Ashland Global Holdings Inc.
ASHLAND GLOBAL HOLDINGS INC (Form: 10-Q, Received: 08/04/2017 09:20:06)


 
 
 
 
 

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, 2017
 
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, a smaller reporting company, or an emerging growth company.  See the definitions of  “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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.)
Emerging Growth Company o  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  
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 June 30, 2017 , there were 62,402,316 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
 
Nine months ended
 
June 30
 
June 30
(In millions except per share data - unaudited)
2017

 
2016

 
2017

 
2016

Sales
$
870

 
$
790

 
$
2,380

 
$
2,265

Cost of sales
635

 
554

 
1,727

 
1,581

Gross profit
235

 
236

 
653

 
684

 
 
 
 
 
 
 
 
Selling, general and administrative expense
182

 
160

 
493

 
481

Research and development expense
20

 
22

 
61

 
66

Equity and other income
4

 
3

 
9

 
7

Operating income
37

 
57

 
108

 
144

 
 
 
 
 
 
 
 
Net interest and other financing expense
51

 
40

 
203

 
125

Net gain (loss) on acquisitions and divestitures
(6
)
 
3

 
(7
)
 
3

Income (loss) from continuing operations
 
 
 
 
 
 
 
before income taxes
(20
)
 
20

 
(102
)
 
22

Income tax benefit - Note I
(4
)
 
(4
)
 
(49
)
 
(39
)
Income (loss) from continuing operations
(16
)
 
24

 
(53
)
 
61

Income (loss) from discontinued operations
 
 
 
 
 
 
 
(net of tax) - Note D
(14
)
 
47

 
138

 
186

Net income (loss)
(30
)
 
71

 
85

 
247

Net income attributable to noncontrolling interest (a)
3

 

 
27

 

Net income (loss) attributable to Ashland
$
(33
)
 
$
71

 
$
58

 
$
247

 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share - Note L
 

 
 

 
 

 
 

Income (loss) from continuing operations
 
 
 
 
 
 
 
 attributable to Ashland
$
(0.26
)
 
$
0.39

 
$
(0.85
)
 
$
0.97

Income (loss) from discontinued operations
(0.28
)
 
0.76

 
1.78

 
2.94

Net income (loss) attributable to Ashland
$
(0.54
)
 
$
1.15

 
$
0.93

 
$
3.91

 
 
 
 
 
 
 
 
Diluted earnings per share - Note L
 

 
 

 
 

 
 

Income (loss) from continuing operations
 
 
 
 
 
 
 
 attributable to Ashland
$
(0.26
)
 
$
0.38

 
$
(0.85
)
 
$
0.95

Income (loss) from discontinued operations
(0.28
)
 
0.75

 
1.78

 
2.92

Net income (loss) attributable to Ashland
$
(0.54
)
 
$
1.13

 
$
0.93

 
$
3.87

 
 
 
 
 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.225

 
$
0.390

 
$
1.005

 
$
1.170

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net income (loss)
$
(30
)
 
$
71

 
$
85

 
$
247

Other comprehensive income (loss), net of tax - Note M
 
 
 
 
 
 
 
Unrealized translation gain (loss)
105

 
(46
)
 
19

 
(26
)
Pension and postretirement obligation adjustment

 

 
(4
)
 
21

Net change in available-for-sale securities
4

 
4

 
10

 
13

Other comprehensive income (loss)
109

 
(42
)
 
25

 
8

Comprehensive income
$
79

 
$
29

 
$
110

 
$
255

Comprehensive income attributable to noncontrolling interest
3

 

 
27

 

Comprehensive income attributable to Ashland
$
76

 
$
29

 
$
83

 
$
255

 
 
 
 
 
 
 
 
(a)
Represents the income attributable to the previous noncontrolling interest in Valvoline Inc., whose results are now included within discontinued operations.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

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

 
 
 

 
June 30

 
September 30

(In millions - unaudited)
2017

 
2016

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
492

 
$
1,017

Accounts receivable  (a)
643

 
529

Inventories - Note F
631

 
539

Other assets
73

 
89

Current assets of discontinued operations - Note D

 
714

Total current assets
1,839

 
2,888

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
3,707

 
3,615

Accumulated depreciation
1,770

 
1,715

Net property, plant and equipment
1,937

 
1,900

Goodwill - Note G
2,426

 
2,138

Intangibles - Note G
1,316

 
1,061

Restricted investments - Note E
299

 
292

Asbestos insurance receivable - Note K
211

 
196

Equity and other unconsolidated investments
32

 
31

Deferred income taxes
35

 
35

Other assets
411

 
406

Noncurrent assets of discontinued operations - Note D

 
1,053

Total noncurrent assets
6,667

 
7,112

Total assets
$
8,506

 
$
10,000

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note H
$
223

 
$
170

Current portion of long-term debt - Note H
6

 

Trade and other payables
392

 
376

Accrued expenses and other liabilities
274

 
313

Current liabilities of discontinued operations - Note D

 
379

Total current liabilities
895

 
1,238

Noncurrent liabilities
 

 
 

Long-term debt - Note H
2,584

 
2,325

Employee benefit obligations - Note J
191

 
195

Asbestos litigation reserve - Note K
702

 
686

Deferred income taxes
374

 
315

Other liabilities
361

 
361

Noncurrent liabilities of discontinued operations - Note D

 
1,715

Total noncurrent liabilities
4,212

 
5,597

Commitments and contingencies - Note K


 


Equity
 
 
 
Stockholders' equity
3,399

 
3,347

Noncontrolling interest (b)

 
(182
)
Total equity
3,399

 
3,165

Total liabilities and equity
$
8,506

 
$
10,000

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $8 million and $10 million at June 30, 2017 and September 30, 2016 , respectively.
(b)
Represents the previous noncontrolling interest in Valvoline Inc. held outside of Ashland which is now included within discontinued operations.


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
 

 
 
 
58

 
 

27

 
85

Other comprehensive loss
 
 
 
 
 
 
25

 

 
25

Regular dividends, $1.005 per common share
 

 
 

 
(62
)
 
 

 
 
 
(62
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 
 
 

   incentive and other plans (c)
 

 
3

 
 
 
 

 
 
 
3

Distribution of Valvoline Inc. (b)
 
 

 
68

 
(33
)
 
152

 
187

Other
 
 
(7
)
 
 
 
 
 
7

 

Distributions to noncontrolling interest
 
 
 
 
 
 
 
 
(4
)
 
(4
)
BALANCE AT JUNE 30, 2017
$
1

 
$
919

 
$
2,768

 
$
(289
)

$

 
$
3,399

 
 
 
 
 
 
 
 
 
 
 
 
(a)
At June 30, 2017 and September 30, 2016 , the after-tax accumulated other comprehensive loss attributable to Ashland of $289 million and $281 million , respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $3 million and $46 million , respectively, net unrealized translation losses of $308 million and $333 million , respectively, and net unrealized gain on available-for-sale securities of $16 million and $6 million , respectively. At September 30, 2016 , amounts attributable to noncontrolling interest included unrecognized prior service credits of $9 million and net unrealized translation losses of $2 million . The accumulated other comprehensive income that was distributed to Valvoline Inc. included $39 million of unrecognized prior service credits and $6 million of net unrealized translation losses.
(b)
See Note B for discussion of the distribution of Valvoline Inc. and the noncontrolling interest.
(c)
Common shares issued were 242,043 for the nine months ended June 30, 2017 .



















SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
Nine months ended
 
June 30
(In millions - unaudited)
2017

 
2016

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
85

 
$
247

Income from discontinued operations (net of tax)
(138
)
 
(186
)
Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
218

 
227

Original issue discount and debt issuance cost amortization
108

 
9

Deferred income taxes
(4
)
 

Equity income from affiliates

 
(1
)
Distributions from equity affiliates
1

 
1

Stock based compensation expense
14

 
23

Loss on early retirement of debt
9

 

Gain on available-for-sale securities
(9
)
 
(6
)
Net loss (gain) on divestitures
4

 
(3
)
Pension contributions
(6
)
 
(24
)
Loss (gain) on pension and other postretirement plan remeasurements
(2
)
 
18

Change in operating assets and liabilities (a)
(166
)
 
(70
)
Total cash flows provided by operating activities from continuing operations
114

 
235

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Additions to property, plant and equipment
(126
)
 
(150
)
Proceeds from disposal of property, plant and equipment
4

 
3

Purchase of operations - net of cash acquired
(680
)
 

Proceeds from sale of operations or equity investments
4

 
18

Net purchase of funds restricted for specific transactions
(2
)
 
(4
)
Reimbursements from restricted investments
19

 
24

Purchases of available-for-sale securities
(19
)
 
(4
)
Proceeds from sales of available-for-sale securities
19

 
4

Proceeds from the settlement of derivative instruments
5

 
8

Payments for the settlement of derivative instruments
(3
)
 
(2
)
Total cash flows used by investing activities from continuing operations
(779
)
 
(103
)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Proceeds from issuance of long-term debt
1,100

 

Repayment of long-term debt
(913
)
 
(50
)
Premium on long-term debt repayment
(17
)
 

Proceeds from short-term debt
69

 
389

Repurchase of common stock

 
(500
)
Debt issuance costs
(15
)
 
(2
)
Cash dividends paid
(62
)
 
(72
)
Excess tax benefits related to share-based payments
2

 
1

Total cash flows provided (used) by financing activities from continuing operations
164

 
(234
)
CASH USED BY CONTINUING OPERATIONS
(501
)
 
(102
)
Cash provided (used) by discontinued operations
 

 
 

Operating cash flows, net
123

 
170

Investing cash flows, net
(293
)
 
(104
)
Financing cash flows, net
(17
)
 

Total cash provided (used) by discontinued operations
(187
)
 
66

Effect of currency exchange rate changes on cash and cash equivalents
(8
)
 
(6
)
DECREASE IN CASH AND CASH EQUIVALENTS
(696
)
 
(42
)
Cash, beginning of period held by Ashland
1,017

 
1,257

Cash, beginning of period held by Valvoline and reported as discontinued operations
171

 

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
1,188

 
1,257

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
492

 
$
1,215

 
 
 
 
(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 June 30, 2017 are not necessarily indicative of the expected results for the remaining quarter in the fiscal year.
On May 12, 2017, Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. which represented approximately 83% of the total outstanding shares of Valvoline Inc.'s common stock. This distribution of Valvoline represented a strategic shift in Ashland's business and qualified as a discontinued operation. Accordingly, Valvoline's assets, liabilities, operating results and cash flows for all periods presented have been classified as discontinued operations within the Condensed Consolidated Financial Statements. See Note B for additional information on the separation of Valvoline Inc. The term Valvoline as used herein, depending on context, refers to either Valvoline Inc. or Valvoline as a previous reportable segment of Ashland.
Subsequent to completing the distribution of Valvoline Inc. during the current quarter, Ashland's operations are now managed within the following three reportable segments: Specialty Ingredients, Composites and Intermediates and Solvents. In previous periods, Composites and Intermediates and Solvents were reporting units included within the Ashland Performance Materials reportable segment.
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.

6

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

 
 
 
NOTE A   SIGNIFICANT ACCOUNTING POLICIES (continued)
 

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 standards relevant to Ashland were either issued or adopted in the current period, or will become effective in a subsequent period.
In May 2014, the FASB issued accounting guidance outlining a single comprehensive five step model for entities to use in accounting for revenue arising from contracts with customers (ASC 606 Revenue from Contracts with Customers). The new guidance supersedes most current revenue recognition guidance, in an effort to converge the revenue recognition principles within U.S. GAAP. This new guidance also requires entities to disclose certain quantitative and qualitative information regarding the nature, amount, timing and uncertainty of qualifying revenue and cash flows arising from contracts with customers. Entities have the option of using a full retrospective or a modified retrospective approach to adopt the new guidance. Ashland has identified an implementation team that is currently evaluating the impact of the new standard on the Condensed Consolidated Financial Statements and the adoption method options available as well as the overall impact the new guidance will have on the organization. This guidance becomes effective for Ashland on October 1, 2018 and Ashland currently plans to adopt the standard at that time.   
In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Statement of Consolidated Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Statement of Consolidated Comprehensive Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This guidance must be applied retrospectively and will become effective for Ashland on October 1, 2018, with early adoption being optional. Ashland currently intends to early adopt this guidance on October 1, 2017 and will revise the presentation of the net periodic benefit cost in previous periods to conform to the current period presentation. Ashland does not expect this guidance to have a significant impact on the presentation of Ashland’s Statements of Consolidated Comprehensive Income.
In January 2017, the FASB issued accounting guidance which simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The guidance instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value.  This guidance must be applied prospectively and will become effective for Ashland on October 1, 2020. Ashland is currently evaluating the impact this guidance may have on Ashland's Condensed Consolidated Financial Statements.
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 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.

7

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

 
 
 
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. As discussed further within the Final Separation section of this Note, Ashland completed the distribution of its remaining shares in Valvoline Inc. on May 12, 2017. The new Ashland is a premier global leader in providing specialty chemical solutions to customers in a wide range of consumer and industrial markets. Key markets and applications include pharmaceutical, personal care, food and beverage, architectural coatings, adhesives, automotive, construction and energy.
After completing the IPO on September 28, 2016 and before the distribution of its remaining shares on May 12, 2017, Ashland owned 170 million shares of Valvoline Inc.’s common stock which represented approximately 83% of the total outstanding shares of Valvoline Inc.’s common stock. As a result, Ashland continued to consolidate Valvoline within the Condensed Consolidated Financial Statements up until the distribution of the remaining shares. The resulting outside stockholders’ interests in Valvoline Inc., which was approximately 17% as of September 30, 2016 , was presented separately as noncontrolling interest within Ashland’s equity in the Condensed Consolidated Balance Sheets. The amount of consolidated net income attributable to these minority holders is presented as a separate caption on the Statements of Consolidated Comprehensive Income.
Ashland recognized separation costs of $28 million for each of the three months ended June 30, 2017 and 2016 , and $82 million and $46 million for the nine months ended June 30, 2017 and 2016 , respectively, which are primarily related to transaction and legal fees. Of these amounts, $13 million of separation costs directly related to Valvoline and were included within the discontinued operations caption of the Statement of Consolidated Comprehensive Income for the nine months ended June 30, 2017 . Otherwise, separation costs are recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income.
Final Separation
Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. as a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017. Based on the shares of Ashland common stock outstanding as of May 5, 2017, the record date for the distribution, each share of Ashland common stock received 2.745338 shares of Valvoline common stock in the distribution. The distribution was recorded at the carrying amount of Valvoline Inc.'s net assets which was a deficit of $187 million as of May 12, 2017, as follows:

8

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

 
NOTE B – VALVOLINE (continued)



 
May 12

(In millions)
2017

ASSETS
 
Current assets
 
Cash
179

Accounts receivable, net
385

Inventories
153

Other current assets
24

Total current assets
741

Noncurrent assets
 
Net property, plant and equipment
357

Goodwill
329

Equity and other unconsolidated investments
31

Deferred income taxes
391

Other noncurrent assets
93

Total noncurrent assets
1,201

Total assets
$
1,942

LIABILITIES AND EQUITY
 
Current liabilities
 
Short-term debt
75

Current portion of long-term debt
16

Trade and other payables
353

Other current liabilities
34

Total current liabilities
478

Noncurrent liabilities
 
Long-term debt
662

Employee benefit obligations
826

Other long-term liabilities
163

Total noncurrent liabilities
1,651

Total liabilities
$
2,129

Net deficit
$
(187
)
A Tax Matters Agreement between Ashland and Valvoline Inc. governs the rights and obligations after the spin-off regarding certain income taxes and other taxes, including certain tax liabilities and benefits, attributes, returns and contests.
Valvoline met the criteria to qualify as a discontinued operation and accordingly, its assets, liabilities, operating results and cash flows have been classified as discontinued operations within the Condensed Consolidated Financial Statements. See Note D for more information.
Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income that were previously allocated to the Valvoline reportable segment do not qualify for classification within discontinued operations and continue to be reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were $6 million and $17 million for the three and nine months ended June 30, 2016 , respectively.

9

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

 
NOTE B – VALVOLINE (continued)



Ashland entered into an agreement in September 2016 for an approximate two year period that provides certain transition services to Valvoline Inc. During the three and nine months ended June 30, 2017, Ashland recognized income for transition service fees of $1 million and $10 million , respectively, which offset costs within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. Likewise, Valvoline Inc. provides certain transition services to Ashland as deemed necessary. During the three and nine months ended June 30, 2017, Ashland recognized expense for transition service fees of $1 million and $4 million , respectively, which are included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income.
NOTE C – ACQUISITION AND DIVESTITURE
Pharmachem
Background
On May 17, 2017, Ashland completed its acquisition of the stock of Pharmachem Laboratories, Inc. (Pharmachem), a leading provider of quality ingredients to the global health and wellness industries and high-value differentiated products to fragrance and flavor houses. With annual revenues of approximately $300 million and 14 manufacturing facilities in the United States and Mexico, New Jersey-based Pharmachem develops, manufactures and supplies custom and branded nutritional and fragrance products.  Ashland has included Pharmachem within the Specialty Ingredients reporting segment.  
Purchase price allocation
The acquisition was recorded by Ashland using the purchase method of accounting in accordance with applicable U.S. GAAP whereby the total purchase price was allocated to tangible and intangible assets and liabilities acquired based on respective fair values.
The all-cash purchase price of Pharmachem was $680 million which included working capital adjustments of approximately $20 million .  Ashland incurred $5 million of transaction costs during the three and nine months ended June 30, 2017 related to the acquisition, which was recorded within the net gain (loss) on acquisitions and divestitures caption within the Statement of Consolidated Income.  The following table summarizes the current preliminary values of the assets acquired and liabilities assumed at the date of acquisition.

10

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

 
NOTE C – ACQUISITION AND DIVESTITURE (continued)



 
At

 
May 17,

Preliminary purchase price allocation (in millions)
2017

Assets:
 
Accounts receivable
53

Inventory
76

Other current assets
9

Intangible assets
312

Goodwill
276

Property, plant and equipment
96

Other noncurrent assets
20

Liabilities:
 

Accounts payable
(23
)
Deferred tax - net
(128
)
Other noncurrent liabilities
(11
)
Total purchase price
$
680

As of June 30, 2017 , the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the above table may occur as the process conducted for various valuations and assessments, including certain tangible and intangible assets, are finalized. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
Intangible assets identified
The purchase price allocation included $312 million of certain definite-lived intangible assets which are being amortized over the estimated useful life in proportion to the economic benefits consumed. The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future cash flows of the combined company.  In addition, Ashland reviewed certain technological trends and also considered the relative stability in the current Pharmachem customer base.
The following details the total intangible assets identified as of May 17, 2017.
 
 
 
Weighted-average
 
 
 
amortization period
Intangible asset type (in millions)
Value

 
(years)
Trademarks and trade names
$
26

 
15
Intellectual property
69

 
22
Customer and supplier relationships
217

 
20
Total
$
312

 
 
Impact on operating results
The results of Pharmachem’s operations have been included in Ashland’s Consolidated Financial Statements since the May 17, 2017 closing date.  The following table provides sales and results of operations from the Pharmachem acquired business lines included in Ashland’s results during the current period.

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

 
NOTE C – ACQUISITION AND DIVESTITURE (continued)



Pharmachem results of operations
Nine months ended
 
(In millions)
June 30, 2017
(a)
Sales
$
36

 
Operating income
4

 
 
 
 
(a)
Amounts represent the sales and results of operations for the period May 17, 2017 through June 30, 2017, the period for which Pharmchem was owned.
The following unaudited pro forma information for the three and nine months ended June 30, 2017 and 2016 assumes the acquisition of Pharmachem occurred at the beginning of the respective periods presented.
 
Three months ended
 
Nine months ended
Unaudited pro forma information
June 30
 
June 30
(In millions, except per share amounts)
2017

 
2016

 
2017

 
2016

Sales
$
943

 
$
861

 
$
2,589

 
$
2,485

Net income (loss)
(26
)
 
70

 
97

 
245

 
These amounts have been calculated after applying Ashland’s accounting policies and adjusting the results of Pharmachem to reflect the additional depreciation, amortization and interest expense that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets, and the related debt incurred had been applied on October 1, 2015, together with the consequential tax effects.                                                                                                                               
The unaudited pro forma information presented above is for illustrative purposes only and does not purport to be indicative of the results of future operations of Ashland or the results that would have been attained had the operations been combined during the periods presented.

Specialty Ingredients Joint Venture
During September 2016, Ashland entered into a definitive sale agreement to sell its ownership interest in a Specialty Ingredients joint venture in China, which primarily serves the construction end market. 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.
During June 2017, Ashland completed the transfer of its ownership interest in the joint venture and recognized an additional loss of $4 million during the current quarter primarily related to a license fee and tax adjustments. The loss was reported within the net gain (loss) on acquisitions and divestitures caption within the Statement of Consolidated Comprehensive Income. The net assets held for sale were not material to Ashland’s Condensed Consolidated Balance Sheet as of September 30, 2016.
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.
Specialty Ingredients Facility
During the current quarter, Ashland committed to a plan to reorganize certain operations within the Specialty Ingredients reportable segment.  As part of this plan a manufacturing facility that was previously operational was closed during the current quarter.  As a result of this closure, the remaining value for primarily machinery and equipment related to this facility was written off during the current quarter, which resulted in an $11 million charge for these assets as well as an additional $2 million reserve for employee costs associated with the facility closure.  No additional charges related to this facility are expected.

12

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

 
 
 
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.
As previously discussed in Notes A and B, Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. on May 12, 2017. Ashland determined that the final distribution of Valvoline qualified as a discontinued operation, in accordance with U.S. GAAP, since it represents a strategic shift for Ashland and has a major effect on Ashland's operations and financial results. Accordingly, Valvoline's assets, liabilities, operating results and cash flows for all periods presented have been classified as discontinued operations within the Condensed Consolidated Financial Statements.
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 and nine months ended June 30, 2017 and 2016 .
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, 2017 and 2016 .
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2017

 
2016

 
2017

 
2016

Income (loss) from discontinued operations (net of tax)
 
 
 
 
 
 
 
Asbestos-related litigation
$
(25
)
 
$
(30
)
 
$
(25
)
 
$
(30
)
Water Technologies
(1
)
 
3

 
2

 
2

Valvoline
12

 
73

 
161

 
214

Gain on disposal of discontinued operations (net of tax)
 

 
 

 
 

 
 

Water Technologies

 
1

 

 

Total income (loss) from discontinued operations (net of tax)
$
(14
)
 
$
47

 
$
138

 
$
186

The following table presents a reconciliation of the captions within Ashland's Statements of Consolidated Income for the income from discontinued operations attributable to Valvoline for the three and nine months ended June 30, 2017 and 2016 .

13

 
 
 
 
 
 
ASHLAND GLOBAL HOLDINGS 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)
2017 (a)

 
2016

 
2017

 
2016

Income (loss) from discontinued operations
 
 
 
 
 
 
 
attributable to Valvoline

 
 
 
 
 
 
 
Sales
$
234

 
$
500

 
$
1,237

 
$
1,435

Cost of sales
(148
)
 
(300
)
 
(750
)
 
(868
)
Selling, general and administrative expense
(50
)
 
(84
)
 
(222
)
 
(245
)
Research and development expense
(1
)
 
(3
)
 
(8
)
 
(9
)
Equity and other income
3

 
5

 
17

 
16

Operating income of discontinued operations
38

 
118

 
274

 
329

Net interest and other financing expense
(5
)
 

 
(22
)
 

Pretax income of discontinued operations
33

 
118

 
252

 
329

Income tax expense
(21
)
 
(45
)
 
(91
)
 
(115
)
Income from discontinued operations
$
12

 
$
73

 
$
161

 
$
214

 
 
 
 
 
 
 
 
(a)
Valvoline results in the current quarter reflect only 42 days of activity since the business was fully distributed on May 12, 2017.
The following table presents the captions of assets and liabilities of Valvoline that are presented as discontinued operations within Ashland's Condensed Consolidated Balance Sheet as of September 30, 2016 .

14

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

 
 
 
NOTE D – DISCONTINUED OPERATIONS (continued)

 
September 30

(In millions)
2016

Cash
$
171

Accounts receivable, net
387

Inventories
131

Other current assets
25

Current assets of discontinued operations
$
714

 
 
Net property, plant and equipment
$
324

Goodwill
264

Equity and other unconsolidated investments
26

Deferred income taxes
347

Other noncurrent assets
92

Noncurrent assets of discontinued operations
$
1,053

 
 
Current portion of long-term debt
$
19

Trade and other payables
360

Current liabilities of discontinued operations
$
379

 
 
Long-term debt
$
730

Employee benefit obligations
886

Other long-term liabilities
99

Noncurrent liabilities of discontinued operations
$
1,715

 
 
Equity
 
Noncontrolling interest
$
(182
)


15

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

 
 
 
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 June 30, 2017 .

16

 
 
 
 
 
 
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
$
492

 
$
492

 
$
492

 
$

 
$

Restricted investments (a)
329

 
329

 
329

 

 

Deferred compensation investments (b)
155

 
155

 

 
155

 

Investments of captive insurance company (b)
3

 
3

 
3

 

 

Foreign currency derivatives
14

 
14

 

 
14

 

Total assets at fair value
$
993

 
$
993

 
$
824

 
$
169

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
10

 
$
10

 
$

 
$
10

 
$

 
 
 
 
 
 
 
 
 
 
(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
$
1,017

 
$
1,017

 
$
1,017

 
$

 
$

Restricted investments (a)
322

 
322

 
322

 

 

Deferred compensation investments (b)
150

 
150

 

 
150

 

Investments of captive insurance company (b)
4

 
4

 
4

 

 

Foreign currency derivatives
3

 
3

 

 
3

 

Total assets at fair value
$
1,496

 
$
1,496

 
$
1,343

 
$
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

17

 
 
 
 
 
 
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 June 30, 2017 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 June 30, 2017 and September 30, 2016 :
 
June 30

 
September 30

(In millions)
2017

 
2016

Original cost
$
335

 
$
335

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

 
332

Investment income (b)
7

 
8

Unrealized gain
26

 
11

Realized gain
2

 

Settlement funds
2

 
4

Disbursements
(19
)
 
(33
)
Fair value
$
329

 
$
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 restricted investment available-for-sale securities as of June 30, 2017 and September 30, 2016 :

18

 
 
 
 
 
 
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 June 30, 2017
 
 
 
 
 
 
 
Demand Deposit
$
15

 
$

 
$

 
$
15

Equity Mutual Fund
168

 
26

 

 
194

Corporate bond Mutual Fund
120

 

 

 
120

Fair value
$
303

 
$
26

 
$

 
$
329

 
 
 
 
 
 
 
 
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 June 30, 2017 and September 30, 2016 were recognized within AOCI. Ashland invests in highly-rated investment grade mutual funds. No other-than-temporary impairment was recognized in AOCI during the three and nine months ended June 30, 2017 and 2016 .
The following table presents the investment income, realized gains and disbursements related to the investments within the portfolio for the three and nine months ended June 30, 2017 and 2016 .
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2017

 
2016

 
2017

 
2016

Investment income
$
2

 
$
2

 
$
7

 
$
6

Realized gains

 

 
2

 

Disbursements
(7
)
 
(1
)
 
(19
)
 
(24
)
Deferred compensation investments
Deferred compensation investments consist of Level 2 measurements within the fair value hierarchy which 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

19

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

recognized during the three and nine months ended June 30, 2017 and 2016 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2017

 
2016

 
2017

 
2016

Foreign currency derivative gain (loss)
$
(1
)
 
$
(3
)
 
$
10

 
$
1

The following table summarizes the fair values of the outstanding foreign currency derivatives as of June 30, 2017 and September 30, 2016 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.
 
June 30

 
September 30

(In millions)
2017

 
2016

Foreign currency derivative assets
$
14

 
$
3

Notional contract values
842

 
325

 
 
 
 
Foreign currency derivative liabilities
$
10

 
$
4

Notional contract values
797

 
528

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 2017 and 2016, 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 and losses recorded within the cumulative translation adjustment within AOCI, including a net gain of $1 million and a net loss of $1 million for the three months ended June 30, 2017 and 2016 , respectively, and net gains of $2 million and $6 million for the nine months June 30, 2017 and 2016 , respectively.
As of June 30, 2017 and September 30, 2016 , the total notional value of foreign currency contracts equaled $49 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 June 30, 2017 and September 30, 2016 .
 
 
June 30

 
September 30

(In millions)
Consolidated balance sheet caption
2017

 
2016

Net investment hedge assets (a)
Accounts receivable
$

 
$

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

 
1

 
 
 
 
 
(a)
Fair value of $0 denotes a value less than $1 million.

20

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

 
 
 
NOTE E – FAIR VALUE MEASUREMENTS (continued)

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, 2017 and 2016 . No portion of the gain or loss was reclassified to income during the three and nine months ended June 30, 2017 and 2016 . There was no hedge ineffectiveness with these instruments during the three and nine months ended June 30, 2017 and 2016 .
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2017

 
2016

 
2017

 
2016

Change in unrealized gain in AOCI (a)
$

 
$

 
$

 
$

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

 
(1
)
 

 

 
 
 
 
 
 
 
 
(a)
$0 denotes a value less than $1 million.
Other financial instruments
At June 30, 2017 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 $2,616 million and $2,345 million , respectively, compared to a fair value of $2,750 million and $2,558 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, and plastics 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)
2017

 
2016

Finished products
$
381

 
$
377

Raw materials, supplies and work in process
251

 
163

LIFO reserves
(1
)
 
(1
)
 
$
631

 
$
539

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 and Solvents reporting units within the Performance Materials reportable segment, and the Core North America, Quick Lubes and

21

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

International reporting units within the Valvoline reportable segment. Subsequent to completing the distribution of Valvoline during the current quarter, Ashland performed an assessment that changed its reportable segments to Specialty Ingredients, Composites and Intermediates and Solvents. In addition, Ashland determined that the reportable segments would also be designated as reporting units. 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 and Solvents during the fourth quarter of 2016.
The following is a progression of goodwill by reportable segment for the nine months ended June 30, 2017 .
 
Specialty

 
 
 
Intermediates

 
 

(In millions)
Ingredients

 
Composites

 
and Solvents

 
Total

Balance as of September 30, 2016
$
1,991

 
$
147

 
$

 
$
2,138

Acquisitions (a)
276

 

 

 
276

Currency translation adjustment
12

 

 

 
12

Balance as of June 30, 2017
$
2,279

 
$
147

 
$

 
$
2,426

 
 
 
 
 
 
 
 
(a)
Relates to the acquisition of Pharmachem during the current quarter. See Note C for more information.
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 25 years, and customer and supplier 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 June 30, 2017 and September 30, 2016 .
 
 
June 30, 2017
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
66

 
$
(21
)
 
$
45

Intellectual property
735

 
(308
)
 
427

Customer and supplier relationships
759

 
(216
)
 
543

Total definite-lived intangible assets (a)
1,560

 
(545
)
 
1,015

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
301

 

 
301

Total intangible assets
$
1,861

 
$
(545
)
 
$
1,316

 
 
 
 
 
 
(a)
The gross carrying amount of the definite-lived intangible assets increased during the nine months ended June 30, 2017 primarily due to the acquisition of Pharmachem. See Note C for more information.


22

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

 
 
 
NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

 
September 30, 2016
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Definite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
$
40

 
$
(19
)
 
$
21

Intellectual property
667

 
(273
)
 
394

Customer relationships
543

 
(198
)
 
345

Total definite-lived intangible assets
1,250

 
(490
)
 
760

 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
Trademarks and trade names
301

 

 
301

Total intangible assets
$
1,551

 
$
(490
)
 
$
1,061

Amortization expense recognized on intangible assets was $20 million and $19 million for the three months ended June 30, 2017 and 2016 , respectively, and $58 million and $57 million for the nine months ended June 30, 2017 and 2016 , 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 $81 million in 2017 (includes nine months actual and three months estimated), $91 million in 2018 , $87 million in 2019 , $86 million in 2020 and $86 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