Ashland Global Holdings Inc.
ASHLAND GLOBAL HOLDINGS INC (Form: 10-Q, Received: 01/27/2017 16:07:20)


 
 
 
 
 

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

___________________________
 
FORM 10-Q
                 
(Mark One)
 
 
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 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 GLOBAL HOLDINGS INC.

(a Delaware corporation)
I.R.S. No. 81-2587835

50 E. RiverCenter Boulevard
Covington, Kentucky 41011
Telephone Number (859) 815-3333

Indicate by check mark whether the Registrant: (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ No  o     
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.  (Check One):
 
 Large Accelerated Filer þ
 
 Accelerated Filer o   
 
 Non-Accelerated Filer o
 
Smaller Reporting Company o   
 
 (Do not check if a smaller reporting company.)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No þ
At December 31, 2016, there were 62,216,863 shares of Registrant’s Common Stock outstanding.
 
 
 
 
 




PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
 
 
 
 
 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
 
 
 
 
 
 
Three months ended
 
December 31
(In millions except per share data - unaudited)
2016

 
2015

Sales
$
1,193

 
$
1,163

Cost of sales
807

 
771

Gross profit
386

 
392

 
 
 
 
Selling, general and administrative expense
239

 
224

Research and development expense
23

 
25

Equity and other income
13

 
8

Operating income
137

 
151

 
 
 
 
Net interest and other financing expense
132

 
42

Net gain (loss) on divestitures
(1
)
 
2

Income from continuing operations before income taxes
4

 
111

Income tax expense (benefit) - Note I
(6
)
 
20

Income from continuing operations
10

 
91

Loss from discontinued operations (net of tax) - Note D

 
(2
)
Net income
10

 
89

Net income attributable to noncontrolling interest
11

 

Net income (loss) attributable to Ashland
$
(1
)
 
$
89

 
 
 
 
PER SHARE DATA
 
 
 
Basic earnings per share - Note L
 

 
 

Income (loss) from continuing operations attributable to Ashland
$
(0.01
)
 
$
1.39

Loss from discontinued operations

 
(0.02
)
Net income (loss) attributable to Ashland
$
(0.01
)
 
$
1.37

 
 
 
 
Diluted earnings per share - Note L
 

 
 

Income (loss) from continuing operations attributable to Ashland
$
(0.01
)
 
$
1.38

Loss from discontinued operations

 
(0.03
)
Net income (loss) attributable to Ashland
$
(0.01
)
 
$
1.35

 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.39

 
$
0.39

 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
 
 
Net income
$
10

 
$
89

Other comprehensive income (loss), net of tax - Note M
 
 
 
Unrealized translation loss
(146
)
 
(61
)
Pension and postretirement obligation adjustment
(1
)
 
(3
)
Unrealized gain on available-for-sale securities

 
6

Other comprehensive loss
(147
)
 
(58
)
Comprehensive income (loss)
(137
)
 
31

Comprehensive income attributable to noncontrolling interest
10

 

Comprehensive income (loss) attributable to Ashland
$
(147
)
 
$
31



SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
December 31

 
September 30

(In millions - unaudited)
2016

 
2016

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
704

 
$
1,188

Accounts receivable  (a)
858

 
894

Inventories - Note F
666

 
671

Other assets
106

 
113

Total current assets
2,334

 
2,866

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
4,283

 
4,343

Accumulated depreciation
2,097

 
2,119

Net property, plant and equipment
2,186

 
2,224

Goodwill - Note G
2,348

 
2,401

Intangibles - Note G
1,026

 
1,064

Restricted investments - Note E
297

 
292

Asbestos insurance receivable - Note K
194

 
196

Equity and other unconsolidated investments
60

 
57

Deferred income taxes
199

 
177

Other assets
419

 
420

Total noncurrent assets
6,729

 
6,831

Total assets
$
9,063

 
$
9,697

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note H
$
92

 
$
170

Current portion of long-term debt - Note H
15

 
19

Trade and other payables
458

 
541

Accrued expenses and other liabilities
451

 
486

Total current liabilities
1,016

 
1,216

Noncurrent liabilities
 

 
 

Long-term debt - Note H
2,825

 
3,055

Employee benefit obligations - Note J
1,040

 
1,080

Asbestos litigation reserve - Note K
674

 
686

Deferred income taxes
69

 
69

Other liabilities
438

 
426

Total noncurrent liabilities
5,046

 
5,316

Commitments and contingencies - Note K


 


Equity
 
 
 
Total Ashland stockholders' equity
3,175

 
3,347

Noncontrolling interest
(174
)
 
(182
)
Total equity
3,001

 
3,165

Total liabilities and equity
$
9,063

 
$
9,697

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $14 million at December 31, 2016 and September 30, 2016 .



SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

 
 
 
 
 
 
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED EQUITY

 
 
 


(In millions - unaudited)
Common
stock

 
Paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income (loss)

(a)
Noncontrolling interest

(b)
Total

BALANCE AT SEPTEMBER 30, 2016
$
1

 
$
923

 
$
2,704

 
$
(281
)

$
(182
)
 
$
3,165

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 

 
 
 
(1
)
 
 

11

 
10

Other comprehensive loss
 
 
 
 
 
 
(146
)
 
(1
)
 
(147
)
Regular dividends, $0.39 per common share
 

 
 

 
(24
)
 
 

 
 
 
(24
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 
 
 

   incentive and other plans (c)
 

 
(1
)
 
 
 
 

 
 
 
(1
)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
 
(2
)
 
(2
)
BALANCE AT DECEMBER 31, 2016
$
1

 
$
922

 
$
2,679

 
$
(427
)

$
(174
)
 
$
3,001

 
 
 
 
 
 
 
 
 
 
 
 
(a)
At December 31, 2016 and September 30, 2016 , the after-tax accumulated other comprehensive loss attributable to Ashland of $427 million and $281 million , respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $45 million and $46 million , respectively, net unrealized translation losses of $478 million and $333 million , respectively, and net unrealized gain on available-for-sale securities of $6 million . At December 31, 2016 and September 30, 2016 , amounts attributable to noncontrolling interest included unrecognized prior service credits of $9 million and net unrealized translation losses of $3 million and $2 million , respectively.
(b)
See Note B for discussion of Valvoline Inc. noncontrolling interest.
(c)
Common shares issued were 56,590 for the three months ended December 31, 2016 .























SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
Three months ended
 
December 31
(In millions - unaudited)
2016

 
2015

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
10

 
$
89

Loss from discontinued operations (net of tax)

 
2

Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
77

 
83

Original issue discount and debt issuance cost amortization
95

 
3

Deferred income taxes
2

 
3

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

 
5

Stock based compensation expense
6

 
8

Gain on early retirement of debt
(3
)
 

Gain on available-for-sale securities
(3
)
 
(2
)
Net loss (gain) on divestitures
1

 
(2
)
Pension contributions
(3
)
 
(4
)
Gain on post-employment plan remeasurement
(10
)
 

Change in operating assets and liabilities (a)
(156
)
 
(115
)
Total cash flows provided by operating activities from continuing operations
12

 
66

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

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

 
1

Purchase of operations - net of cash acquired

 
(4
)
Uses from sale of operations or equity investments

 
(2
)
Net purchase of funds restricted for specific transactions
(2
)
 

Reimbursements from restricted investments

 
7

Proceeds from the settlement of derivative instruments
4

 
7

Total cash flows used by investing activities from continuing operations
(41
)
 
(44
)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Repayment of long-term debt
(318
)
 
(14
)
Premium on long-term debt repayment
(5
)
 

Proceeds (repayment) from short-term debt
(78
)
 
319

Repurchase of common stock

 
(500
)
Debt issuance costs
(4
)
 

Cash dividends paid
(24
)
 
(24
)
Distributions to noncontrolling interest
(2
)
 

Excess tax benefits related to share-based payments
(4
)
 

Total cash flows used by financing activities from continuing operations
(435
)
 
(219
)
CASH USED BY CONTINUING OPERATIONS
(464
)
 
(197
)
Cash used by discontinued operations
 

 
 

Operating cash flows
(12
)
 
(10
)
Investing cash flows

 

Total cash used by discontinued operations
(12
)
 
(10
)
Effect of currency exchange rate changes on cash and cash equivalents
(8
)
 
(11
)
DECREASE IN CASH AND CASH EQUIVALENTS
(484
)
 
(218
)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
1,188

 
1,257

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
704

 
$
1,039

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




SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

5

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

 
 
 



NOTE A   SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation  
On September 20, 2016, Ashland was reincorporated under the laws of the State of Delaware through a tax-free reorganization under a new holding company structure (the 2016 Reorganization). As a result of the Reorganization, Ashland Global Holdings Inc. replaced Ashland Inc. as the publicly held corporation and, through its subsidiaries, now conducts all of the operations that historically were conducted by Ashland Inc. The Condensed Consolidated Financial Statements include the accounts of Ashland Global Holdings Inc. and its majority owned subsidiaries and, when applicable, entities for which Ashland has a controlling financial interest or is the primary beneficiary (Ashland).
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, 2016 .  Results of operations for the period ended December 31, 2016 are not necessarily indicative of the expected results for the remaining quarter in the fiscal year.
Ashland is composed of three reportable segments:  Ashland Specialty Ingredients (Specialty Ingredients), Ashland Performance Materials (Performance Materials) and Valvoline. As of December 31, 2016 , Ashland maintains an approximately 83% controlling interest in Valvoline Inc., which holds the Valvoline reportable segment. See Note B for additional information. The term Valvoline as used herein, depending on context, refers to either Valvoline Inc. or Valvoline as a reportable segment of Ashland.
Use of estimates, risks and uncertainties
The preparation of Ashland’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities.  Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and other 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 or 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, 2016 . The following standard relevant to Ashland was adopted in the current period.
In April 2015, the FASB issued accounting guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Cloud computing arrangements represent the delivery of hosted

6

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

 
 
 
NOTE A   SIGNIFICANT ACCOUNTING POLICIES (continued)
 

services over the internet which includes software, platforms, infrastructure and other hosting arrangements. Under the guidance, customers that gain access to software in a cloud computing arrangement account for the software as internal-use software only if the arrangement includes a software license. This guidance became effective prospectively for Ashland on October 1, 2016.
NOTE B – VALVOLINE
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 (now known as Ashland Global Holdings Inc.) and Valvoline Inc. The initial step of the separation, the initial public offering (IPO) of Valvoline Inc., closed on September 28, 2016. The new Ashland is a premier global leader in providing specialty chemical solutions to customers in a wide range of consumer and industrial markets. These markets are currently served by Specialty Ingredients and Performance Materials. Key markets and applications include pharmaceutical, personal care, food and beverage, architectural coatings, adhesives, automotive, construction and energy. Valvoline Inc., a controlled subsidiary, operates on a stand-alone basis as a premium consumer-branded lubricant supplier.
After completing the IPO on September 28, 2016, Ashland owns 170 million shares of Valvoline Inc.’s common stock, representing approximately 83% of the total outstanding shares of Valvoline Inc.’s common stock. Ashland presently intends to distribute the remaining Valvoline Inc. shares in 2017 following the release of March-quarter earnings results by both Ashland and Valvoline Inc.
The resulting outside stockholders’ interests in Valvoline Inc., which was approximately 17% as of December 31, 2016 and September 30, 2016 , are presented separately as a noncontrolling interest within Ashland’s equity in the Condensed Consolidated Balance Sheets. As of December 31, 2016 and September 30, 2016 , the noncontrolling interest was $174 million and $182 million , respectively. The amount of consolidated net income attributable to these minority holders is presented as a separate caption on the Statement of Consolidated Comprehensive Income.
During the three months ended December 31, 2016 and 2015 , Ashland recognized separation costs of $28 million and $6 million , respectively, which are primarily related to transaction and legal fees. Separation costs are primarily recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income.
Transferred Assets and Liabilities
As of September 30, 2016, Valvoline Inc. included substantially all of the Valvoline business as historically reported by Ashland, as well as certain other assets and liabilities transferred to Valvoline Inc. by Ashland as a part of the separation process. The largest transferred liabilities were the net pension and other postretirement plan liabilities, which include a substantial portion of the largest U.S. qualified pension plans and non-qualified U.S. pension plans. As of September 30, 2016, Valvoline Inc.’s net pension and other postretirement plan liabilities totaled approximately $900 million .
Other transferred assets and liabilities primarily consist of deferred compensation, certain Ashland legacy business insurance reserves, tax attributes and certain trade payables. The impact of these other transferring assets and liabilities during 2016 was approximately $15 million of net assets. Additionally, any deferred tax assets and liabilities that relate specifically to these assets and liabilities have been transferred to Valvoline Inc. as well as certain other tax liabilities as a result of the Tax Matters Agreement. For purposes of Ashland’s 2017 segment reporting and consistent with prior periods, these transferred assets and liabilities remain included within Unallocated and other.

7

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

 
NOTE B – VALVOLINE (continued)



Time-It Lube
On January 4, 2017, Valvoline announced that it signed a definitive agreement to acquire the business assets related to 28 quick-lube stores from Time-It Lube L.L.C. and Time-It Lube of Texas, LP (together, Time-It Lube) for $48 million . The stores are located in Louisiana and eastern Texas. The acquisition is expected to be completed in the second quarter of fiscal 2017. 
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 2016. The purchase price allocation primarily included $83 million of goodwill.
NOTE C - DIVESTITURES
Specialty Ingredients Joint Venture    
During September 2016, Ashland entered into a definitive sale agreement to sell its ownership interest in a Specialty Ingredients consolidated joint venture. Ashland recognized a loss of $12 million before tax in 2016 to recognize the assets at fair value less cost to sell, using Level 2 nonrecurring fair value measurements. The loss was reported within the net gain (loss) on divestitures caption within the Statement of Consolidated Comprehensive Income. The net assets held for sale are not material to Ashland’s Condensed Consolidated Balance Sheets.
Ashland determined this transaction 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 incurred. The disposition is expected to be completed during fiscal 2017.
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.
On July 31, 2014, Ashland completed the sale of the Ashland Water Technologies (Water Technologies) business to Clayton, Dubilier & Rice. Ashland made subsequent post-closing adjustments to the discontinued operations caption as defined by the definitive agreement during the three months ended December 31, 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 months ended December 31, 2016 and 2015 .

8

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

 
 
 
NOTE D – DISCONTINUED OPERATIONS (continued)

 
Three months ended
 
December 31
(In millions)
2016

 
2015

Loss on disposal of discontinued operations (net of tax)
 

 
 

Water Technologies
$

 
$
(2
)
Total loss from discontinued operations (net of tax)
$

 
$
(2
)
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.  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 December 31, 2016 .

9

 
 
 
 
 
 
ASHLAND GLOBAL HOLDINGS 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
$
704

 
$
704

 
$
704

 
$

 
$

Restricted investments (a)
327

 
327

 
327

 

 

Deferred compensation investments (b)
184

 
184

 
34

 
150

 

Investments of captive insurance company (b)
2

 
2

 
2

 

 

Foreign currency derivatives
17

 
17

 

 
17

 

Total assets at fair value
$
1,234

 
$
1,234

 
$
1,067

 
$
167

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
12

 
$
12

 
$

 
$
12

 
$

 
 
 
 
 
 
 
 
 
 
(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, 2016 .
(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
$
1,188

 
$
1,188

 
$
1,188

 
$

 
$

Restricted investments (a)
322

 
322

 
322

 

 

Deferred compensation investments (b)
185

 
185

 
35

 
150

 

Investments of captive insurance company (b)
4

 
4

 
4

 

 

Foreign currency derivatives
3

 
3

 

 
3

 

Total assets at fair value
$
1,702

 
$
1,702

 
$
1,549

 
$
153

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
5

 
$
5

 
$

 
$
5

 
$

 
 
 
 
 
 
 
 
 
 
(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 entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity Company and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). During the March 2015 quarter, Ashland placed $335 million of the settlement

10

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

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 December 31, 2016 and September 30, 2016 .
During 2015, Ashland diversified the restricted investments received from the January 2015 asbestos insurance settlement into primarily equity and corporate bond mutual funds that are designated as available-for-sale securities, classified as Level 1 measurements within the fair value hierarchy. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in the stockholders' equity section of the Condensed Consolidated Balance Sheets as a component of accumulated other comprehensive income (AOCI). Investment income and realized gains and losses on the available-for-sale securities are reported in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income. The following table provides a summary of the available-for-sale securities portfolio as of December 31, 2016 and September 30, 2016 :
 
December 31

 
September 30

(In millions)
2016

 
2016

Original cost
$
335

 
$
335

Accumulated investment income, settlement funds,
 
 
 
and disbursements, net
(24
)
 
(3
)
Adjusted cost (a)
311

 
332

Investment income (b)
3

 
8

Unrealized gain
13

 
11

Unrealized loss
(2
)
 

Settlement funds
2

 
4

Disbursements

 
(33
)
Fair value
$
327

 
$
322

 
 
 
 
(a)
The adjusted cost of the demand deposit includes accumulated investment income, disbursements and settlements 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 following table presents gross unrealized gains and losses for the available-for-sale securities as of December 31, 2016 and September 30, 2016 :

11

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

 
 
 
Gross

 
Gross

 
 
(In millions)
Adjusted Cost

 
Unrealized Gain

 
Unrealized Loss

 
Fair Value

As of December 31, 2016
 
 
 
 
 
 
 
Demand Deposit
$
11

 
$

 
$

 
$
11

Equity Mutual Fund
185

 
13

 

 
198

Corporate bond Mutual Fund
120

 

 
(2
)
 
118

Fair value
$
316

 
$
13

 
$
(2
)
 
$
327

 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
 
 
 
 
 
Demand Deposit
$
6

 
$

 
$

 
$
6

Equity Mutual Fund
185

 
8

 

 
193

Corporate bond Mutual Fund
120

 
3

 

 
123

Fair value
$
311

 
$
11

 
$

 
$
322


The unrealized gains and losses as of December 31, 2016 and September 30, 2016 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 months ended December 31, 2016 and 2015 .
The following table presents the investment income and disbursements related to the investments within the portfolio for the three months ended December 31, 2016 and 2015 .
 
Three months ended
 
December 31
(In millions)
2016

 
2015

Investment income
$
3

 
$
2

Disbursements

 
(7
)
Deferred compensation investments
Deferred compensation investments consist of Level 1 and Level 2 measurements within the fair value hierarchy. Level 1 investments consist primarily of fixed income U.S. government bonds while Level 2 investments are comprised primarily of a guaranteed interest fund, a common stock index fund and an intermediate government bond fund. Gains and losses related to deferred compensation investments are immediately recognized within the Statements of Consolidated Comprehensive Income.

12

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

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 months ended December 31, 2016 and 2015 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
December 31
(In millions)
2016

 
2015

Foreign currency derivative gain
$
2

 
$
3

The following table summarizes the fair values of the outstanding foreign currency derivatives as of December 31, 2016 and September 30, 2016 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.
 
December 31

 
September 30

(In millions)
2016

 
2016

Foreign currency derivative assets
$
15

 
$
3

Notional contract values
678

 
333

 
 
 
 
Foreign currency derivative liabilities
$
12

 
$
4

Notional contract values
629

 
530

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 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 the three months ended December 31, 2016 and 2015 , these foreign currency contracts were settled and for certain hedges Ashland entered into new foreign currency contracts designated as hedges of net investments in foreign subsidiaries. These settlements resulted in net gains, recorded within the cumulative translation adjustment within AOCI, of $4 million and $7 million for the three months ended December 31, 2016 and 2015 , respectively.

13

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

As of December 31, 2016 and September 30, 2016 , the total notional value of foreign currency contracts equaled $69 million and $94 million , respectively. The fair value of Ashland's net investment hedge assets and liabilities are calculated using forward rates. Accordingly, these instruments are deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these net investment hedges are highly rated financial institutions which Ashland believes carry only a nominal risk of nonperformance. The following table summarizes the fair value of the outstanding net investment hedge instruments as of December 31, 2016 and September 30, 2016 .
 
 
December 31

 
September 30

(In millions)
Consolidated balance sheet caption
2016

 
2016

Net investment hedge assets (a)
Accounts receivable
$
2

 
$

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

 
1

 
 
 
 
 
(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 months ended December 31, 2016 and 2015 . No portion of the gain or loss was reclassified to income during the three months ended December 31, 2016 and 2015 . There was no hedge ineffectiveness with these instruments during the three months ended December 31, 2016 and 2015 .
 
Three months ended
 
December 31
(In millions)
2016

 
2015

Change in unrealized gain in AOCI (a)
$
2

 
$

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

 
 
 
 
(a)
$0 denotes a value less than $1 million.
Other financial instruments
At December 31, 2016 and September 30, 2016 , Ashland’s consolidated long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $2,869 million and $3,103 million , respectively, compared to a fair value of $3,020 million and $3,336 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.

14

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

 
NOTE F – INVENTORIES (continued)

 
December 31

 
September 30

(In millions)
2016

 
2016

Finished products
$
512

 
$
516

Raw materials, supplies and work in process
182

 
184

LIFO reserves
(28
)
 
(29
)
 
$
666

 
$
671

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, 2016 assessment, Ashland determined that its reporting units for the allocation of goodwill include the Specialty Ingredients reportable segment, the Composites and Intermediates/Solvents reporting units within the Performance Materials reportable segment, and the Core North America, Quick Lubes and International reporting units within the Valvoline reportable segment. Based on the results of its goodwill impairment testing as of July 1, 2016, Ashland recorded a pre-tax goodwill impairment charge of $171 million for Intermediates/Solvents during the fourth quarter of 2016.
The following is a progression of goodwill by reportable segment for the three months ended December 31, 2016 .
 
Specialty

 
Performance

 
 
 
 

(In millions)
Ingredients

 
Materials

(a)
Valvoline

(b)
Total

Balance as of September 30, 2016
$
1,991

 
$
147

 
$
263

 
$
2,401

Acquisitions (c)

 

 
4

 
4

Currency translation adjustment
(54
)
 
(3
)
 

 
(57
)
Balance as of December 31, 2016
$
1,937

 
$
144

 
$
267

 
$
2,348

 
 
 
 
 
 
 
 
(a)
As of December 31, 2016 , goodwill was completely attributable to the Composites reporting unit due to the full impairment of the goodwill for the Intermediates/Solvents reporting unit during the fourth quarter of 2016.
(b)
As of December 31, 2016 , goodwill consisted of $89 million for the Core North America reporting unit, $139 million for the Quick Lubes reporting unit and $39 million for the International reporting unit.
(c)
Relates to Valvoline Instant Oil Change SM center acquisitions during the three months ended December 31, 2016 .
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.
Ashland annually reviews indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.  
Intangible assets were comprised of the following as of December 31, 2016 and September 30, 2016 .
 

15

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

 
December 31, 2016
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
42

 
$
(20
)
 
$
22

Intellectual property
659

 
(284
)
 
375

Customer relationships
530

 
(202
)
 
328

Total definite-lived intangible assets
1,231

 
(506
)
 
725

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
301

 

 
301

Total intangible assets
$
1,532

 
$
(506
)
 
$
1,026


 
September 30, 2016
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
42

 
$
(19
)
 
$
23

Intellectual property
667

 
(273
)
 
394

Customer relationships
546

 
(200
)
 
346

Total definite-lived intangible assets
1,255

 
(492
)
 
763

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
301

 

 
301

Total intangible assets
$
1,556

 
$
(492
)
 
$
1,064

Amortization expense recognized on intangible assets was $19 million for each of the three months ended December 31, 2016 and 2015 , 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 $75 million in 2017 (includes three months actual and nine months estimated), $75 million in 2018 , $70 million in 2019 , $70 million in 2020 and $69 million in 2021 . The amortization expense for future periods is an estimate. Actual amounts may change from such estimated amounts due to fluctuations in foreign currency exchange rates, additional intangible asset acquisitions and divestitures, potential impairment, accelerated amortization, or other events.
NOTE H – DEBT
The following table summarizes Ashland’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets.

16

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

 
 
 
NOTE H – DEBT (continued)

 
December 31

 
September 30

(In millions)
2016

 
2016

4.750% notes, due 2022
$
1,085

 
$
1,121

3.875% notes, due 2018
671

 
700

6.875% notes, due 2043
376

 
376

5.500% notes, due 2024 (a)
375

 
375

Term Loan, due 2021 (a)
296

 
375

2017 accounts receivable securitization facility (a)
75

 

6.50% junior subordinated notes, due 2029  
50

 
140

Other international loans, interest at a weighted-
 

 
 

average rate of 4.9% at December 31, 2016 (4.8% to 5.0%)
17

 
20

Medium-term notes, due 2019, interest of 9.4% at December 31, 2016
5

 
5

Term Loan, due 2017

 
150

Other (b)
(18
)
 
(18
)
Total debt
2,932

 
3,244

Short-term debt
(92
)
 
(170
)
Current portion of long-term debt
(15
)
 
(19
)
Long-term debt (less current portion and debt issuance cost discounts)
$
2,825

 
$
3,055

 
 
 
 
(a)
These debt instruments were issued by Valvoline during 2016 and 2017 in connection with the separation process.
(b)
Other includes $29 million of debt issuance cost discounts as of December 31, 2016 and September 30, 2016 .
The scheduled aggregate maturities of long-term debt by year (including the current portion and excluding debt issuance costs) are as follows:  $11 million remaining in 2017 , $686 million in 2018 , $35 million in 2019 , $30 million in 2020 and $210 million in 2021 .  
Ashland Financing Activities
6.50% junior subordinated notes due 2029
In December 2016, Hercules LLC (Hercules) (formerly Hercules Incorporated), an indirect wholly-owned subsidiary of Ashland, repurchased, through a cash tender offer (the Tender Offer), $182 million of the aggregate principal par value amount of its 6.50% junior subordinated notes due 2029 (2029 notes) for an aggregate purchase price of $177 million . As a result of the Tender Offer, the carrying value of the 2029 notes was reduced by $90 million and Ashland recognized a $92 million charge related to accelerated accretion of the recorded debt discount (compared to the total par value) and $5 million of a net gain related to the repayment of the debt. The charge and net gain are included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three months ended December 31, 2016 .
Open market repurchases of 4.750% notes due 2022 and 3.875% notes due 2018
During the first quarter of 2017, Ashland executed open market repurchases of its 4.750% notes due 2022 (2022 notes) and its 3.875% notes due 2018 (2018 notes). As a result of these repurchases, the carrying values of the 2022 notes and 2018 notes were reduced by $36 million and $29 million , respectively. Ashland recognized a $2 million charge related to premiums paid in the open market repurchases and accelerated amortization of previously capitalized debt issuance costs, which is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three months ended December 31, 2016 .

17

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

 
 
 
NOTE H – DEBT (continued)

Subsidiary senior unsecured term loan
During August 2016, a wholly owned foreign subsidiary of Ashland entered into a credit agreement which provided for an aggregate principal amount of $150 million in a senior unsecured term loan facility. This term loan was drawn in full as of September 30, 2016 and was fully repaid during the three months ended December 31, 2016 .
Remaining borrowing capacity
The borrowing capacity remaining under Ashland's 2015 revolving credit facility was $742 million , due to a reduction of $58 million for letters of credit outstanding at December 31, 2016 . Ashland's total borrowing capacity at December 31, 2016 (excluding Valvoline) was $817 million , which included $75 million of available capacity from the accounts receivable securitization facility.
Covenants related to current Ashland debt agreements
Ashland's debt contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional subsidiary indebtedness, restrictions on subsidiary distributions, investments, mergers, sale of assets and restricted payments and other customary limitations.   As of December 31, 2016 , Ashland is in compliance with all debt covenant restrictions.
The maximum consolidated leverage ratios permitted under Ashland's most recent credit agreement (the 2015 Senior Credit Agreement) are as follows: 3.75 from June 30, 2015 through December 31, 2016 and 3.5 from March 31, 2017 and each fiscal quarter thereafter.  At December 31, 2016 , Ashland’s calculation of the consolidated leverage ratio was 3.1 , 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 December 31, 2016 , Ashland’s calculation of the interest coverage ratio was 4.4 , which exceeds the minimum required consolidated ratio of 3.0 .
Valvoline Financing Activities
Accounts receivable securitization
In November 2016, Valvoline entered into a $125 million accounts receivable securitization facility (the 2017 accounts receivable securitization facility) pursuant to (i) a Sale Agreement, between Valvoline and LEX Capital LLC, a wholly-owned “bankruptcy remote” special purpose subsidiary of Valvoline (Lex) and (ii) a Transfer and Administration Agreement, among Lex, Valvoline, as Master Servicer, a certain Conduit Investor, Uncommitted Investor, and Letter of Credit Issuer, certain Managing Agents, Administrators and Committed Investors, and PNC Bank National Association, as agent for various secured parties (the Agent).
Under the Sale Agreement, Valvoline will sell, on an ongoing basis, substantially all of its accounts receivable, certain related assets and the right to the collections on those accounts receivable to Lex. Under the terms of the Transfer and Administration Agreement, Lex may, from time to time, obtain up to $125 million (in the form of cash or letters of credit for the benefit of Valvoline) from the Conduit Investor, the Uncommitted Investor and/or the Committed Investors (together the “Investors”) through the sale of an undivided interest in such accounts receivable, related assets and collections. The Transfer and Administration Agreement has a term of one year but is extendable at the discretion of the Investors. Valvoline accounts for the 2017 accounts receivable securitization facility as secured borrowings, and the receivables sold pursuant to the facility are included in Ashland's Condensed Consolidated Balance Sheet as accounts receivable. Valvoline classifies any borrowings under this facility as short-term debt within Ashland's Condensed Consolidated Balance Sheet. 

18

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

 
 
 
NOTE H – DEBT (continued)

During the first quarter of 2017, Valvoline borrowed $75 million under the 2017 accounts receivable securitization facility and used the net proceeds to repay an equal amount of the 2016 term loan facility. As a result, Valvoline recognized a $1 million charge related to the accelerated amortization of previously capitalized debt issuance costs, which is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three months ended December 31, 2016 .
Remaining borrowing capacity
At December 31, 2016 , the total borrowing capacity remaining under Valvoline's 2016 revolving credit facility was $428 million due to a reduction of $22 million for letters of credit outstanding. Valvoline's total borrowing capacity at December 31, 2016 was $478 million , which included $50 million of available capacity from the 2017 accounts receivable securitization facility.
Covenants related to current Valvoline debt agreements
The Valvoline Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio) and other customary limitations.  As of December 31, 2016 , Valvoline Inc. was in compliance with all debt agreement covenant restrictions.
The maximum consolidated leverage ratio permitted under the Valvoline Credit Agreement is 4.5 . At December 31, 2016 , Valvoline’s calculation of the consolidated leverage ratio was 1.2 , which is below the maximum consolidated leverage ratio of 4.5 .
The minimum required consolidated interest coverage ratio under the Valvoline Credit Agreement during its entire duration is 3.0 . At December 31, 2016 , Valvoline’s calculation of the interest coverage ratio was 13.6 , 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, 2017 is 25% . 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 benefit rate was 150% for the three months ended December 31, 2016 . The effective income tax rate was impacted by the current quarter income mix, including the Ashland identified key items, which resulted in charges that were taxed at a U.S. statutory rate and drove the overall rate to a tax benefit. The current quarter tax rate was also impacted by net unfavorable tax discrete items of $1 million .
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, 2016 was 25% . The overall effective tax rate was 18% for the three months ended December 31, 2015 and was impacted by net favorable tax discrete items of $7 million , primarily related to the law change from the reinstatement of the research and development credit and certain global restructuring steps.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2016 .

19

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

 
 
 
NOTE I – INCOME TAXES (continued)

 (In millions)
 

Balance at October 1, 2016
$
168

Increases related to positions taken on items from prior years
4

Decreases related to positions taken on items from prior years
(2
)
Increases related to positions taken in the current year
4

Settlement of uncertain tax positions with tax authorities
(1
)
Balance at December 31, 2016
$
173

In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $3 million for continuing operations and zero for discontinued operations related primarily to audit settlements and statute of limitations expirations in various tax jurisdictions. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.
NOTE J – EMPLOYEE BENEFIT PLANS
For the three months ended December 31, 2016 , Ashland contributed $2 million to its non-qualified U.S. pension plans, all of which was paid by Valvoline, and $1 million to its non-U.S. pension plans. No contributions were made to Ashland's qualified U.S. pension plans during the three months ended December 31, 2016 . Ashland expects to make additional contributions to the non-qualified U.S. plans of approximately $13 million , which will be paid by Valvoline, and to the non-U.S. plans of approximately $9 million during the remainder of 2017 .
Plan Transfers, Amendments and Remeasurements
Effective January 1, 2017, Ashland discontinued certain post-employment health and life insurance benefits. The effect of these plan changes resulted in a remeasurement gain of $10 million , $4 million within cost of sales and $6 million within selling, general and administrative expense, in the Statements of Consolidated Comprehensive Income for the three months ended December 31, 2016.
During September 2016, Ashland transferred a substantial portion of the largest U.S. qualified pension and non-qualified U.S. pension plans as well as certain other postretirement obligations to Valvoline Inc. as part of the separation process discussed further in Note B.
Components of net periodic benefit costs (income)
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.

20

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

 
 
 
NOTE J – EMPLOYEE BENEFIT PLANS (continued)

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 December 31
 
 
 
 
 
 
 
Service cost (a)
$
3

 
$
6

 
$

 
$

Interest cost
23

 
31

 
1

 
2

Expected return on plan assets
(39
)
 
(47
)
 

 

Amortization of prior service credit (a)

 
(1
)
 
(3
)
 
(4
)
Actuarial gain

 

 
(10
)
 

 
$
(13
)
 
$
(11
)
 
$
(12
)
 
$
(2
)
 
 
 
 
 
 
 
 
(a)
Activity of $0 denote values less than $1 million.
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES
Asbestos litigation
Ashland and Hercules 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 Stoker Corporation, a former subsidiary.  The amount and timing of settlements and number of open claims can fluctuate from period to period.  A summary of Ashland asbestos claims activity, excluding Hercules claims, follows.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
  Years ended September 30
(In thousands)
2016

 
2015

 
2016

 
2015

 
2014

Open claims - beginning of period
57

 
60

 
60

 
65

 
65

New claims filed

 
1

 
2

 
2

 
2

Claims settled

 

 

 

 
(1
)
Claims dismissed
(1
)
 
(2
)
 
(5
)
 
(7
)
 
(1
)
Open claims - end of period
56

 
59

 
57

 
60

 
65


21

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


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.  
During the most recent annual update of this estimate completed during the June 2016 quarter, it was determined that the liability for Ashland asbestos-related claims should be increased by $37 million .  Total reserves for asbestos claims were $406 million at December 31, 2016 compared to $415 million at September 30, 2016 .
A progression of activity in the asbestos reserve is presented in the following table.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
  Years ended September 30
(In millions)
2016

 
2015

 
2016

 
2015

 
2014

Asbestos reserve - beginning of period
$
415

 
$
409

 
$
409

 
$
438

 
$
463

Reserve adjustment

 

 
37

 

 
4

Amounts paid
(9
)
 
(8
)
 
(31
)
 
(29
)
 
(29
)
Asbestos reserve - end of period
$
406

 
$
401

 
$
415

 
$
409

 
$
438

Ashland asbestos-related receivables
Ashland has insurance coverage for certain litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide substantially all of the coverage that will be accessed.  
For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent.  Substantially all of the estimated receivables from insurance companies are expected to be due from domestic insurers, all of which are solvent.
At December 31, 2016 , Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $149 million (excluding the Hercules receivable for asbestos claims), of which $7 million relates to costs previously paid.  Receivables from insurers amounted to $151 million at September 30, 2016 .  During the June 2016 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed.  This model update resulted in a $16 million increase in the receivable for probable insurance recoveries.
During the March 2016 quarter, Ashland entered into settlement agreements totaling $4 million with certain insurers, which resulted in a reduction of the Ashland insurance receivable within the Condensed Consolidated Balance Sheets by the same amount. During the June 2016 quarter, Ashland placed $4 million of the settlement funds into the renewable annual trust.
A progression of activity in the Ashland insurance receivable is presented in the following table.

22

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


 
Three months ended
 
 
 
 
 
 
 
December 31
 
Years ended September 30
(In millions)
2016

 
2015

 
2016

 
2015

 
2014

Insurance receivable - beginning of period
$
151

 
$
150

 
$
150

 
$
402

 
$
408

Receivable adjustment

 

 
16

 
(3
)
 
22

Insurance settlement

 

 
(4
)
 
(227
)
 

Amounts collected
(2
)
 
(5
)
 
(11
)
 
(22
)
 
(28
)
Insurance receivable - end of period
$
149

 
$
145

 
$
151

 
$
150

 
$
402

Hercules asbestos-related litigation
Hercules has liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of Hercules’ former subsidiaries to a limited industrial market.  The amount and timing of settlements and number of open claims can fluctuate from period to period.  A summary of Hercules’ asbestos claims activity follows.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
    Years ended September 30
(In thousands)
2016

 
2015

 
2016

 
2015

 
2014

Open claims - beginning of period
15

 
20

 
20

 
21

 
21

New claims filed

 

 
1

 
1

 
1

Claims dismissed

 

 
(6
)
 
(2
)
 
(1
)
Open claims - end of period
15

 
20

 
15

 
20

 
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 2016 quarter, it was determined that the liability for Hercules asbestos-related claims should be increased by $25 million .  Total reserves for asbestos claims were $318 million at December 31, 2016 compared to $321 million at September 30, 2016 .
A progression of activity in the asbestos reserve is presented in the following table.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
Years ended September 30
(In millions)
2016

 
2015

 
2016

 
2015

 
2014

Asbestos reserve - beginning of period
$
321

 
$
311

 
$
311

 
$
329

 
$
342

Reserve adjustment

 

 
25

 
4

 
10

Amounts paid
(3
)
 
(5
)
 
(15
)
 
(22
)
 
(23
)
Asbestos reserve - end of period
$
318

 
$
306

 
$
321

 
$
311

 
$
329


23

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

 
 
 
NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)


Hercules asbestos-related receivables
For the Hercules asbestos-related obligations, certain reimbursement obligations pursuant to coverage-in-place agreements with insurance carriers exist.  As a result, any increases in the asbestos reserve have been partially offset by probable insurance recoveries.  Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent.  The estimated receivable consists exclusively of solvent domestic insurers.
As of December 31, 2016 and September 30, 2016 , the receivables from insurers amounted to $63 million . During the June 2016 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed.  This model update resulted in a $7 million increase in the receivable for probable insurance recoveries.
A progression of activity in the Hercules insurance receivable is presented in the following table.
 
Three months ended
 
 
 
 
 
 
 
December 31
 
Years ended September 30
(In millions)
2016

 
2015

 
2016

 
2015

 
2014

Insurance receivable - beginning of period
$
63

 
$
56

 
$
56

 
$
77

 
$
75

Receivable adjustment

 

 
7

 
1

 
3

Insurance settlement

 

 

 
(22
)
 

Amounts collected

 

 

 

 
(1
)
Insurance receivable - end of period
$
63

 
$
56

 
$
63

 
$
56

 
$
77

Asbestos litigation cost projection
Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict.  In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, mortality rates, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards.  Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens.  In light of these inherent uncertainties, Ashland believes that the asbestos reserves for Ashland and Hercules represent the best estimate within a range of possible outcomes.  As a part of the process to develop these estimates of future asbestos costs, a range of long-term cost models was developed.  These models are based on national studies that predict the number of people likely to develop asbestos-related diseases and are heavily influenced by assumptions regarding long-term inflation rates for indemnity payments and legal defense costs, as well as other variables mentioned previously.  Ashland has currently estimated in various models ranging from approximately 40 to 50 year periods that it is reasonably possible that total future litigation defense and claim settlement costs on an inflated and undiscounted basis could range as high as approximately $670 million for the Ashland asbestos-related litigation (current reserve of $406 million ) and approximately $490 million for the Hercules asbestos-related litigation (current reserve of $318 million ), depending on the combination of assumptions selected in the various models.  If actual experience is worse than projected, relative to the number of claims filed, the severity of alleged disease associated with those claims or costs incurred to resolve those claims, or actuarial refinement or improvements to the assumptions used within these models are initiated, Ashland may need to further increase the estimates of the costs associated with asbestos claims and these increases could be material over time.

24