Edgar Filing: ASHLAND INC.

6.30.2015 ASH 10Q

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, 2015



	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, 2015, there were 67,624,467 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)	2015			2014			2015			2014
Sales	$	1,367		$	1,605		$	4,107		$	4,583
Cost of sales	939			1,161			2,845			3,377
Gross profit	428			444			1,262			1,206

Selling, general and administrative expense	216			286			645			891
Research and development expense	24			23			74			87
Equity and other income (loss)	8			8			16			(6		)
Operating income	196			143			559			222

Net interest and other financing expense	54			41			136			124
Net gain (loss) on divestitures	—			(3		)	(118		)	3
Income from continuing operations before
income taxes	142			99			305			101
Income tax expense - Note I	27			28			55			3
Income from continuing operations	115			71			250			98
Income (loss) from discontinued operations
(net of tax) - Note C	(8		)	28			113			67
Net income	$	107		$	99		$	363		$	165

PER SHARE DATA
Basic earnings per share - Note L
Income from continuing operations	$	1.70		$	0.91		$	3.66		$	1.26
Income (loss) from discontinued operations	(0.12		)	0.36			1.65			0.86
Net income	$	1.58		$	1.27		$	5.31		$	2.12

Diluted earnings per share - Note L
Income from continuing operations	$	1.68		$	0.90		$	3.61		$	1.24
Income (loss) from discontinued operations	(0.12		)	0.35			1.63			0.85
Net income	$	1.56		$	1.25		$	5.24		$	2.09

DIVIDENDS PAID PER COMMON SHARE	$	0.39		$	0.34		$	1.07		$	1.02

COMPREHENSIVE INCOME (LOSS)
Net income	$	107		$	99		$	363		$	165
Other comprehensive income (loss), net of tax - Note M
Unrealized translation gain (loss)	68			11			(314		)	25
Pension and postretirement obligation adjustment	(2		)	(3		)	(13		)	(12		)
Unrealized loss on available-for-sale securities	(3		)	—			(3		)	—
Other comprehensive income (loss)	63			8			(330		)	13
Comprehensive income	$	170		$	107		$	33		$	178

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	June 30		September 30
(In millions - unaudited)	2015		2014

ASSETS
Current assets
Cash and cash equivalents	$	1,113	$	1,393
Accounts receivable (a)	1,010		1,202
Inventories - Note F	700		765
Deferred income taxes	123		118
Other assets	146		83
Total current assets	3,092		3,561
Noncurrent assets
Property, plant and equipment
Cost	4,085		4,275
Accumulated depreciation	1,918		1,861
Net property, plant and equipment	2,167		2,414
Goodwill - Note G	2,509		2,643
Intangibles - Note G	1,180		1,309
Restricted investments - Note A	302		—
Asbestos insurance receivable - Note K	183		433
Equity and other unconsolidated investments	66		81
Other assets	456		479
Total noncurrent assets	6,863		7,359
Total assets	$	9,955	$	10,920

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term debt - Note H	$	231	$	329
Current portion of long-term debt - Note H	105		9
Trade and other payables	544		674
Accrued expenses and other liabilities	494		675
Total current liabilities	1,374		1,687
Noncurrent liabilities
Long-term debt - Note H	3,362		2,911
Employee benefit obligations - Note J	849		1,468
Asbestos litigation reserve - Note K	676		701
Deferred income taxes	102		110
Other liabilities	425		460
Total noncurrent liabilities	5,414		5,650
Commitments and contingencies - Note K
Stockholders’ equity	3,167		3,583

Total liabilities and stockholders’ equity	$	9,955	$	10,920


(a)	Accounts receivable includes an allowance for doubtful accounts of $13 million at June 30, 2015 and September 30, 2014, 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 (loss)			(a)	Total
BALANCE AT SEPTEMBER 30, 2014	$	1	$	—	$	3,475		$	107			$	3,583
Total comprehensive income (loss)					363			(330		)		33
Regular dividends, $1.07 per common share					(72		)					(72		)
Common shares issued under stock
incentive and other plans (b)			28		(8		)					20
Repurchase of common shares (c)					(397		)					(397		)
BALANCE AT JUNE 30, 2015	$	1	$	28	$	3,361		$	(223	)		$	3,167

(a)

At June 30, 2015 and September 30, 2014, the after-tax accumulated other comprehensive loss of $223 million and gain of $107 million, respectively, was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $46 million and $59 million, respectively, net unrealized translation loss of $266 million and gain of $48 million, respectively, and net unrealized loss on available-for-sale securities of $3 million and zero, respectively.


(b)	Common shares issued were 407,256 for the nine months ended June 30, 2015 and includes the impact of the modification of certain performance shares. See Note N of the Notes to Condensed Consolidated Financial Statements for further information.


(c)	Common shares repurchased were 3,078,136 for the nine months ended June 30, 2015. See Note M of the Notes to Condensed Consolidated Financial Statements.

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)	2015			2014
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS
Net income	$	363		$	165
Income from discontinued operations (net of tax)	(113		)	(67		)
Adjustments to reconcile income from continuing operations to
cash flows from operating activities
Depreciation and amortization	255			281
Debt issuance cost amortization	17			11
Deferred income taxes	(16		)	(20		)
Equity income from affiliates	(12		)	(22		)
Distributions from equity affiliates	18			7
Stock based compensation expense	22			26
Loss on early retirement of debt	8			—
Gain on available-for-sale securities	(1		)	—
Net loss (gain) on divestitures	118			(3		)
Impairments of equity investments and in-process research and development	14			59
Pension contributions	(592		)	(27		)
Losses on pension and other postretirement plan remeasurements	9			121
Change in operating assets and liabilities (a)	(249		)	(127		)
Total cash flows provided (used) by operating activities from continuing operations	(159		)	404
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS
Additions to property, plant and equipment	(147		)	(152		)
Proceeds from disposal of property, plant and equipment	2			9
Purchase of operations - net of cash acquired	(5		)	(2		)
Proceeds from sale of operations or equity investments	133			92
Proceeds from sales of available-for-sale securities	315			—
Purchase of available-for-sale securities	(315		)	—
Funds restricted for specific transactions	(320		)	—
Proceeds from the settlement of derivative instruments	17			—
Payments for the settlement of derivative instruments	(5		)	—
Total cash flows used by investing activities from continuing operations	(325		)	(53		)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS
Proceeds from issuance of long-term debt	1,100			—
Repayment of long-term debt	(559		)	(12		)
Premium on long-term debt repayment	(8		)	—
Proceeds (repayment) from short-term debt	(98		)	58
Repurchase of common stock	(397		)	(125		)
Debt issuance costs	(9		)	—
Cash dividends paid	(72		)	(79		)
Excess tax benefits related to share-based payments	9			10
Total cash flows used by financing activities from continuing operations	(34		)	(148		)
CASH PROVIDED (USED) BY CONTINUING OPERATIONS	(518		)	203
Cash provided (used) by discontinued operations
Operating cash flows	261			48
Investing cash flows	19			(27		)
Total cash provided by discontinued operations	280			21
Effect of currency exchange rate changes on cash and cash equivalents	(42		)	—
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(280		)	224
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	1,393			346
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	1,113		$	570


(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 accounting principles generally accepted in the United States for interim financial reporting and Securities and Exchange Commission regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014. Results of operations for the period ended June 30, 2015 are not necessarily indicative of the expected results for the remaining quarter in the fiscal year. Additionally, certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying notes to conform to the current period presentation.

Ashland is composed of three reportable segments: Ashland Specialty Ingredients (Specialty Ingredients), Ashland Performance Materials (Performance Materials) and Valvoline. On July 31, 2014, Ashland completed the sale of the assets and liabilities of Ashland Water Technologies (Water Technologies). As a result of this sale, all prior period operating results and cash flows related to Water Technologies have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows. In addition to the sale of Water Technologies, Ashland sold certain assets remaining in its portfolio of businesses which are discussed in Note B. See Notes C, D and O for additional information on this activity and related results as well as Ashland’s current reportable segment results.

Use of estimates, risks and uncertainties

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

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

Restricted investments

On January 13, 2015, Ashland and Hercules, a wholly owned subsidiary of Ashland that was acquired in 2009, entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). During the March 2015 quarter, Ashland placed $335 million of the settlement funds into a renewable annual trust restricted for the purpose of paying ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – SIGNIFICANT ACCOUNTING POLICIES (continued)

claims. These funds are presented primarily as noncurrent assets, with $30 million classified within other current assets in the Condensed Consolidated Balance Sheets.

As of June 30, 2015, the funds were primarily invested in equity and corporate bond investments with a portion maintained in demand deposits. The funds within the trust are classified as available-for-sale securities. 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. Interest 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. See Notes E and K for additional information regarding fair value of these investments within the trust and the January 2015 asbestos insurance settlement.

New accounting standards

A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of all new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2014. The following standards relevant to Ashland were either issued or adopted in the current period or will become effective in a subsequent period.

In April 2015, the FASB issued accounting guidance to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. The adoption of the new guidance is on a retrospective basis. Ashland elected to early adopt this guidance for debt issuance costs during the quarter ending June 30, 2015. As a result, Ashland reclassed $27 million and $31 million from other noncurrent assets to long-term debt within the Condensed Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014, respectively.

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. During July 2015, the FASB delayed the effective date of this standard by one year. As a result, this guidance now becomes effective for Ashland on October 1, 2018. Ashland is currently evaluating the new accounting standard and the available implementation options the standard allows as well as the impact this new guidance will have on Ashland's Condensed Consolidated Financial Statements.

In April 2014, the FASB issued accounting guidance amending the requirements for reporting discontinued operations (ASC 205 Presentation of Financial Statements and ASC 360 Property, Plant and Equipment). This guidance limits the requirement for discontinued operations treatment to the disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Additionally, this new guidance no longer precludes discontinued operations presentation based on continuing involvement or cash flows following the disposal. Ashland adopted this guidance on October 1, 2014, which is applicable only to divestitures subsequent to the adoption date, and has evaluated each divestiture under this new guidance during the current year.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - DIVESTITURES

Industrial Biocides

During May 2015, Ashland entered into a definitive sale agreement to sell the industrial biocides assets within Specialty Ingredients, which closed on July 1, 2015. As a result of the sale, Ashland expects to report net cash proceeds of approximately $30 million in the Statement of Condensed Consolidated Cash Flows during the upcoming September 2015 quarter and recognize a nominal gain before tax and after customary closing costs.

The sale of Specialty Ingredient's industrial biocides assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results.

Valvoline Car Care Products

In April 2015, Ashland entered into a definitive sale agreement to sell Valvoline's car care product assets for $24 million, which included Car Brite™ and Eagle One™ automotive appearance products. During the March 2015 quarter, Ashland recognized a loss of $26 million before tax to recognize the assets at fair value less cost to sell since the assets met the U.S. GAAP held for sale criteria at March 31, 2015. The loss is reported within the net gain (loss) on divestitures caption within the Statements of Consolidated Comprehensive Income. The transaction closed on June 30, 2015 and Ashland received net proceeds of $19 million after adjusting for certain customary closing costs and final working capital totals.

The sale of Valvoline's car care product assets did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results.

Valvoline Joint Venture

During April 2015, Ashland sold a Valvoline joint venture equity investment in Venezuela. During the nine months ended June 30, 2015, Ashland recognized a $14 million impairment, for which there was no tax effect, within the equity and other income (loss) caption of the Statements of Consolidated Comprehensive Income.

Ashland’s decision to sell the equity investment and the resulting charge recorded in the prior quarter is reflective of the continued devaluation of the Venezuelan currency (bolivar) based on changes to the Venezuelan currency exchange rate mechanisms during the prior quarter. In addition, the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar had restricted the joint venture’s ability to pay dividends and obligations denominated in U.S. dollars. These exchange regulations and cash flow limitations, combined with other recent Venezuelan regulations and the impact of declining oil prices on the Venezuelan economy, had significantly restricted Ashland’s ability to conduct normal business operations through the joint venture arrangement. Ashland determined this divestiture does not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results, and thus it does not qualify for discontinued operations treatment.

MAP Transaction

As part of the 2005 transfer of Ashland's 38% interest in the Marathon Ashland Petroleum joint venture and two other small businesses to Marathon Oil Corporation (Marathon) (the MAP Transaction), Marathon is entitled to the tax deductions for Ashland's future payments of certain contingent liabilities, including asbestos liabilities, related to previously owned businesses of Ashland. Marathon agreed to compensate Ashland for these tax deductions and Ashland established a discounted receivable, which represented the estimated present value of probable recoveries from Marathon for the portion of their future tax deductions. As a result of the January 2015 asbestos insurance settlement, Ashland recorded a $7 million charge during the nine months ended June 30, 2015 within the net gain (loss) on divestitures caption of the Statements of Consolidated

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B – DIVESTITURES (continued)

Comprehensive Income and accordingly reduced the discounted receivable by the same amount. The total MAP receivable remaining as of June 30, 2015 was $9 million. See Note K for more information related to the January 2015 asbestos insurance settlement.

Elastomers

On October 9, 2014, Ashland entered into a definitive agreement to sell the Elastomers division of the Performance Materials reportable segment, which operated a 250-person manufacturing facility in Port Neches, Texas, to Lion Copolymer Holdings, LLC. The Elastomers division, which primarily served the North American replacement tire market, accounted for approximately 5% of Ashland's 2014 sales of $6.1 billion and 18% of Ashland Performance Materials' $1.6 billion in sales in 2014. The sale was completed on December 1, 2014 in a transaction valued at approximately $120 million which was subject to working capital adjustments. The total post-closing adjusted cash proceeds received before taxes by Ashland during the nine months ended June 30, 2015 was $109 million, which includes working capital adjustments and transaction costs, as defined in the definitive agreement.

Elastomers' net assets as of November 30, 2014 were $191 million which primarily included accounts receivable, inventory, property, plant and equipment, non-deductible goodwill and other intangibles and payables. Since the net proceeds received were less than book value, Ashland recorded a loss of $86 million pre-tax within the net gain (loss) on divestiture caption within the Statements of Consolidated Comprehensive Income during the nine months ended June 30, 2015. The related tax effect was a benefit of $28 million included in the income tax expense caption within the Statements of Consolidated Comprehensive Income.

Ashland determined that the sale of Elastomers did not represent a strategic shift that had or will have a major effect on Ashland's operations and financial results. As such, Elastomers' results were included in the Performance Materials reportable segment results of operations and financial position within the Statements of Consolidated Comprehensive Income and Condensed Consolidated Balance Sheets, respectively, until its December 1, 2014 sale. Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income that were previously allocated to the Elastomers division are now reported as selling, general and administrative expense within continuing operations on a consolidated basis within the Unallocated and other segment. These costs were $3 million and $8 million during the three and nine months ended June 30, 2015, respectively.

Water Technologies

On July 31, 2014, Ashland sold the Water Technologies business to a fund managed by Clayton, Dubilier & Rice (CD&R) in a transaction valued at approximately $1.8 billion. The total post-closing adjusted cash proceeds received by Ashland during 2014, before taxes, was $1.6 billion, which includes estimates for certain working capital and other post-closing adjustments, as defined in the definitive agreement. During the nine months ended June 30, 2015, Ashland received approximately $42 million of the $48 million of delayed purchase price funds related to a foreign entity which completed certain regulatory closing requirements. Ashland received the remainder of these funds in July 2015. Final settlement of working capital and other post-closing adjustments occurred during the nine months ended June 30, 2015 resulting in a payment of approximately $20 million to CD&R.

Since this transaction signified Ashland’s exit from the Water Technologies business, Ashland has classified Water Technologies’ results of operations and cash flows within the Statements of Consolidated Comprehensive Income and Statements of Condensed Consolidated Cash Flows as discontinued operations for prior periods presented. Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income that were previously allocated to the Water Technologies reportable segment do not qualify for classification within discontinued operations and are now

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE B – DIVESTITURES (continued)

reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were $9 million and $28 million during the three and nine months ended June 30, 2014, respectively.

Ashland retained and agreed to indemnify CD&R for certain liabilities of the Water Technologies business arising prior to the closing of the sale, including certain pension and postretirement liabilities, environmental remediation liabilities and certain legacy liabilities relating to businesses disposed or discontinued by the Water Technologies business. Costs directly related to these retained liabilities have been included within the discontinued operations caption of the Statements of Consolidated Comprehensive Income during the three and nine months ended June 30, 2014. The ongoing effects of the pension and postretirement plans for former Water Technologies employees are reported within the Unallocated and other segment.

Ashland provides certain transition services to CD&R for a fee. During the three and nine months ended June 30, 2015, Ashland recognized transition service fees of $8 million and $25 million, respectively, within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. While the transition services vary in duration depending upon the type of service provided, Ashland will continue to reduce costs as the transition services are completed. See Note C for further information on the results of operations of Water Technologies for all periods presented.

Casting Solutions joint venture

During 2014, Ashland, in conjunction with its partner, initiated a process to sell the ASK Chemicals GmbH (ASK) joint venture, in which Ashland had 50% ownership. As part of the sale process, Ashland determined that the fair value of its investment in the ASK joint venture was less than the carrying value and that an other than temporary impairment had occurred. As a result, Ashland recognized an impairment of $4 million and $50 million related to its investment in the ASK joint venture during the three and nine months ended June 30, 2014, respectively. These charges were recognized within the equity and other income (loss) caption of the Statements of Consolidated Comprehensive Income.

On June 30, 2014, Ashland, in conjunction with its partner, sold the ASK joint venture to investment funds affiliated with Rhône Capital, LLC (Rhône), a London and New York-based private equity investment firm. From the sale, total pre-tax proceeds to the sellers, which were split evenly between Ashland and its partner under the terms of the 50/50 joint venture, were $205 million, which included $176 million in cash and a $29 million note from Rhône due in calendar year 2022.

NOTE C – DISCONTINUED OPERATIONS

In previous periods, Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income for all periods presented and are discussed further within this note.

Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, which qualified as a discontinued operation, and from the 2009 acquisition of Hercules, a wholly-owned subsidiary of Ashland. Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations. During the nine months ended June 30, 2015, Ashland recorded an after-tax gain of $120 million within discontinued operations due to the January 2015 asbestos insurance settlement. See Note K for more information related to the adjustments on asbestos liabilities and receivables.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C – DISCONTINUED OPERATIONS (continued)

As previously described in Note B, on July 31, 2014, Ashland completed the sale of the Water Technologies business to CD&R. Sales for the three and nine months ended June 30, 2014 were $441 million and $1,308 million, respectively. The results of operations for the three and nine months ended June 30, 2014 are included in the table below. Ashland has made certain post-closing adjustments, including the pension plan remeasurement discussed in Note J, as defined by the definitive agreement, during the nine months ended June 30, 2015.

On March 31, 2011, Ashland completed the sale of the Ashland Distribution (Distribution) reportable segment to Nexeo Solutions, LLC for substantially all of the assets and certain liabilities of this global distribution business. Ashland determined that this sale qualified as a discontinued operation, in accordance with U.S. GAAP, since Ashland does not have significant continuing involvement in the distribution business. Ashland has made subsequent adjustments to the gain on sale of Distribution, primarily relating to the tax effects of the sale.

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, 2015 and 2014.



	Three months ended						Nine months ended
	June 30						June 30
(In millions)	2015			2014			2015		2014
Income (loss) from discontinued operations (net of tax)
Asbestos-related litigation	$	(10	)	$	(3	)	$	110	$	(4	)
Water Technologies (a)	2			33			—		74
Distribution	—			(2		)	—		(3		)
Gain on disposal of discontinued operations (net of tax)
Water Technologies	—			—			3		—
Total income (loss) from discontinued operations (net of tax)	$	(8	)	$	28		$	113	$	67


(a)	For the three and nine months ended June 30, 2014, pretax income recorded for Water Technologies was $46 million and $101 million, respectively.

NOTE D – RESTRUCTURING ACTIVITIES

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

During 2014, Ashland announced a global restructuring program to streamline the resources used across the organization. As part of this global restructuring program, Ashland announced a voluntary severance offer (VSO) to certain U.S. employees. Approximately 400 employees were formally approved for the VSO. Additionally, during 2014, an involuntary program for employees was also initiated as part of the global restructuring program. Substantially all payments related to the VSO and involuntary programs will be paid by the end of fiscal 2015. The VSO and involuntary programs resulted in $16 million and $91 million of expense being recognized during the three and nine months ended June 30, 2014, respectively. Of these amounts, $13 million was recorded within the cost of sales caption for the nine months ended June 30, 2014, and $16 million and $78 million during the three and nine months ended June 30, 2014, respectively, were recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. In addition, the employee reductions resulted in a pension curtailment being recorded during the prior year period. See Note J for further information. As of June 30, 2015 and September 30, 2014,

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE D – RESTRUCTURING ACTIVITIES (continued)

the remaining restructuring reserve for this global restructuring program was $12 million and $53 million, respectively.

As of June 30, 2015 and September 30, 2014, the remaining $1 million and $3 million, respectively, in restructuring reserves for other previously announced programs principally consisted of expected future severance payments for programs implemented during 2011.

During the March 2014 quarter, Ashland incurred an additional $3 million lease abandonment charge related to its exit from an office facility that was obtained as part of the Hercules acquisition. The costs related to the reserve will be paid over the remaining lease term through May 2016. As of June 30, 2015 and September 30, 2014, the remaining restructuring reserve for all qualifying facility costs totaled $4 million and $9 million, respectively.

The following table summarizes the related activity in these reserves for the nine months ended June 30, 2015 and 2014. The severance reserves and facility costs reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.



				Facility
(In millions)	Severance			costs			Total
Balance as of September 30, 2014	$	56		$	9		$	65
Reserve adjustments	(2		)	(2		)	(4		)
Utilization (cash paid)	(41		)	(3		)	(44		)
Balance at June 30, 2015	$	13		$	4		$	17

Balance as of September 30, 2013	$	17		$	8		$	25
Restructuring reserve	91			4			95
Reserve adjustments	(1		)	—			(1		)
Utilization (cash paid)	(34		)	(2		)	(36		)
Balance at June 30, 2014	$	73		$	10		$	83

Specialty Ingredients Restructuring

During the March 2015 quarter, Specialty Ingredients committed to a restructuring plan within an existing manufacturing facility. As a result, during the three and nine months ended June 30, 2015, restructuring charges of $2 million and $20 million, respectively, were recorded within the cost of sales caption of the Statements of Consolidated Comprehensive Income. As of June 30, 2015, the remaining restructuring reserve related to severance for the Specialty Ingredients' manufacturing facility totaled $13 million. The restructuring plan is expected to be completed during fiscal 2016.

NOTE E – FAIR VALUE MEASUREMENTS

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)

For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets (market approach), adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable. During the March 2015 quarter, Ashland recorded two impairments which represented nonrecurring fair value measurements relating to Valvoline assets using observable inputs considered Level 2 fair values within the fair value hierarchy.

The following table summarizes financial instruments subject to recurring fair value measurements as of June 30, 2015.



(In millions)	Carrying value		Total fair value		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets
Cash and cash equivalents	$	1,113	$	1,113	$	1,113	$	—	$	—
Restricted investments (a)	332		332		332		—		—
Deferred compensation investments (b)	187		187		43		144		—
Investments of captive insurance company (b)	3		3		3		—		—
Foreign currency derivatives	3		3		—		3		—
Total assets at fair value	$	1,638	$	1,638	$	1,491	$	147	$	—

Liabilities
Foreign currency derivatives	$	2	$	2	$	—	$	2	$	—


(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, 2014.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)



(In millions)	Carrying value		Total fair value		Quoted prices in active markets for identical assets Level 1		Significant other observable inputs Level 2		Significant unobservable inputs Level 3
Assets
Cash and cash equivalents	$	1,393	$	1,393	$	1,393	$	—	$	—
Deferred compensation investments (a)	184		184		45		139		—
Investments of captive insurance company (a)	3		3		3		—		—
Foreign currency derivatives	11		11		—		11		—
Total assets at fair value	$	1,591	$	1,591	$	1,441	$	150	$	—

Liabilities
Foreign currency derivatives	$	9	$	9	$	—	$	9	$	—


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

Restricted investments

As discussed in Note A, during the June 2015 quarter, Ashland diversified the restricted investments, received from the January 2015 asbestos insurance settlement, into primarily equity and corporate bond mutual funds that are designated as available-for-sale securities, classified as Level 1 measurements within the fair value hierarchy. These securities were classified primarily as noncurrent restricted investment assets, with $30 million classified within other current assets, in the Condensed Consolidated Balance Sheets. The following table provides a summary of the available-for-sale securities portfolio as of June 30, 2015:



(In millions)	Amortized		Unrealized		Unrealized			Fair
As of June 30, 2015	Cost		gain		loss			Value
Demand deposit	$	22	$	—	$	—		$	22
Equity mutual fund	195		—		(2		)	193
Corporate bond mutual fund	120		—		(3		)	117
Total	$	337	$	—	$	(5	)	$	332

Investment income of $1 million was recognized during the current quarter within net interest and other financing expense in the Statements of Consolidated Comprehensive Income. The unrealized losses were recognized within accumulated other comprehensive income (AOCI). At June 30, 2015, Ashland considered the decline in market value of its restricted investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. Ashland invests in highly-rated mutual funds comprised principally of investment grade securities. No realized gain or loss was reclassified out of AOCI and no other-than-temporary impairment was recognized in AOCI during the three and nine months ended June 30, 2015.

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)

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 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, 2015 and 2014 within the Statements of Consolidated Comprehensive Income.



	Three months ended					Nine months ended
	June 30					June 30
(In millions)	2015		2014			2015			2014
Foreign currency derivative gain (loss)	$	9	$	(2	)	$	(7	)	$	3

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



	June 30		September 30
(In millions)	2015		2014
Foreign currency derivative assets	$	1	$	2
Notional contract values	214		88

Foreign currency derivative liabilities	$	2	$	4
Notional contract values	383		281

Net investment hedges

During 2014, Ashland entered into foreign currency contracts in order to manage the foreign currency exposure of the net investment in certain foreign operations, as a result of certain proceeds from the sale of Water Technologies being received in non-U.S. denominated currencies. Ashland designated the foreign currency contracts as hedges of net investment in its foreign subsidiaries. As a result, Ashland records these hedges at fair value using forward rates, with the effective portion of the gain or loss reported as a component of the cumulative translation adjustment within AOCI and subsequently recognized in the Statements of Consolidated Comprehensive Income when the hedged item affects net income. During the three and nine months ended June 30, 2015, these foreign currency contracts were settled and Ashland entered into new foreign currency contracts designated as hedges of net investments in foreign subsidiaries. These settlements resulted in net gains, within the cumulative translation adjustment within AOCI, of $12 million for the three and nine months ended June 30, 2015.

As of June 30, 2015 and September 30, 2014, the total notional value of foreign currency contracts equaled $189 million and $206 million, respectively. The fair value of Ashland's net investment hedge assets and liabilities are calculated using forward rates. Accordingly, these instruments are deemed to be Level 2 measurements within the fair value hierarchy. Counterparties to these net investment hedges are highly rated financial institutions which Ashland believes carry only a nominal risk of nonperformance. The following table summarizes the fair value of the outstanding net investment hedge instruments as of June 30, 2015 and September 30, 2014.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE E – FAIR VALUE MEASUREMENTS (continued)



		June 30		September 30
(In millions)	Consolidated balance sheet caption	2015		2014
Net investment hedge assets	Accounts receivable	$	2	$	9
Net investment hedge liabilities (a)	Accrued expenses and other liabilities	—		5


(a)	Denotes a value less than $1 million.

The following table summarizes the change in the unrealized gain on the net investment hedge instruments recognized within the cumulative translation adjustment within AOCI during the three and nine months ended June 30, 2015. No portion of the gain was reclassified to income during the three and nine months ended June 30, 2015. There was no hedge ineffectiveness with these instruments during the three and nine months ended June 30, 2015.



	Three months ended				Nine months ended
		June 30				June 30
(In millions)		2015				2015
Change in unrealized gain in AOCI		$	2			$	2
Tax impact of change in unrealized gain in AOCI		(1		)		(1		)

Other financial instruments

At June 30, 2015 and September 30, 2014, Ashland’s long-term debt (including the current portion and excluding debt issuance costs) had a carrying value of $3,494 million and $2,951 million, respectively, compared to a fair value of $3,643 million and $3,102 million, respectively. The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates, which are deemed to be Level 2 measurements within the fair value hierarchy.

NOTE F – INVENTORIES

Inventories are carried at the lower of cost or market. Inventories are primarily stated at cost using the weighted-average cost method. In addition, certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method.

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



	June 30			September 30
(In millions)	2015			2014
Finished products	$	537		$	557
Raw materials, supplies and work in process	205			239
LIFO reserve	(42		)	(31		)
	$	700		$	765

NOTE G – GOODWILL AND OTHER INTANGIBLES

Goodwill

Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually or when events and circumstances indicate an impairment may have occurred. This annual assessment is performed as of July 1

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)

and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value. For its July 1, 2014 assessment, Ashland determined that its reporting units for allocation of goodwill included the Specialty Ingredients and Valvoline reportable segments, and the Composites, Intermediates/Solvents, and Elastomers reporting units within the Performance Materials reportable segment, and determined at that time that no impairment existed. As discussed in Note B, Ashland sold the Elastomers division on December 1, 2014 and as a result, Elastomers is no longer a reporting unit as of June 30, 2015.

The following is a progression of goodwill by reportable segment for the nine months ended June 30, 2015.



	Specialty			Performance
(In millions)	Ingredients			Materials			(a)	Valvoline			Total
Balance at September 30, 2014	$	2,129		$	346			$	168		$	2,643
Acquisitions (b)	—			—				3			3
Divestiture (c)	—			(10		)		(1		)	(11		)
Currency translation adjustment	(108		)	(18		)		—			(126		)
Balance at June 30, 2015	$	2,021		$	318			$	170		$	2,509


(a)	As of June 30, 2015, goodwill consisted of $172 million for the Intermediates/Solvents reporting unit and $146 million for the Composites reporting unit.


(b)	Relates to Valvoline Instant Oil Change^SM center acquisitions during the June 30, 2015 quarter.


(c)	Divestiture caption represents the amounts of goodwill for the sale of Elastomers and Valvoline car care products. See Note B for additional information.

Other intangible assets

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

IPR&D and certain intangible assets within trademarks and trade names have been classified as indefinite-lived and had a balance of $322 million as of June 30, 2015 and September 30, 2014. During the nine months ended June 30, 2014, Ashland incurred a $9 million impairment related to certain IPR&D assets associated with the acquisition of International Specialty Products Inc. (ISP). This charge was included in the research and development expense caption of the Statements of Consolidated Comprehensive Income. Ashland annually reviews indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

Intangible assets were comprised of the following as of June 30, 2015 and September 30, 2014.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE G – GOODWILL AND OTHER INTANGIBLES (continued)



	June 30, 2015
	Gross					Net
	carrying		Accumulated			carrying
(In millions)	amount		amortization			amount
Definite-lived intangible assets
Trademarks and trade names (a) (b)	$	59	$	(43	)	$	16
Intellectual property (a)	809		(256		)	553
Customer relationships (b)	429		(140		)	289
Total definite-lived intangible assets	1,297		(439		)	858

Indefinite-lived intangible assets
IPR&D	19		—			19
Trademarks and trade names	303		—			303
Total intangible assets	$	1,619	$	(439	)	$	1,180


(a)	Elastomers had a gross carrying amount for trademarks/trade names and intellectual property of $6 million and $18 million, respectively, with $5 million of accumulated amortization for each caption.

(b)

Valvoline car care products intangibles were included in the loss to recognize the fair value of assets less cost of sale during the March 2015 quarter. These intangibles included trademarks/trade names and customer relationships with gross carrying amounts of $7 million and $1 million, respectively, with $3 million and $1 million, respectively, of accumulated amortization. See Note B for additional information.



	September 30, 2014
	Gross					Net
	carrying		Accumulated			carrying
(In millions)	amount		amortization			amount
Definite-lived intangible assets
Trademarks and trade names	$	72	$	(49	)	$	23
Intellectual property	827		(226		)	601
Customer relationships	481		(118		)	363
Total definite-lived intangible assets	1,380		(393		)	987

Indefinite-lived intangible assets
IPR&D	19		—			19
Trademarks and trade names	303		—			303
Total intangible assets	$	1,702	$	(393	)	$	1,309

Amortization expense recognized on intangible assets was $19 million and $22 million for the three months ended June 30, 2015 and 2014, respectively, and $60 million and $67 million for the nine months ended June 30, 2015 and 2014, respectively, and is included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. Estimated amortization expense for future periods is $79 million in 2015 (includes nine months actual and three months estimated), $77 million in 2016, $77 million in 2017, $77 million in 2018 and $73 million in 2019.

NOTE H – DEBT

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE H – DEBT (continued)



	June 30			September 30
(In millions)	2015			2014
4.750% notes, due 2022	$	1,120		$	1,120
3.875% notes, due 2018	700			700
3.000% notes, due 2016	50			600
6.875% notes, due 2043	376			376
Term Loan, due 2020	1,100			—
Accounts receivable securitization (a)	205			255
6.50% junior subordinated notes, due 2029	136			134
Revolving credit facility	—			45
Other international loans, interest at a weighted-
average rate of 6.4% at June 30, 2015 (5.6% to 9.8%)	26			29
Medium-term notes, due 2019, interest of 9.4% at June 30, 2015	5			14
Other (b)	(20		)	(24		)
Total debt	3,698			3,249
Short-term debt	(231		)	(329		)
Current portion of long-term debt	(105		)	(9		)
Long-term debt (less current portion and debt issuance costs)	$	3,362		$	2,911


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


(b)	Other includes $27 million and $31 million of debt issuance costs as of June 30, 2015 and September 30, 2014, respectively.

The scheduled aggregate maturities of debt by year are as follows: $277 million remaining in 2015, $73 million in 2016, $69 million in 2017, $810 million in 2018 and $143 million in 2019. The borrowing capacity remaining under the $1.2 billion senior unsecured revolving credit facility (the 2015 revolving credit facility) was $1,128 million, due to a reduction of $72 million for letters of credit outstanding at June 30, 2015. Ashland's total borrowing capacity at June 30, 2015 was $1,147 million, which includes $19 million of available capacity from the accounts receivable securitization facility.

Senior notes refinancing and 2015 Senior Credit Agreement

During the June 2015 quarter, Ashland completed certain refinancing transactions related to the $600 million 3.000% senior notes due 2016 (2016 senior notes). Ashland commenced a cash tender offer to purchase for cash any and all of its outstanding 2016 senior notes. At the close of the tender offer, $550 million aggregate principal amount of the 2016 senior notes was tendered by note holders, representing approximately 92% of the outstanding 2016 senior notes, which have been purchased by Ashland. Subsequently, Ashland redeemed the remaining balance of the 2016 senior notes of $50 million on July 23, 2015.

In connection with the tender offer and redemption, in the June 2015 quarter Ashland entered into a Credit Agreement (the 2015 Senior Credit Agreement), which replaced the 2013 Senior Credit Facility, and was comprised of a new five-year senior unsecured revolving credit facility in an aggregate amount of $1.2 billion (the 2015 revolving credit facility) and a five-year senior unsecured term loan facility in an aggregate principal amount of $1.1 billion (the term loan facility).

During the June 2015 quarter, Ashland used the proceeds from borrowings under the $1.1 billion term loan facility along with cash on hand (i) to fund the tender offer of the 2016 senior notes, (ii) to pay in full the outstanding loans under the 2013 Senior Credit Facility, (iii) to pay accrued interest, fees and expenses under the 2013 Senior Credit Facility and the 2016 senior notes, (iv) to contribute funds to the U.S. pension plans impacted by the pension plan settlement program discussed in Note J, and (v) to pay fees and expenses incurred in connection with the entry into the 2015 Senior Credit Agreement. As a result of the tender offer, Ashland

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE H – DEBT (continued)

recognized an $8 million charge related to an early redemption premium payment, which is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three and nine months ended June 30, 2015.

Ashland incurred $10 million of new debt issuance costs in connection with the 2015 Senior Credit Agreement, of which $3 million was recognized immediately within the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three and nine months ended June 30, 2015. The remaining $7 million will be amortized over the term of the 2015 Senior Credit Agreement using the effective interest method. Additionally, as a result of the termination of the 2013 Senior Credit Facility and the repayment of the 2016 senior notes, Ashland recognized a $3 million charge for the accelerated amortization of previously capitalized debt issuance costs, which is included in the net interest and other financing expense caption of the Statements of Consolidated Comprehensive Income for the three and nine months ended June 30, 2015.

Covenant restrictions

Ashland's debt contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional subsidiary indebtedness, restrictions on subsidiary distributions, investments, mergers, sale of assets and restricted payments and other customary limitations. As of June 30, 2015, Ashland is in compliance with all debt agreement covenant restrictions.

Financial covenants

The maximum consolidated leverage ratios permitted under the 2015 Senior Credit Agreement are as follows: 3.75 from June 30, 2015 through December 31, 2016 and 3.5 from March 31, 2017 and each fiscal quarter thereafter. At June 30, 2015, Ashland’s calculation of the consolidated leverage ratio was 2.6, which is below the maximum consolidated leverage ratio of 3.75.

The minimum required consolidated interest coverage ratio under the 2015 Senior Credit Agreement during its entire duration is 3.0. At June 30, 2015, Ashland’s calculation of the interest coverage ratio was 6.6, which exceeds the minimum required consolidated ratio of 3.0.

NOTE I – INCOME TAXES

Current fiscal year

Ashland’s estimated annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2015 is 25%. Ashland’s effective tax rate in any interim period is subject to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations. The overall effective tax rate was 19% and 18% for the three and nine months ended June 30, 2015, respectively. The current quarter and period tax rate was impacted by net favorable tax discrete items of $7 million and $10 million, respectively, primarily related to recording return to provision adjustments for foreign and domestic entities. These favorable tax discrete adjustments were partially offset by an accrual for an unrecognized tax benefit. The current period tax rate was also impacted by the release of a valuation reserve on certain deferred taxes.

Prior fiscal year

Ashland’s annual effective income tax rate used to determine income tax expense in interim financial reporting for the year ending September 30, 2014 was 22%. The overall effective tax rate was 28% and 3% for the three and nine months ended June 30, 2014, respectively. The prior year quarter tax rate was impacted by net unfavorable tax discrete items of $9 million, primarily related to recognition of outside tax basis for the Water

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE I – INCOME TAXES (continued)

Technologies business. In addition, the prior year period tax rate was impacted by net charges for tax discrete items of $11 million, which consisted of $15 million in a foreign income tax rate change and other divestiture-related deferred tax adjustments, partially offset by $11 million for the reversal of unrecognized tax benefits and by $2 million primarily related to the release of a foreign valuation allowance and certain non-taxable pretax income amounts as well as the $9 million unfavorable tax discrete item referenced in the quarter.

Unrecognized tax benefits

Changes in unrecognized tax benefits are summarized as follows for the nine months ended June 30, 2015.



(In millions)
Balance at October 1, 2014	$	155
Increases related to positions taken on items from prior years	8
Decreases related to positions taken on items from prior years	(18		)
Increases related to positions taken in the current year	15
Lapse of the statute of limitations	(3		)
Settlement of uncertain tax positions with tax authorities	(8		)
Balance at June 30, 2015	$	149

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 $8 million for discontinued operations related primarily to audit settlements and statute of limitations expirations in various tax jurisdictions. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.

As of June 30, 2015, Ashland has recorded valuation allowances related to state net operating loss carry forwards and other state deferred tax asset balances. Ashland will continue to assess, based upon all available evidence both positive and negative, whether the valuation allowances are supportable and it is possible that an amount equal to $20 million to $30 million could be reversed in fiscal year 2015.

Other matters

During the March 2015 quarter, Ashland received funds as a result of a tax indemnity settlement. As a result, Ashland recognized $16 million of income during the nine months ended June 30, 2015 within selling, general and administrative expenses in the Statements of Consolidated Comprehensive Income.

NOTE J – EMPLOYEE BENEFIT PLANS

For the nine months ended June 30, 2015, Ashland contributed $580 million to its U.S. pension plans and $12 million to its non-U.S. pension plans. The contributions included $500 million to the U.S. pension plans impacted by the pension plan settlement program discussed below, during the three and nine months ended June 30, 2015. Ashland expects to make additional contributions to the U.S. plans of approximately $5 million and to the non-U.S. plans of approximately $4 million during the remainder of 2015.

Pension plan settlement program

During the current quarter, Ashland began informing approximately 20,000 former employees, who are included in the approximately 53,000 participants within the primary U.S. pension plans, that Ashland is offering these participants the option of receiving a lump sum payment on their vested retirement benefit or a reduced annuity now, in lieu of receiving monthly annuity payments deferred until retirement eligibility or

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE J – EMPLOYEE BENEFIT PLANS (continued)

when the participant may choose to initiate payment. Participants eligible for this program will have until August 2015 to make their election with the expected payout for those participants occurring in September 2015. Settlement payments are expected to be funded with pension plan assets.

Ashland expects to record an adjustment to income in the September 2015 quarter for settling these obligations. The actual amount of such charge will depend upon the number of eligible participants electing the lump sum payment or reduced annuity option, the actual return on plan assets, the discount rate and various actuarial assumptions.

Components of net periodic benefit costs (income)

During the nine months ended June 30, 2015, Ashland was required to remeasure a non-U.S. pension plan due to the exit of Water Technologies' employees from the plan. As a result of the remeasurement, Ashland recognized a curtailment gain of $7 million and actuarial loss of $11 million during the nine months ended June 30, 2015. Of these amounts, all of the curtailment gain and $2 million of the actuarial loss were attributable to the Water Technologies business and therefore included in the discontinued operations caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2015.

During the three and nine months ended June 30, 2014, Ashland settled two non-U.S. pension plans, which in accordance with U.S. GAAP requires the plans to be remeasured. These remeasurements resulted in Ashland recognizing settlement losses of $16 million and $38 million during the three and nine months ended June 30, 2014, respectively, and actuarial losses of $4 million and $17 million during the three and nine months ended June 30, 2014, respectively. Of these amounts, for the three and nine months ended June 30, 2014, $3 million and $6 million of the settlement losses, respectively, and $1 million and $3 million of the actuarial losses, respectively, were attributable to the Water Technologies business and therefore included in the discontinued operations caption of the Statements of Consolidated Comprehensive Income.

During 2014, due to the global restructuring plan, Ashland was required to remeasure certain pension and other postretirement plan obligations, which included updating assumptions related to these plans such as the discount rate, asset values and demographic data. As a result of the remeasurements, Ashland recognized a curtailment loss of $6 million and actuarial loss of $83 million during the nine months ended June 30, 2014. In accordance with U.S. GAAP, $14 million of the actuarial loss was attributable to the Water Technologies business and included in the discontinued operations caption of the Statements of Consolidated Comprehensive Income for the nine months ended June 30, 2014.

For segment reporting purposes, service cost for continuing operations is proportionately allocated to each segment, excluding the Unallocated and other segment, while all other costs for continuing operations are recorded within the Unallocated and other segment. In accordance with U.S. GAAP, during 2014, a portion of the other components of pension and other postretirement benefit costs (i.e. interest cost, expected return on assets, and amortization of prior service credit) related to Water Technologies was reclassified from the Unallocated and other segment to the discontinued operations caption of the Statements of Consolidated Comprehensive Income. For the three and nine months ended June 30, 2014, income of $2 million and $6 million, respectively, was classified within discontinued operations.

The following table details the components of pension and other postretirement benefit costs for both continuing and discontinued operations.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE J – EMPLOYEE BENEFIT PLANS (continued)



							Other postretirement
	Pension benefits						benefits
(In millions)	2015			2014			2015			2014
Three months ended June 30
Service cost (a)	$	7		$	9		$	—		$	—
Interest cost	43			45			2			3
Expected return on plan assets	(53		)	(58		)	—			—
Amortization of prior service credit	(1		)	(1		)	(4		)	(5		)
Curtailment, settlement and other	—			17			—			(1		)
Actuarial loss	—			3			—			1
	$	(4	)	$	15		$	(2	)	$	(2	)

Nine months ended June 30
Service cost	$	20		$	30		$	1		$	1
Interest cost	131			144			6			7
Expected return on plan assets	(162		)	(177		)	—			—
Amortization of prior service credit	(2		)	(2		)	(13		)	(16		)
Curtailment, settlement and other	(7		)	45			—			(1		)
Actuarial loss	11			99			—			1
	$	(9	)	$	139		$	(6	)	$	(8	)


(a)	Service cost and net pension benefit costs of $0 denote values less than $1 million.

NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES

Asbestos litigation

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

Ashland asbestos-related litigation

The claims alleging personal injury caused by exposure to asbestos asserted against Ashland result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley, a former subsidiary. The amount and timing of settlements and number of open claims can fluctuate from period to period. A summary of Ashland asbestos claims activity, excluding Hercules claims, follows.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)



	Nine months ended
	June 30				Years ended September 30
(In thousands)	2015		2014		2014		2013		2012
Open claims - beginning of period	65		65		65		66		72
New claims filed	2		2		2		2		2
Claims settled	—		(1	)	(1	)	(1	)	(1	)
Claims dismissed	(2	)	(1	)	(1	)	(2	)	(7	)
Open claims - end of period	65		65		65		65		66

Ashland asbestos-related liability

From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A. As a result of the most recent annual update of this estimate, completed during the June 2015 quarter, it was determined that the liability total for asbestos claims did not need to be adjusted. Total reserves for asbestos claims were $416 million at June 30, 2015 compared to $438 million at September 30, 2014.

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)	2015			2014			2014			2013			2012
Asbestos reserve - beginning of period	$	438		$	463		$	463		$	522		$	543
Reserve adjustment	—			4			4			(28		)	11
Amounts paid	(22		)	(24		)	(29		)	(31		)	(32		)
Asbestos reserve - end of period	$	416		$	443		$	438		$	463		$	522

Ashland asbestos-related receivables

Ashland has insurance coverage for certain litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide substantially all of the coverage that will be accessed.

For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. Substantially all of the estimated receivables from insurance companies are expected to be due from domestic insurers. Approximately 50% of the receivable is from insurance companies rated by A. M. Best, all of which have a credit rating of BBB+ or higher as of June 30, 2015.

In October 2012, Ashland and Hercules initiated various arbitration proceedings against Underwriters at Lloyd’s, certain London companies and/or Chartis (AIG) member companies seeking to enforce these insurers’ contractual obligations to provide indemnity for asbestos liabilities and defense costs under existing coverage-in-place agreements. In addition, Ashland and Hercules initiated a lawsuit in Kentucky state court against certain Berkshire Hathaway entities (National Indemnity Company and Resolute Management, Inc.) on grounds that these Berkshire entities wrongfully interfered with Underwriters' and Chartis' performance of their

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

respective contractual obligations to provide asbestos coverage by directing the insurers to reduce and delay certain claim payments.

On January 13, 2015, Ashland and Hercules entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companies and Chartis (AIG) member companies, along with National Indemnity and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million. In exchange, all claims were released against these entities for past, present and future coverage obligations arising out of the asbestos coverage-in-place agreements that were the subject of the pending arbitration proceedings. In addition, as part of this settlement, Ashland and Hercules released all claims against National Indemnity and Resolute Management, Inc. in the Kentucky state court action. As a result, the arbitration proceedings and the Kentucky state court action have been terminated.

As a result of this settlement, Ashland recorded an after-tax gain of $120 million within the discontinued operations caption of the Statements of Consolidated Comprehensive Income during the nine months ended June 30, 2015. The Ashland insurance receivable balance was also reduced as a result of this settlement by $227 million within the Condensed Consolidated Balance Sheets.

In addition, Ashland placed $335 million of the settlement funds received into a renewable annual trust restricted for the purpose of paying for ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims.

At June 30, 2015, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $152 million, of which $12 million relates to costs previously paid. Receivables from insurers amounted to $402 million at September 30, 2014. During the June 2015 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed. This model update resulted in a $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)	2015			2014			2014			2013			2012
Insurance receivable - beginning of period	$	402		$	408		$	408		$	423		$	431
Receivable adjustment	(3		)	7			22			(3		)	19
Insurance settlement	(227		)	—			—			—			—
Amounts collected	(20		)	(7		)	(28		)	(12		)	(27		)
Insurance receivable - end of period	$	152		$	408		$	402		$	408		$	423

Hercules asbestos-related litigation

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

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)



	Nine months ended
	June 30				Years ended September 30
(In thousands)	2015		2014		2014		2013		2012
Open claims - beginning of period	21		21		21		21		21
New claims filed	1		1		1		1		1
Claims dismissed	(1	)	(1	)	(1	)	(1	)	(1	)
Open claims - end of period	21		21		21		21		21

Hercules asbestos-related liability

From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A. As a result of the most recent annual update of this estimate, completed during the June 2015 quarter, it was determined that the liability for Hercules asbestos-related claims should be increased by $4 million. Total reserves for asbestos claims were $319 million at June 30, 2015 compared to $329 million at September 30, 2014.

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)	2015	2014	2014	2013	2012