 2015 . There was no hedge ineffectiveness with these instruments during the three and nine months ended June 30, 2016 and 2015 .
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2016

 
2015

 
2016

 
2015

Change in unrealized gain in AOCI (a)
$

 
$
2

 
$

 
$
2

Tax impact of change in unrealized gain in AOCI (a)
(1
)
 
(1
)
 

 
(1
)
 
 
 
 
 
 
 
 
(a)
$0 denotes a value less than $1 million.
Other financial instruments
At June 30, 2016 and September 30, 2015 , Ashland’s long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $3,396 million and $3,431 million , respectively, compared to a fair value of $3,516 million and $3,484 million , respectively.  The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates, which are deemed to be Level 2 measurements within the fair value hierarchy.

16

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

 
NOTE G – INVENTORIES

Inventories are carried at the lower of cost or market.  Inventories are primarily stated at cost using the weighted-average cost method. In addition, certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.  
The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
June 30

 
September 30

(In millions)
2016

 
2015

Finished products
$
515

 
$
542

Raw materials, supplies and work in process
187

 
198

LIFO reserve
(25
)
 
(34
)
 
$
677

 
$
706

NOTE H – GOODWILL AND OTHER INTANGIBLES
Goodwill
Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually or when events and circumstances indicate an impairment may have occurred.  This annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value.  For its July 1, 2015 assessment, Ashland determined that its reporting units for allocation of goodwill included the Specialty Ingredients and Valvoline reportable segments, and the Composites and Intermediates/Solvents reporting units within the Performance Materials reportable segment, and determined at that time that no impairment existed.
The following is a progression of goodwill by reportable segment for the nine months ended June 30, 2016 .
 
Specialty

 
Performance

 
 
 
 

(In millions)
Ingredients

 
Materials

(a)
Valvoline

 
Total

Balance as of September 30, 2015
$
2,004

 
$
313

 
$
169

 
$
2,486

Acquisitions (b)

 

 
86

 
86

Currency translation adjustment
(10
)
 
5

 

 
(5
)
Balance as of June 30, 2016
$
1,994

 
$
318

 
$
255

 
$
2,567

 
 
 
 
 
 
 
 
(a)
As of June 30, 2016 , goodwill consisted of $171 million for the Intermediates/Solvents reporting unit and $147 million for the Composites reporting unit.
(b)
Relates to $83 million for the acquisition of Oil Can Henry's and $3 million for Valvoline Instant Oil Change SM center acquisitions during the nine months ended June 30, 2016 . See Note B for more information on the acquisition of Oil Can Henry's.
Other intangible assets
Intangible assets principally consist of trademarks and trade names, intellectual property and customer relationships. Intangible assets classified as finite are amortized on a straight-line basis over their estimated useful lives.  The cost of trademarks and trade names is amortized principally over 3 to 25 years, intellectual property over 5 to 20 years, and customer relationships over 3 to 24 years.
As of September 30, 2015 , in-process research and development (IPR&D) and certain intangible assets within trademarks and trade names were classified as indefinite-lived and had a balance of $311 million . During the nine months ended June 30, 2016 , Ashland started amortizing the remaining IPR&D assets since the technology was commercialized during this period. As a result, as of June 30, 2016 , the indefinite-lived intangible assets consisted only of certain trademarks and trade names of $301 million . Ashland annually reviews indefinite-

17

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

 
 
 
NOTE H – GOODWILL AND OTHER INTANGIBLES (continued)

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 June 30, 2016 and September 30, 2015 .
 
 
June 30, 2016
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names (a)
$
52

 
$
(43
)
 
$
9

Intellectual property
821

 
(300
)
 
521

Customer relationships
423

 
(168
)
 
255

Total definite-lived intangible assets
1,296

 
(511
)
 
785

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
301

 

 
301

Total intangible assets
$
1,597

 
$
(511
)
 
$
1,086

 
 
 
 
 
 
(a)
Acquired trade names during the nine months ended June 30, 2016 had gross carrying amounts of $2 million for Oil Can Henry's. See Note B for more information on the acquisition of Oil Can Henry's.
 
September 30, 2015
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
48

 
$
(41
)
 
$
7

Intellectual property
813

 
(266
)
 
547

Customer relationships
424

 
(147
)
 
277

Total definite-lived intangible assets
1,285

 
(454
)
 
831

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
IPR&D
8

 

 
8

Trademarks and trade names
303

 

 
303

Total intangible assets
$
1,596

 
$
(454
)
 
$
1,142

Amortization expense recognized on intangible assets was $19 million for each of the three months ended June 30, 2016 and 2015 , and $57 million and $60 million for the nine months ended June 30, 2016 and 2015 , 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 $77 million in 2016 (includes nine months actual and three months estimated), $77 million in 2017 , $76 million in 2018 , $72 million in 2019 and $71 million in 2020 . The amortization expense for future periods is an estimate. Actual amounts may change from such estimated amounts due to fluctuations in foreign currency exchange rates, additional intangible asset acquisitions and divestitures, potential impairment, accelerated amortization, or other events.

18

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

 
 
 
NOTE I – DEBT

The following table summarizes Ashland’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets.
 
June 30

 
September 30

(In millions)
2016

 
2015

4.750% notes, due 2022
$
1,121

 
$
1,120

Term Loan, due 2020
1,045

 
1,086

3.875% notes, due 2018
700

 
700

Revolving credit facility
500

 
110

6.875% notes, due 2043
376

 
376

6.50% junior subordinated notes, due 2029  
139

 
136

Accounts receivable securitization
195

 
190

Other international loans, interest at a weighted-
 

 
 

average rate of 4.9% at June 30, 2016 (4.8% to 5.0%)
20

 
25

Medium-term notes, due 2019, interest of 9.4% at June 30, 2016
5

 
5

Other (a)
(14
)
 
(19
)
Total debt
4,087

 
3,729

Short-term debt
(716
)
 
(326
)
Current portion of long-term debt
(55
)
 
(55
)
Long-term debt (less current portion and debt issuance cost discounts)
$
3,316

 
$
3,348

 
 
 
 
(a)
Other includes $25 million and $28 million of debt issuance cost discounts as of June 30, 2016 and September 30, 2015 , respectively.

The scheduled aggregate maturities of long-term debt by year (including the current portion and excluding debt issuance costs) are as follows:  $14 million remaining in 2016 , $69 million in 2017 , $810 million in 2018 , $143 million in 2019 and $715 million in 2020 .  The borrowing capacity remaining under the $1.2 billion senior unsecured revolving credit facility (the 2015 revolving credit facility) was $625 million , due to an outstanding balance of $500 million , as well as a reduction of $75 million for letters of credit outstanding at June 30, 2016 . Ashland's total borrowing capacity at June 30, 2016 was $648 million , which includes $23 million of available capacity from the accounts receivable securitization facility.
Amendment to 2015 Senior Credit Agreement
During July 2016, Ashland amended the 2015 Senior Credit Agreement. The amendment permits the reorganization of Ashland into a subsidiary of Ashland Global and defines the series of events causing the separation of Valvoline for purposes of the 2015 Senior Credit Agreement. Additionally, the amendment provides that once the aggregate principal amount of the Valvoline debt reaches $750 million , Ashland is required to use the net proceeds of such borrowings to repay its existing term loan A loan and/or permanently reduce its existing revolving credit commitments under the 2015 Senior Credit Agreement in an aggregate amount of up to $1 billion . During July 2016, as a result of the repayment of a portion of the outstanding balance of the 2015 revolving credit facility, Ashland’s borrowing capacity was decreased to $1.1 billion .
Accounts receivable securitization
During the December 2015 quarter, the Transfer and Administration Agreement was amended to extend the termination date of the accounts receivable securitization facility from December 31, 2015 to March 22, 2017. No other changes to the agreement within the current year amendments are expected to have a significant impact to Ashland's results of operations and financial position.

19

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

 
 
 
NOTE I – DEBT (continued)

Valvoline Debt
Valvoline Credit Agreement
During July 2016, Valvoline Finco One LLC (Valvoline Finco), a Delaware limited liability company and a wholly owned, newly formed finance subsidiary of Valvoline US LLC (Valvoline US), entered into a Credit Agreement (the Valvoline Credit Agreement). The Valvoline Credit Agreement provides for an aggregate principal amount of $1,325 million in senior secured credit facilities (Valvoline Credit Facilities), comprised of (i) a five-year $875 million term loan A facility and (ii) a five-year $450 million revolving credit facility (including a $100 million letter of credit sublimit). The Valvoline Credit Facilities were undrawn as of the signing date. Proceeds of borrowings under the Valvoline Credit Facilities will be used, among other things, (i) to repay existing Ashland debt, (ii) to pay fees and expenses related to the Valvoline Credit Facilities and (iii) for ongoing working capital and general corporate purposes. The Valvoline Credit Facilities may be prepaid at any time without premium.
Effective at the time of the initial funding, the Valvoline Credit Facilities will be guaranteed by Valvoline Inc.’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, foreign subsidiaries and certain other subsidiaries), and will be secured by a first-priority security interest in substantially all the personal property assets, and certain real property assets, of Valvoline Inc. and the guarantors, including all or a portion of the equity interests of certain of Valvoline Inc.’s domestic subsidiaries and first-tier foreign subsidiaries and, in certain cases, a portion of the equity interests of other foreign subsidiaries.
At Valvoline Finco's option, the loans issued under the Valvoline Credit Agreement will bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. Loans will initially bear interest at LIBOR plus 2.375% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.375% , in the alternative, through and including the date of delivery of a quarterly compliance certificate and thereafter the interest rate will fluctuate between LIBOR plus 1.500% per annum and LIBOR plus 2.500% per annum (or between the alternate base rate plus 0.500% per annum and the alternate base rate plus 1.500% annum), based upon Valvoline Finco’s corporate credit ratings or the consolidated first lien net leverage ratio (as defined in the Valvoline Credit Agreement) (whichever yields a lower applicable interest rate margin) at such time.
Valvoline senior notes
During July 2016, Valvoline Finco Two LLC (Valvoline Finco Two), a Delaware limited liability company and a wholly owned, newly formed subsidiary of Valvoline US, completed its issuance of 5.500% senior unsecured notes due 2024 (2024 notes) with an aggregate principal amount of $375 million . The 2024 notes are unsecured obligations of Valvoline Finco Two. Following the transfer by Ashland to Valvoline Inc. of substantially all of the Valvoline business, as well as other assets and liabilities, Valvoline Finco Two plans to merge with and into Valvoline Inc., and Valvoline Inc. expects to assume all of Valvoline Finco Two’s obligations under the 2024 notes (Assumption). The 2024 notes are initially guaranteed on an unsubordinated unsecured basis by Ashland (Ashland Guarantee). The Ashland Guarantee will automatically be released upon the Assumption.
During July 2016, Valvoline Finco Two transferred the net proceeds of the offering of $370 million (after deducting initial purchasers’ discounts and other fees and expenses) to Ashland. Ashland repaid $110 million of the outstanding balance under Ashland’s 2015 revolving credit facility and $260 million of the Ashland term loan facility.

20

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

 
 
 
NOTE I – DEBT (continued)

Covenant restrictions
Ashland and Valvoline's debt contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional subsidiary indebtedness, restrictions on subsidiary distributions, investments, mergers, sale of assets and restricted payments and other customary limitations.   As of June 30, 2016 , Ashland is in compliance with all debt agreement covenant restrictions under the 2015 Senior Credit Agreement.
Financial covenants
The maximum consolidated leverage ratios permitted under Ashland's most recent credit agreement (the 2015 Senior Credit Agreement) are as follows: 3.75 from June 30, 2015 through December 31, 2016 and 3.5 from March 31, 2017 and each fiscal quarter thereafter.  At June 30, 2016 , Ashland’s calculation of the consolidated leverage ratio was 3.0 , which is below the maximum consolidated leverage ratio of 3.75 .
The minimum required consolidated interest coverage ratio under the 2015 Senior Credit Agreement during its entire duration is 3.0 .  At June 30, 2016 , Ashland’s calculation of the interest coverage ratio was 6.0 , which exceeds the minimum required consolidated ratio of 3.0 .
NOTE J – INCOME TAXES
Current fiscal year
Ashland’s estimated annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2016 is 26% . Ashland’s effective tax rate in any interim period is subject to adjustments related to discrete items and the mix of domestic and foreign operating results.  The overall effective tax rate was 30% and 22% for the three and nine months ended June 30, 2016 , respectively. The current quarter and period tax rate was impacted by net unfavorable and favorable tax discrete items of $1 million and $12 million , respectively. The favorable items primarily relate to the law change from the reinstatement of the research and development credit, a favorable tax liquidation resolution and the reversal of unrecognized tax benefits due to lapse of the statute of limitations.
Prior fiscal year
Ashland’s annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2015 was 25% . The overall effective tax rate was 19% and 18% for the three and nine months ended June 30, 2015 , respectively. The prior year quarter and period tax rate was impacted by net favorable tax discrete items of $7 million and $10 million , respectively, primarily related to recording return to provision adjustments for foreign and domestic entities. These favorable tax discrete adjustments were partially offset by an accrual for an unrecognized tax benefit. The prior year period tax rate was also impacted by the release of a valuation reserve on certain deferred taxes.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the nine months ended June 30, 2016 .

21

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

 
 
 
NOTE J – INCOME TAXES (continued)

 (In millions)
 

Balance at October 1, 2015
$
144

Increases related to positions taken on items from prior years
4

Decreases related to positions taken on items from prior years
(4
)
Increases related to positions taken in the current year
12

Lapse of the statute of limitations
(2
)
Settlement of uncertain tax positions with tax authorities
(3
)
Balance at June 30, 2016
$
151

In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $3 million for continuing operations and zero for discontinued operations related primarily to audit settlements and statute of limitations expirations in various tax jurisdictions. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.
On September 22, 2015, Ashland announced that the Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the new Ashland and Valvoline. The separation is expected to be tax free for Ashland shareholders; however, there could be material one-time tax costs incurred by Ashland associated with internal restructuring steps that will be recorded in subsequent quarters as plans are finalized.
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 nine months ended June 30, 2015 within selling, general and administrative expenses in the Statements of Consolidated Comprehensive Income.
NOTE K – EMPLOYEE BENEFIT PLANS
For the nine months ended June 30, 2016 , Ashland contributed $15 million to its non-qualified U.S. pension plans and $9 million to its non-U.S. pension plans. No contributions were made to Ashland's qualified U.S. pension plans during the nine months ended June 30, 2016 . Ashland expects to make additional contributions to the non-qualified U.S. plans of approximately $7 million and to the non-U.S. plans of approximately $6 million during the remainder of 2016 .
Plan Amendments and Remeasurements
During March 2016, Ashland announced plans to amend the majority of its U.S. pension plans, with the exception of certain union plans, to freeze the accrual of pension benefits for participants. The plan changes will be effective September 30, 2016. Additionally, Ashland announced that it will reduce retiree life and medical benefits effective October 1, 2016 and January 1, 2017, respectively. The net effect of these plan changes resulted in a curtailment of benefits requiring a remeasurement of the benefit obligation and plan assets. Ashland recognized a loss of $23 million within the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2016 as a result of the plan remeasurements. The following details the components of the remeasurement impact:
As a result of the remeasurement of the affected U.S. pension plans, Ashland recognized a curtailment gain of $65 million and actuarial loss of $123 million during the nine months ended June 30, 2016 .

22

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

 
 
 
NOTE K – EMPLOYEE BENEFIT PLANS (continued)

As a result of the remeasurement of other postretirement benefit plans, Ashland recognized a curtailment gain of $39 million and actuarial loss of $7 million during the nine months ended June 30, 2016 . This remeasurement reduced the benefit obligations by $86 million , which will be amortized to income in future periods.
Ashland was also required to remeasure a non-U.S. pension plan during the March 2016 quarter and as a result recognized a curtailment gain of $6 million and actuarial loss of $3 million during the nine months ended June 30, 2016 .
During the nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 2015 .
2015 Pension plan settlement program
During the June 2015 quarter, Ashland informed approximately 20,000 former employees, who were included in the approximately 53,000 participants within the primary U.S. pension plans, that Ashland was offering these participants the option of receiving a lump sum payment on their vested retirement benefit or a reduced annuity now, in lieu of receiving monthly annuity payments deferred until retirement eligibility or when the participant may choose to initiate payment. Ashland also made a voluntary contribution during the June 2015 quarter of $500 million to the U.S. pension plans impacted by the pension plan settlement program. Settlement payments were made from pension plan assets and the resulting adjustment was recorded to income during September 2015.
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.

23

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

 
 
 
NOTE K – EMPLOYEE BENEFIT PLANS (continued)

Components of net periodic benefit costs (income)
The following table details the components of pension and other postretirement benefit costs.
 
 
 
 
 
Other postretirement
 
Pension benefits
 
benefits
(In millions)
2016

 
2015

 
2016

 
2015

Three months ended June 30
 
 
 
 
 
 
 
Service cost (a)
$
7

 
$
7

 
$

 
$

Interest cost
27

 
43

 
1

 
2

Expected return on plan assets
(46
)
 
(53
)
 

 

Amortization of prior service credit (a)

 
(1
)
 
(3
)
 
(4
)
 
$
(12
)
 
$
(4
)
 
$
(2
)
 
$
(2
)
 
 
 
 
 
 
 
 
Nine months ended June 30
 

 
 

 
 

 
 

Service cost
$
20

 
$
20

 
$
1

 
$
1

Interest cost
89

 
131

 
3

 
6

Expected return on plan assets
(141
)
 
(162
)
 

 

Amortization of prior service credit
(1
)
 
(2
)
 
(11
)
 
(13
)
Curtailment
(71
)
 
(7
)
 
(39
)
 

Actuarial loss
126

 
11

 
7

 

 
$
22

 
$
(9
)
 
$
(39
)
 
$
(6
)
 
 
 
 
 
 
 
 
(a)
Activity of $0 denote values less than $1 million.
Change in Applying Discount Rate to Measure Benefit Costs
During the December 2015 quarter, Ashland changed the method used to estimate the service and interest cost components of net periodic benefit cost for pension and other postretirement benefits. This change compared to the previous method resulted in a decrease in the service and interest cost components for pension and other postretirement benefit costs during the quarter. Historically, Ashland estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Ashland has elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Ashland has made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of Ashland's total benefit obligations or annual net periodic benefit costs as the change in the service and interest costs will be offset in the actuarial gain or loss reported, which typically occurs during the fourth fiscal quarter. Ashland has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has accounted for it prospectively.
The impact of this discount rate change compared to the previous method will decrease estimated pension and other postretirement benefits service and interest cost by approximately $33 million for the full year 2016. The decrease during the three and nine months ended June 30, 2016 was approximately $8 million and $24 million , respectively, with substantially all of the decrease attributable to interest cost. The impact on service cost is not significant due to the nature of Ashland’s largest U.S. pension plan, which is closed to new entrants and has curtailed other benefits. Of this expected annual decrease and based on plan demographics, approximately $13 million will be reported in cost of sales and approximately $20 million will be reported in selling, general, and administrative expense on a full year basis, or approximately $3 million and $5 million

24

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

 
 
 
NOTE K – EMPLOYEE BENEFIT PLANS (continued)

on a quarterly basis, respectively, within the Statements of Consolidated Comprehensive Income in the Unallocated and other segment. Service and interest cost, as well as the other components of net periodic benefit costs, are subject to change for such reasons as an event requiring a remeasurement. Ashland's total projected benefit obligations will not be impacted by these reductions in service and interest costs as the decrease will be substantially offset within the actuarial gain or loss caption when the plans are remeasured during the fiscal year.
NOTE L – LITIGATION, CLAIMS AND CONTIGENCIES
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.
 
Nine months ended
 
 
 
 
 
 
 
June 30
 
  Years ended September 30