Edgar Filing: ASHLAND INC.

6.30.2013 ASH 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________

FORM 10-Q



(Mark One)



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission file number 1-32532

ASHLAND INC.

(a Kentucky corporation)

I.R.S. No. 20-0865835

50 E. RiverCenter Boulevard

P.O. Box 391

Covington, Kentucky 41012-0391

Telephone Number (859) 815-3333

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):



	Large Accelerated Filer þ		Accelerated Filer o
	Non-Accelerated Filer o		Smaller Reporting Company o
	(Do not check if a smaller reporting company.)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At June 30, 2013, there were 77,357,425 shares of Registrant’s Common Stock outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME



	Three months ended						Nine months ended
	June 30						June 30
(In millions except per share data - unaudited)	2013			2012			2013			2012
Sales	$	2,059		$	2,141		$	5,902		$	6,149
Cost of sales	1,479			1,514			4,217			4,426
Gross profit	580			627			1,685			1,723

Selling, general and administrative expense	363			349			1,047			1,092
Research and development expense	35			30			106			91
Equity and other income	28			15			59			46
Operating income	210			263			591			586

Net interest and other financing expense	51			53			239			166
Net (loss) gain on divestitures	(1		)	5			6			2
Income from continuing operations before income taxes	158			215			358			422
Income tax expense - Note J	41			55			84			112
Income from continuing operations	117			160			274			310
Income (loss) from discontinued operations (net of
income taxes) - Note D	7			(9		)	4			(10		)
Net income	$	124		$	151		$	278		$	300

PER SHARE DATA
Basic earnings per share - Note M
Income from continuing operations	$	1.49		$	2.04		$	3.48		$	3.97
Income (loss) from discontinued operations	0.09			(0.11		)	0.05			(0.13		)
Net income	$	1.58		$	1.93		$	3.53		$	3.84

Diluted earnings per share - Note M
Income from continuing operations	$	1.47		$	2.00		$	3.42		$	3.90
Income (loss) from discontinued operations	0.08			(0.10		)	0.05			(0.13		)
Net income	$	1.55		$	1.90		$	3.47		$	3.77

DIVIDENDS PAID PER COMMON SHARE	$	0.340		$	0.225		$	0.790		$	0.575

COMPREHENSIVE INCOME (LOSS)
Net income	$	124		$	151		$	278		$	300
Other comprehensive (loss) income, net of tax - Note N
Unrealized translation loss	(9		)	(190		)	(30		)	(217		)
Pension and postretirement obligation adjustment	(4		)	(1		)	(11		)	(1		)
Net change in interest rate hedges	—			(14		)	38			(20		)
Other comprehensive loss	(13		)	(205		)	(3		)	(238		)
Comprehensive income (loss)	$	111		$	(54	)	$	275		$	62

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	June 30		September 30
(In millions - unaudited)	2013		2012

ASSETS
Current assets
Cash and cash equivalents	$	377	$	523
Accounts receivable (a)	1,512		1,481
Inventories - Note G	864		1,008
Deferred income taxes	157		116
Other assets	66		81
Total current assets	2,976		3,209
Noncurrent assets
Property, plant and equipment
Cost	4,615		4,478
Accumulated depreciation and amortization	1,837		1,646
Net property, plant and equipment	2,778		2,832
Goodwill - Note H	3,348		3,342
Intangibles - Note H	1,840		1,936
Asbestos insurance receivable - Note L	439		449
Equity and other unconsolidated investments	225		217
Other assets	553		539
Total noncurrent assets	9,183		9,315
Total assets	$	12,159	$	12,524

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term debt - Note I	$	456	$	344
Current portion of long-term debt - Note I	8		115
Trade and other payables	746		877
Accrued expenses and other liabilities	608		577
Total current liabilities	1,818		1,913
Noncurrent liabilities
Long-term debt - Note I	2,958		3,131
Employee benefit obligations - Note K	1,697		1,839
Asbestos litigation reserve - Note L	746		771
Deferred income taxes	264		208
Other liabilities	577		633
Total noncurrent liabilities	6,242		6,582

Stockholders’ equity	4,099		4,029

Total liabilities and stockholders’ equity	$	12,159	$	12,524


(a)	Accounts receivable includes an allowance for doubtful accounts of $18 million and $24 million at June 30, 2013 and September 30, 2012, respectively.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED STOCKHOLDERS’ EQUITY



(In millions - unaudited)	Common stock		Paid-in capital			Retained earnings			Accumulated other comprehensive income			(a)	Total
BALANCE AT SEPTEMBER 30, 2012	$	1	$	647		$	3,163		$	218			$	4,029
Total comprehensive income (loss)						278			(3		)		275
Dividend on common stock, $.79 per share						(62		)					(62		)
Common shares issued under stock
incentive and other plans (b)			7										7
Repurchase of common shares (c)			(150		)								(150		)
BALANCE AT JUNE 30, 2013	$	1	$	504		$	3,379		$	215			$	4,099


(a)	At June 30, 2013, the after-tax accumulated other comprehensive income of $215 million was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $74 million and net unrealized translation gains of $141 million.


(b)	Common shares issued were 280,136 for the nine months ended June 30, 2013.


(c)	Common shares repurchased were 1,737,744 for the nine months ended June 30, 2013.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS



	Nine months ended
	June 30
(In millions - unaudited)	2013			2012
CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS
Net income	$	278		$	300
(Income) loss from discontinued operations (net of income taxes)	(4		)	10
Adjustments to reconcile income from continuing operations to
cash flows from operating activities
Depreciation and amortization	318			320
Debt issuance cost amortization	62			18
Purchased in-process research and development impairment	4			—
Deferred income taxes	16			(2		)
Equity income from affiliates	(22		)	(24		)
Distributions from equity affiliates	9			3
Gain from sale of property and equipment	(1		)	(1		)
Stock based compensation expense	25			19
Net gain on divestitures	(6		)	(4		)
Inventory fair value adjustment related to ISP acquisition	—			28
Change in operating assets and liabilities (a)	(186		)	(521		)
	493			146
CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS
Additions to property, plant and equipment	(188		)	(164		)
Proceeds from disposal of property, plant and equipment	5			10
Proceeds from sale of operations or equity investments	2			41
Proceeds from sale of available-for-sale securities	—			4
	(181		)	(109		)
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS
Proceeds from issuance of long-term debt	2,320			2
Repayment of long-term debt	(2,605		)	(79		)
Proceeds from/(repayment of) short-term debt	112			(38		)
Repurchase of common stock	(150		)	—
Debt issuance costs	(38		)	—
Cash dividends paid	(62		)	(45		)
Proceeds from exercise of stock options	1			2
Excess tax benefits related to share-based payments	5			5
	(417		)	(153		)
CASH USED BY CONTINUING OPERATIONS	(105		)	(116		)
Cash used by discontinued operations
Operating cash flows	(43		)	(17		)
Investing cash flows	—			(1		)
Effect of currency exchange rate changes on cash and cash equivalents	2			(6		)
DECREASE IN CASH AND CASH EQUIVALENTS	(146		)	(140		)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	523			737
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	377		$	597


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

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012. Results of operations for the period ended June 30, 2013 are not necessarily indicative of results to be expected for the year ending September 30, 2013. Certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying footnotes to conform to current period presentation. Additionally, the presentation of the September 30, 2012 Condensed Consolidated Balance Sheet has been revised subsequent to the filing of Ashland’s Annual Report on Form 10-K.

Ashland is composed of four reportable segments: Ashland Specialty Ingredients (Specialty Ingredients), Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets).

Use of estimates, risks and uncertainties

The preparation of Ashland’s Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities as well as qualifying subsequent events. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and intangible assets), employee benefit obligations, income taxes and liabilities and receivables associated with asbestos litigation and environmental remediation. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

Ashland’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of certain key raw materials, can have a significant effect on operations. While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.

New accounting standards

A description of new accounting standards issued during the current year is required in interim financial reporting. A detailed listing of all new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

In March 2013, the FASB issued accounting guidance related to a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity (ASC 830 Foreign Currency Matters). This guidance requires that the cumulative translation adjustment associated with a qualifying derecognized subsidiary or group of assets be immediately recognized within the income statement by the parent company. This guidance will become effective for Ashland on October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Condensed Consolidated Financial Statements.

ASHLAND INC. AND CONSOLIDATED SUBSIDIAIRES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – SIGNIFICANT ACCOUNTING POLICIES (continued)

In February 2013, the FASB issued accounting guidance related to the reporting of amounts reclassified out of accumulated other comprehensive income (ASC 220 Comprehensive Income). This guidance sets forth new disclosure requirements for items reclassified from accumulated other comprehensive income by requiring disclosures for both the changes in accumulated other comprehensive income by component and where the significant items reclassified from accumulated other comprehensive income are classified in the Statements of Consolidated Comprehensive Income. This guidance will become effective for Ashland on October 1, 2013 and will require additional disclosure for changes in accumulated other comprehensive income.

NOTE B – ACQUISITIONS

International Specialty Products Inc. (ISP)

Background and financing

On August 23, 2011, Ashland completed its acquisition of ISP, a global specialty chemical manufacturer of innovative functional ingredients and technologies, in a transaction valued at $3.2 billion. ISP reported sales of $1.9 billion for the twelve month period ended September 30, 2011. The purchase price of $2.2 billion was an all cash transaction, reduced by the amount of ISP’s net indebtedness at closing. Ashland has included ISP within the Specialty Ingredients reportable segment, with the exception of ISP’s Elastomers business line, which has been included within the Performance Materials reportable segment. The acquisition was recorded by Ashland using the acquisition 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 purchase price allocation for the acquisition was completed as of September 30, 2012.

On August 23, 2011, in conjunction with the ISP acquisition closing, Ashland entered into a $3.9 billion senior secured credit facility with a group of lenders (2011 Senior Credit Facility). The 2011 Senior Credit Facility was comprised of (i) a $1.5 billion term loan A facility, (ii) a $1.4 billion term loan B facility and (iii) a $1.0 billion revolving credit facility. Proceeds from borrowings under the term loan A facility and the term loan B facility were used, together with cash on hand, to finance the cash consideration paid for the ISP acquisition, as well as to finance the repayment of existing indebtedness of ISP in connection with the acquisition. For additional discussion regarding the subsequent repayment of these debt facilities during 2013, see Note I.

NOTE C – DIVESTITURES

Synlubes business divestiture

In January 2012, Ashland completed the sale of its aviation and refrigerant lubricants business, a polyol/ester-based synlubes (Synlubes) business previously included within the Water Technologies business segment to Monument Chemical Inc., a Heritage Group Company. Annual sales of the business were approximately $50 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The transaction resulted in a pretax loss of less than $1 million recognized during the nine months ended June 30, 2012.

PVAc business divestiture

In January 2012, Ashland completed the sale of its polyvinyl acetate homopolymer and copolymer (PVAc) business previously included within the Performance Materials business segment to Celanese Corporation. Annual sales of the business were approximately $45 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The sale included the transfer of the PVAc business, inventory and related technology, but did not include any real

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – DIVESTITURES (continued)

estate or manufacturing facilities. Ashland’s PVAc business included two brands, Flexbond™ and Vinac™ emulsions. The transaction resulted in a pretax gain of $2 million recognized during the nine months ended June 30, 2012.

Ashland Distribution

On March 31, 2011, Ashland completed the sale to Nexeo Solutions, LLC (Nexeo) of substantially all of the assets and certain liabilities of its global distribution business which previously comprised the Ashland Distribution (Distribution) segment. The transaction was an asset sale with the total post-closing adjusted cash proceeds received by Ashland of $972 million, before transaction fees and taxes. Ashland recognized an after-tax gain of $271 million during 2011. Because this transaction signified Ashland’s exit from the distribution business, the results of operations and cash flows of Distribution have been classified as discontinued operations for all periods presented. During the year following the sale of Distribution, certain indirect corporate costs included within selling, general and administrative expense that were previously allocated to the Distribution reporting segment that did not qualify for discontinued operations accounting classification were reported as costs within the Unallocated and other section of continuing operations for segment reporting purposes and equaled $5 million for the nine months ended June 30, 2012.

Ashland retained and agreed to indemnify Nexeo for certain liabilities of the Distribution business arising prior to the closing of the sale. This includes pension and other postretirement benefits, as well as certain other liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in the definitive agreement. The ongoing effects of the pension and postretirement plans for former Distribution employees are reported within the Unallocated and other section of continuing operations for segment reporting purposes.

As part of this sale, Ashland received transition service fees for ongoing administrative and other services provided to Nexeo. Ashland recognized transition service fees of $6 million and $22 million, respectively, during the three and nine months ended June 30, 2012, which offset the costs of providing transition services and were classified within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. While the transition service agreements varied in duration depending upon the type of service provided, Ashland implemented plans to reduce costs as the transition services were phased out.

NOTE D – DISCONTINUED OPERATIONS

Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, and from businesses previously divested by Hercules, a wholly-owned subsidiary of Ashland that was acquired in 2009. Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations. See Note L for more information related to the adjustments on asbestos liabilities and receivables.

As previously described in Note C, on March 31, 2011 Ashland completed the sale of substantially all of the assets and certain liabilities of Distribution. Ashland determined that this sale qualifies as a discontinued operation, in accordance with U.S. GAAP, since Ashland does not have significant continuing involvement in the distribution business. Therefore, operating results and cash flows related to Distribution have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows. Ashland made subsequent adjustments to the gain on sale of Distribution, primarily relating to the tax effects of the sale, during the three and nine months ended June 30, 2013 and 2012.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE D – DISCONTINUED OPERATIONS (continued)

On August 28, 2006, Ashland completed the sale of the stock of Ashland Paving and Construction, Inc. (APAC) for $1.3 billion, which qualified as a discontinued operation. Therefore, previous operating results, assets and liabilities related to APAC have been reflected as discontinued operations in the Condensed Consolidated Financial Statements. Ashland has made subsequent adjustments to the gain on the sale of APAC, primarily relating to the tax effects of the sale, during the three and nine months ended June 30, 2013.

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, 2013 and 2012.



	Three months ended						Nine months ended
	June 30						June 30
(In millions)	2013			2012			2013			2012
(Loss) income from discontinued operations (net of tax)
Distribution	$	(2	)	$	(2	)	$	(3	)	$	(5	)
Asbestos-related litigation reserves and receivables	4			(7		)	3			(1		)
Gain (loss) on disposal of discontinued operations (net of tax)
Distribution	—			—			—			(4		)
APAC	5			—			4			—
Total income (loss) from discontinued operations (net of tax)	$	7		$	(9	)	$	4		$	(10	)

NOTE E – RESTRUCTURING ACTIVITIES

Ashland periodically implements corporate restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business.

Severance costs

During 2011, Ashland announced steps to reduce stranded costs resulting from the divestiture of Distribution and the contribution of the Casting Solutions business to an expanded global joint venture. In addition, Ashland continues to take action to integrate ISP subsequent to its purchase in August 2011. As a first step to address cost reduction opportunities resulting from these transactions, Ashland announced a voluntary severance offer (VSO) in June 2011 to approximately 1,500 regular, full-time, non-union, U.S.-based employees, primarily within various shared resource groups as well as certain positions within the Specialty Ingredients business, ultimately resulting in 150 employees being formally approved for the VSO. An involuntary program was also initiated as a further step to capture targeted savings levels from these transactions and other business cost saving initiatives. The VSO and involuntary program resulted in a severance charge of $34 million during the September 2011 quarter. The involuntary program continued during 2012 and resulted in an expense of $21 million being recognized within the selling, general and administrative expense caption during the nine months ended June 30, 2012. As of June 30, 2013 and 2012, the remaining restructuring reserve for these programs totaled $16 million and $37 million, respectively.

As of June 30, 2013 and 2012, the remaining $1 million and $2 million, respectively, in restructuring reserves for other previously announced programs consisted of expected future severance payments from the 2009 Hercules Integration Plan, which resulted in 12 permanent facility closings and a reduction in the global workforce of over 2,000 employees from 2008 through 2010.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – RESTRUCTURING ACTIVITIES (continued)

Facility costs

During the March 2012 quarter, Ashland incurred a $20 million lease abandonment charge related to its exit from an office facility that was retained as part of the Hercules acquisition. The costs related to the reserve are being paid over the remaining lease term through May 2016. Also during the March 2012 quarter, in order to maximize operational efficiencies, Ashland abandoned a construction project for a multi-purpose facility in China. This project abandonment resulted in a $16 million charge which primarily related to expenses incurred for engineering and construction in progress. Both charges were recognized within the selling, general and administrative expense caption during the nine months ended June 30, 2012. As of June 30, 2013 and 2012, the remaining restructuring reserve for these programs totaled $8 million and $18 million, respectively.

The following table details, as of June 30, 2013 and 2012, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves for the nine months ended June 30, 2013 and 2012. The severance reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets while facility costs reserves are primarily within other noncurrent liabilities.



				Facility
(In millions)	Severance			costs			Total
Balance as of September 30, 2012	$	29		$	15		$	44
Reserve adjustments	4			—			4
Utilization (cash paid or otherwise settled)	(16		)	(7		)	(23		)
Balance at June 30, 2013	$	17		$	8		$	25

Balance as of September 30, 2011	$	45		$	—		$	45
Restructuring reserve	21			20			41
Utilization (cash paid or otherwise settled)	(27		)	(2		)	(29		)
Balance at June 30, 2012	$	39		$	18		$	57

NOTE F – FAIR VALUE MEASUREMENTS

As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement.

For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets (market approach), adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.

The following table summarizes financial asset instruments subject to recurring fair value measurements as of June 30, 2013.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – FAIR VALUE MEASUREMENTS (continued)



(In millions)	Carrying value		Total fair value		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets
Cash and cash equivalents	$	377	$	377	$	377	$	—	$	—
Deferred compensation investments (a)	180		180		53		127		—
Investments of captive insurance company (a)	3		3		3		—		—
Foreign currency derivatives	1		1		—		1		—
Total assets at fair value	$	561	$	561	$	433	$	128	$	—

Liabilities
Foreign currency derivatives	$	3	$	3	$	—	$	3	$	—


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

The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2012.



(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	$	523	$	523	$	523	$	—	$	—
Deferred compensation investments (a)	176		176		56		120		—
Investments of captive insurance company (a)	2		2		2		—		—
Foreign currency derivatives	1		1		—		1		—
Total assets at fair value	$	702	$	702	$	581	$	121	$	—

Liabilities
Interest rate swap derivatives (b)	$	62	$	62	$	—	$	62	$	—


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


(b)	Included in accrued expense and other liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheets. These interest rate swap liabilities were terminated during the March 2013 quarter.

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – FAIR VALUE MEASUREMENTS (continued)

generally have maturities of less than twelve months. All contracts are marked-to-market with net changes in fair value recorded within the selling, general and administrative expense caption. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in non-functional currencies. The following table summarizes the gains and losses recognized during the three and nine months ended June 30, 2013 and 2012 within the Statements of Consolidated Comprehensive Income.



	Three months ended					Nine months ended
	June 30					June 30
(In millions)	2013			2012		2013			2012
Foreign currency derivative (loss) gain	$	(1	)	$	—	$	(2	)	$	3

The following table summarizes the fair values of the outstanding foreign currency derivatives as of June 30, 2013 and September 30, 2012 included in other current assets and trade and other payables of the Condensed Consolidated Balance Sheets.



	June 30		September 30
(In millions)	2013		2012
Foreign currency derivative assets	$	1	$	1
Notional contract values	190		168

Foreign currency derivative liabilities (a)	$	3	$	—
Notional contract values	122		35


(a)	Fair values of liabilities of $0 denote values less than $1 million.

Interest rate hedges

During 2011, Ashland entered into interest rate swap agreements in order to manage the variable interest rate risk associated with term loans A and B that were borrowed in conjunction with the ISP acquisition. Ashland terminated the interest rate swap agreements in conjunction with the repayment of term loans A and B during the March 2013 quarter, resulting in a charge of $52 million included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2013.

As of September 30, 2012, the notional values of the interest rate swaps associated with term loan A and term loan B equaled $1.4 billion and $650 million, respectively, while the total fair value of the interest rate swaps equaled a liability position of $62 million. Of the $62 million, $22 million was included in the accrued expenses and other liabilities caption and $40 million in the other noncurrent liabilities caption of the Condensed Consolidated Balance Sheets. These instruments qualified for hedge accounting treatment and were designated as cash flow hedges whereby Ashland recorded these hedges at fair value, with the effective portion of the gain or loss reported as a component of accumulated other comprehensive income (AOCI) and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affected net income. There was no hedge ineffectiveness with these instruments during the three and nine months ended June 30, 2012.

The fair value of Ashland’s interest rate swap assets and liabilities were calculated using standard pricing models. These models utilized inputs derived from observable market data such as interest rate spot rates and forward rates, and were deemed to be Level 2 measurements within the fair value hierarchy. Counterparties

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – FAIR VALUE MEASUREMENTS (continued)

to these interest rate swap agreements were highly rated financial institutions which Ashland believed carry only a minimal risk of nonperformance.

The following table summarizes the unrealized loss on interest rate hedges recognized in AOCI during the three and nine months ended June 30, 2013 and 2012, as well as the loss reclassified from AOCI to the Statements of Consolidated Comprehensive Income during the three and nine months ended June 30, 2013 and 2012, which includes the $52 million of deferred loss related to the interest rate swaps that was reclassified out of AOCI at the time of the termination for the nine months ended June 30, 2013. The loss reclassified to the Statements of Consolidated Comprehensive Income was recorded in the net interest and other financing expense caption.



	Three months ended				Nine months ended
	June 30				June 30
(In millions)	2013		2012		2013		2012
Change in unrealized loss in AOCI	$	—	$	29	$	3	$	49
Loss reclassified from AOCI to income	—		6		65		16

Other financial instruments

At June 30, 2013 and September 30, 2012, Ashland’s long-term debt had a carrying value of $2,966 million and $3,246 million, respectively, compared to a fair value of $3,094 million and $3,405 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 G – INVENTORIES

Inventories are carried at the lower of cost or market. Certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method. The remaining inventories are stated at cost using the weighted-average cost method or the first-in, first-out method.

During the June 2013 quarter, Ashland identified a lower of cost or market adjustment affecting prior periods related to the Elastomers line of business in the Performance Materials segment. The total impact was $17 million, of which $13 million related to the December 2012 quarter. Ashland assessed the quantitative and qualitative impact of this adjustment and determined the effects on current and prior period financial statements were immaterial, and therefore recorded the charge within the cost of sales caption on the Statements of Consolidated Comprehensive Income during the three and nine months ended June 30, 2013.

During the nine months ended June 30, 2013, the Specialty Ingredients business incurred a $31 million loss on straight guar, $28 million of which related to a lower of cost or market charge that was recognized within the cost of sales caption on the Statements of Consolidated Comprehensive Income. This charge was due to the identifiable market price of certain guar inventories, which fell below the cost of the product.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - INVENTORIES (continued)

The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.



	June 30			September 30
(In millions)	2013			2012
Finished products	$	605		$	675
Raw materials, supplies and work in process	291			376
LIFO reserve	(32		)	(43		)
	$	864		$	1,008

NOTE H – GOODWILL AND OTHER INTANGIBLES

Goodwill

In accordance with U.S. GAAP, Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually and when events and circumstances indicate an impairment may have occurred. The annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value. For its July 1, 2012 assessment, Ashland determined that its reporting units for allocation of goodwill included the Specialty Ingredients, Water Technologies and Consumer Markets segments and the Composite Polymers/Specialty Polymers/Adhesives and Elastomers reporting units within the Performance Materials segment. Ashland performed its most recent annual goodwill impairment test as of July 1, 2012, and determined at that time that no impairment existed.

The following is a progression of goodwill by segment for the nine months ended June 30, 2013.



	Specialty		Water			Performance			Consumer
(In millions)	Ingredients		Technologies			Materials			Markets		Total
Balance at September 30, 2012	$	2,202	$	659		$	315		$	166	$	3,342
Other (a)	13		—			—			—		13
Currency translation adjustment	7		(13		)	(1		)	—		(7		)
Balance at June 30, 2013	$	2,222	$	646		$	314		$	166	$	3,348

(a)This adjustment represents a reclassification for certain income tax items related to the ISP acquisition.

Other intangible assets

Other intangible assets principally consist of trademarks and trade names, intellectual property, customer relationships, in-process research and development (IPR&D) and sale contracts and those classified as finite are amortized on a straight-line basis over their estimated useful lives. The cost of definite-lived trademarks and trade names is amortized principally over 4 to 25 years, intellectual property over 5 to 20 years, customer relationships over 3 to 24 years and other intangibles over 2 to 50 years.

IPR&D and certain intangible assets within trademarks and trade names have been classified as indefinite-lived and had a balance of $532 million and $536 million as of June 30, 2013 and September 30, 2012, respectively. The $4 million decrease in indefinite-lived intangible assets resulted from an impairment charge related to certain IPR&D assets associated with the acquisition of ISP. This charge was included in the research and development expense caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2013. In accordance with U.S. GAAP, Ashland annually reviews indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE H – GOODWILL AND OTHER INTANGIBLES (continued)

Intangible assets were comprised of the following as of June 30, 2013 and September 30, 2012.



	June 30, 2013
	Gross					Net
	carrying		Accumulated			carrying
(In millions)	amount		amortization			amount
Trademarks and trade names	$	535	$	(45	)	$	490
Intellectual property	840		(172		)	668
Customer relationships	831		(218		)	613
IPR&D	69		—			69
Other intangibles	35		(35		)	—
Total intangible assets	$	2,310	$	(470	)	$	1,840



	September 30, 2012
	Gross					Net
	carrying		Accumulated			carrying
(In millions)	amount		amortization			amount
Trademarks and trade names	$	535	$	(39	)	$	496
Intellectual property	843		(136		)	707
Customer relationships	833		(173		)	660
IPR&D	73		—			73
Other intangibles	35		(35		)	—
Total intangible assets	$	2,319	$	(383	)	$	1,936

Amortization expense recognized on intangible assets was $29 million for the three months ended June 30, 2013 and 2012 and $87 million and $88 million for the nine months ended June 30, 2013 and 2012, respectively, and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. Estimated amortization expense for future periods is $114 million in 2013 (includes nine months actual and three months estimated), $114 million in 2014, $112 million in 2015, $109 million in 2016 and $108 million in 2017.

NOTE I – DEBT

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIAIRES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE I – DEBT (continued)



	June 30			September 30
(In millions)	2013			2012
4.750% notes, due 2022	$	1,119		$	500
3.875% notes, due 2018	700			—
3.000% notes, due 2016	600			—
6.875% notes, due 2043	376			—
Term Loan A, due 2016 (a)	—			1,425
Term Loan B, due 2018 (a)	—			1,036
Accounts receivable securitization	350			300
6.50% junior subordinated notes, due 2029	131			129
Revolving credit facility (b)	65			—
9.125% notes, due 2017	—			76
Other international loans, interest at a weighted-
average rate of 6.9% at June 30, 2013 (5.0% to 10.5%)	53			69
Medium-term notes, due 2013-2019, interest at a weighted-
average rate of 8.4% at June 30, 2013 (7.7% to 9.4%)	21			21
8.80% debentures, due 2012	—			20
Other	7			14
Total debt	3,422			3,590
Short-term debt	(456		)	(344		)
Current portion of long-term debt	(8		)	(115		)
Long-term debt (less current portion)	$	2,958		$	3,131

(a)2011 Senior Credit Facility

(b)2013 Senior Credit Facility

The scheduled aggregate maturities of debt by year are as follows: $26 million remaining in 2013, $36 million in 2014, $359 million in 2015, $600 million in 2016 and none in 2017. The borrowing capacity remaining under the $1.2 billion revolving credit facility was $1.047 billion, due to an outstanding balance of $65 million, as well as a reduction of $88 million for letters of credit outstanding at June 30, 2013. No capacity remained under the accounts receivable securitization facility as the maximum borrowing amount was outstanding at June 30, 2013.

Repayment of 9.125% senior notes

During the June 2013 quarter, Ashland redeemed the remaining $78 million outstanding principal of the 9.125% senior notes. Ashland recognized a $3 million charge for debt issuance costs and the original issue discount related to the 9.125% senior notes, as well as a $4 million charge related to an early redemption premium payment, both of which are included in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income for the three and nine months ended June 30, 2013.

Senior notes refinancing

During the March 2013 quarter, Ashland completed its issuance of senior notes with an aggregate principal amount of $2.3 billion. These senior unsecured notes (senior notes) are comprised of 3.000% senior notes due 2016 ($600 million), 3.875% senior notes due 2018 ($700 million), 4.750% senior notes due 2022 ($625 million) and 6.875% senior notes due 2043 ($375 million). The 2022 notes were issued as additional notes under the existing 2022 notes indenture issued in August 2012 and have the same terms as the originally issued notes. The 2043 notes were issued at a $1 million premium, while the new 2022 notes were issued at a $6 million discount. In accordance with U.S. GAAP, the premium and discount are being accreted into the

ASHLAND INC. AND CONSOLIDATED SUBSIDIAIRES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE I – DEBT (continued)

net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income over the terms of the respective notes.

During the March 2013 quarter, Ashland also entered into a new five-year senior unsecured revolving credit facility in an aggregate amount of $1.2 billion (the 2013 Senior Credit Facility), which replaced the previous $1.0 billion senior secured revolving credit facility under the 2011 Senior Credit Facility.

Ashland used the net proceeds from its issuance of the senior notes, along with the initial $85 million borrowing under the 2013 Senior Credit Facility and cash on hand, (i) to pay in full the 2011 Senior Credit Facility, including the $1.41 billion outstanding principal of the term loan A facility and the $1.03 billion outstanding principal of the term loan B facility, (ii) to pay $52 million to terminate the interest rate swaps associated with the term loan A and term loan B facilities, (iii) to pay accrued interest, fees and expenses under the 2011 Senior Credit Facility and (iv) to pay $38 million in fees and expenses with respect to the issuance of the senior notes and entry into the 2013 Senior Credit Facility. The $52 million charge to terminate the interest rate swaps is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2013. The $38 million of new fees and expense is being amortized proportionately for each tranche of the senior notes and the 2013 Senior Credit Facility.

As a result of the repayment and the termination of the 2011 Senior Credit Facility, Ashland recognized a $47 million charge for the accelerated amortization of previous debt issuance and other costs, which is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2013.

Covenant restrictions

The 2013 Senior Credit Facility contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional indebtedness, further negative pledges, investments, mergers, sale of assets and restricted payments, and other customary limitations. As of June 30, 2013, Ashland is in compliance with all debt agreement covenant restrictions.

Financial covenants

The maximum consolidated leverage ratio permitted under the 2013 Credit Facility during its entire duration is 3.25. At June 30, 2013, Ashland’s calculation of the consolidated leverage ratio was 2.6, which is below the maximum consolidated leverage ratio of 3.25.

The minimum required consolidated interest coverage ratio under the 2013 Credit Facility during its entire duration is 3.00. At June 30, 2013, Ashland’s calculation of the interest coverage ratio was 7.4, which exceeds the minimum required consolidated ratio of 3.00.

NOTE J – INCOME TAXES

Current fiscal year

Ashland’s effective tax rate is subject to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations. The overall effective tax rate was 25.9% for the three months ended June 30, 2013 and was impacted by discrete charges of $4 million, primarily related to ISP integration activities.

The overall effective tax rate of 23.5% for the nine months ended June 30, 2013 includes certain discrete items including the current quarter discrete items discussed previously, as well as two net discrete tax benefit adjustments of $6 million and $4 million, respectively, related to the reversal of an unrecognized tax benefit

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE J – INCOME TAXES (continued)

and a foreign income tax rate change recorded during the current period. Additionally, the nine month period was impacted by a $36 million benefit related to the $106 million charge from interest rate swap terminations and accelerated debt issuance and other costs and a $6 million benefit for fiscal year 2012 research and development credits as a result of tax legislation that became effective in the current period. These favorable discrete items were partially offset by unfavorable discrete adjustments of $14 million, primarily related to recording a reserve for an unrecognized benefit associated with a foreign tax audit.

Prior fiscal year

The overall effective tax rate was 25.6% for the three months ended June 30, 2012 and includes net discrete benefit adjustments of $5 million primarily related to the release of a valuation allowance, adjustments to uncertain tax positions and foreign deferred tax adjustments.

The overall effective tax rate of 26.5% for the nine months ended June 30, 2012 includes certain discrete items including the prior year quarter discrete items discussed previously, as well as two benefits of $7 million and $10 million, respectively, for the $21 million severance and restructuring charge and the $28 million fair value assessment of ISP inventory charge recorded during the prior year period.

Unrecognized tax benefits

Changes in unrecognized tax benefits are summarized as follows for the nine months ended June 30, 2013.



(In millions)
Balance at October 1, 2012	$	124
Increases related to positions taken on items from prior years	16
Decreases related to positions taken on items from prior years	(2		)
Increases related to positions taken in the current year	10
Lapse of the statute of limitations	(9		)
Settlement of uncertain tax positions with tax authorities	(2		)
Balance at June 30, 2013	$	137

In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $14 million for continuing operations and $13 million for discontinued operations, respectively, related primarily to statute of limitations expirations in various tax jurisdictions. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.

NOTE K – EMPLOYEE BENEFIT PLANS

For the nine months ended June 30, 2013, Ashland contributed $98 million to its U.S. pension plans and $19 million to its non-U.S. pension plans. Ashland expects to make additional contributions to U.S. plans of approximately $6 million and to the non-U.S. plans of approximately $3 million during the remainder of 2013.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE K – EMPLOYEE BENEFIT PLANS (continued)

The following table details the components of pension and other postretirement benefit costs.



							Other postretirement
	Pension benefits						benefits
(In millions)	2013			2012			2013			2012
Three months ended June 30
Service cost (a)	$	10		$	9		$	—		$	1
Interest cost (b)	44			51			2			2
Curtailment (b)	—			(1		)	—			—
Expected return on plan assets (b)	(60		)	(56		)	—			—
Amortization of prior service credit (b)	(1		)	—			(5		)	(3		)
	$	(7	)	$	3		$	(3	)	$	—

Nine months ended June 30
Service cost (a)	$	32		$	28		$	2		$	2
Interest cost (b)	132			149			5			9
Curtailment (b)	—			(1		)	—			—
Expected return on plan assets (b)	(178		)	(170		)	—			—
Amortization of prior service credit (b)	(1		)	(1		)	(16		)	(10		)
	$	(15	)	$	5		$	(9	)	$	1

(a)For segment reporting purposes, cost is proportionately allocated to each business segment, excluding the Unallocated and other segment.

(b)For segment reporting purposes, cost is recorded within the Unallocated and other segment.

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES

Asbestos litigation

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

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 significantly from period to period. A summary of Ashland asbestos claims activity, excluding those related to Hercules, follows.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)



	Nine months ended
	June 30				Years ended September 30
(In thousands)	2013		2012		2012		2011		2010
Open claims - beginning of period	66		72		72		83		100
New claims filed	2		2		2		2		2
Claims settled	(1	)	(1	)	(1	)	(1	)	(1	)
Claims dismissed	(1	)	(4	)	(7	)	(12	)	(18	)
Open claims - end of period	66		69		66		72		83

Ashland asbestos-related liability

From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A. As a result of the most recent annual update of this estimate, completed during the June 2013 quarter, it was determined that the liability for asbestos claims should be decreased by $28 million. Total reserves for asbestos claims were $469 million at June 30, 2013 compared to $522 million at September 30, 2012.

A progression of activity in the asbestos reserve is presented in the following table.



	Nine months ended
	June 30						Years ended September 30
(In millions)	2013			2012			2012			2011			2010
Asbestos reserve - beginning of period	$	522		$	543		$	543		$	537		$	543
Reserve adjustment	(28		)	11			11			41			28
Amounts paid	(25		)	(25		)	(32		)	(35		)	(34		)
Asbestos reserve - end of period	$	469		$	529		$	522		$	543		$	537

Ashland asbestos-related receivables

Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed. As a result, any increases in the asbestos reserve have been largely offset by probable insurance recoveries. The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland’s insurance coverage.

For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. Approximately 65% of the estimated receivables from insurance companies are expected to be due from domestic insurers. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of June 30, 2013. The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings, and from Underwriters at Lloyd’s, whose insurance policy obligations have been transferred to a Berkshire Hathaway entity. Ashland discounts this piece of the receivable based upon the projected timing of the receipt of cash from those insurers unless likely settlement amounts can be determined.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

During the December 2011 quarter, Ashland received $7 million in cash after reaching a settlement with certain insolvent London market insurance companies. The cash received from this settlement during the prior period was recognized as an after-tax gain of $6 million within discontinued operations of the Statements of Consolidated Comprehensive Income since Ashland’s policy is to not record asbestos receivables for any carriers that are insolvent until cash is received.

In October 2012, Ashland initiated arbitration proceedings against Underwriters at Lloyd’s and certain Chartis (AIG member) companies seeking to enforce these insurers’ contractual obligations to provide indemnity for asbestos liabilities and defense costs under existing coverage-in-place agreements. In addition, Ashland has initiated a lawsuit in Kentucky state court against certain Berkshire Hathaway entities (National Indemnity Company and Resolute Management Inc.) on grounds that these Berkshire entities have wrongfully interfered with Underwriters’ and Chartis’ performance of their respective contractual obligations to provide asbestos coverage by directing the insurers to reduce and delay certain claim payments. While Ashland anticipates its position will be supported by the proceedings, an adverse resolution of these proceedings could have a significant effect on the timing of loss reimbursement and the amount of Ashland’s recorded insurance receivables from these insurers.

At June 30, 2013, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $409 million, of which $85 million relates to costs previously paid. Receivables from insurers amounted to $423 million at September 30, 2012. During the June 2013 quarter, the annual update of the model used for purposes of valuing the asbestos reserve described above, and its impact on valuation of future recoveries from insurers, was completed. This model update resulted in a $3 million decrease in the receivable for probable insurance recoveries.

A progression of activity in the Ashland insurance receivable is presented in the following table.



	Nine months ended
	June 30						Years ended September 30
(In millions)	2013			2012			2012			2011			2010
Insurance receivable - beginning of period	$	423		$	431		$	431		$	421		$	422
Receivable adjustment	(3		)	19			19			42			36
Amounts collected	(11		)	(24		)	(27		)	(32		)	(37		)
Insurance receivable - end of period	$	409		$	426		$	423		$	431		$	421

Hercules asbestos-related litigation

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



	Nine months ended
	June 30			Years ended September 30
(In thousands)	2013		2012	2012		2011		2010
Open claims - beginning of period	21		21	21		20		21
New claims filed	1		—	1		2		—
Claims dismissed	(1	)	—	(1	)	(1	)	(1	)
Open claims - end of period	21		21	21		21		20

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

Hercules asbestos-related liability

From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A. As a result of the most recent annual update of this estimate, completed during the June 2013 quarter, it was determined that the liability for Hercules asbestos related claims should be increased by $46 million. Total reserves for asbestos claims were $347 million at June 30, 2013 compared to $320 million at September 30, 2012.

A progression of activity in the asbestos reserve is presented in the following table.



	Nine months ended
	June 30						Years ended September 30
(In millions)	2013			2012			2012			2011			2010			(a)
Asbestos reserve - beginning of period	$	320		$	311		$	311		$	375		$	484
Reserve adjustment	46			30			30			(48		)	(93		)
Amounts paid	(19		)	(15		)	(21		)	(16		)	(16		)
Asbestos reserve - end of period	$	347		$	326		$	320		$	311		$	375

(a) Reserve adjustment includes a reduction of $49 million during 2010 for purchase accounting adjustments as part of the purchase price allocation for the Hercules acquisition.

Hercules asbestos-related receivables

For the Hercules asbestos-related obligations, certain reimbursements pursuant to coverage-in-place agreements with insurance carriers exist. As a result, any increases in the asbestos reserve have been partially offset by probable insurance recoveries. Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. The estimated receivable consists exclusively of domestic insurers. Of the insurance companies rated by A. M. Best, all have a credit rating of B+ or higher as of June 30, 2013.

As of June 30, 2013 and September 30, 2012, the receivables from insurers amounted to $75 million and $56 million, respectively. As previously mentioned, during the June 2013 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed. This model update caused a $19 million increase in the receivable for probable insurance recoveries.

A progression of activity in the Hercules insurance receivable is presented in the following table.



	Nine months ended
	June 30					Years ended September 30
(In millions)	2013		2012			2012			2011			2010			(a)
Insurance receivable - beginning of period	$	56	$	48		$	48		$	68		$	118
Receivable adjustment	19		9			9			(20		)	(50		)
Amounts collected	—		(1		)	(1		)	—			—
Insurance receivable - end of period	$	75	$	56		$	56		$	48		$	68

(a) Receivable adjustment includes a reduction of $28 million during 2010 for purchase accounting adjustments as part of the purchase price allocation for the Hercules acquisition.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

Asbestos liability projection

Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards. Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens. In light of these inherent uncertainties, Ashland believes that the asbestos reserves for Ashland and 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 $740 million for the Ashland asbestos-related litigation and approximately $640 million for the Hercules asbestos-related litigation (or approximately $1.4 billion in the aggregate), 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, Ashland may need to further increase the estimates of the costs associated with asbestos claims and these increases could be material over time.

Environmental remediation and asset retirement obligations

Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations. At June 30, 2013, such locations included 78 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 146 current and former operating facilities (including certain operating facilities conveyed to Marathon Ashland Petroleum LLC (MAP) in 2005) and about 1,225 service station properties, of which 85 are being actively remediated.

Ashland’s reserves for environmental remediation amounted to $221 million at June 30, 2013 compared to $228 million at September 30, 2012, of which $180 million at June 30, 2013 and $187 million at September 30, 2012 were classified in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.

The following table provides a reconciliation of the changes in the environmental contingencies and asset retirement obligations during the nine months ended June 30, 2013 and 2012.



	Nine months ended
	June 30
(In millions)	2013			2012
Reserve - beginning of period	$	228		$	246
Disbursements, net of cost recoveries	(35		)	(29		)
Revised obligation estimates and accretion	27			23
Foreign currency translation	1			(1		)
Reserve - end of period	$	221		$	239

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

The total reserves for environmental remediation reflect Ashland’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable, without regard to any third-party recoveries. Engineering studies, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. Ashland continues to discount certain environmental sites and regularly adjusts its reserves as environmental remediation continues. Ashland has estimated the value of its probable insurance recoveries associated with its environmental reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage. At June 30, 2013 and September 30, 2012, Ashland’s recorded receivable for these probable insurance recoveries was $26 million.

Components of environmental remediation expense included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income are presented in the following table for the three and nine months ended June 30, 2013 and 2012.



	Three months ended						Nine months ended
	June 30						June 30
(In millions)	2013			2012			2013			2012
Environmental expense	$	20		$	12		$	25		$	20
Accretion	—			1			2			3
Legal expense	—			1			1			2
Total expense	20			14			28			25

Insurance receivable	(3		)	(2		)	(4		)	(5		)
Total expense, net of receivable activity