10-Q 1 a3312013ash10q.htm 10-Q 3.31.2013 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 March 31, 2013
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934
 
For the transition period from _________ to ___________

Commission file number 1-32532

ASHLAND INC.

(a Kentucky corporation)
I.R.S. No. 20-0865835

50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333

Indicate by check mark whether the Registrant: (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ No  o    
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.  (Check One):
 
 Large Accelerated Filer þ
 
 Accelerated Filer o  
 
 Non-Accelerated Filer o
 
Smaller Reporting Company o  
 
 (Do not check if a smaller reporting company.)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No þ
At March 31, 2013, there were 79,023,385 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
 
Six months ended
 
March 31
 
March 31
(In millions except per share data - unaudited)
2013

 
2012

 
2013

 
2012

Sales
$
1,974

 
$
2,079

 
$
3,843

 
$
4,009

Cost of sales
1,406

 
1,504

 
2,738

 
2,912

Gross profit
568

 
575

 
1,105

 
1,097

 
 
 
 
 
 
 
 
Selling, general and administrative expense
342

 
381

 
685

 
743

Research and development expense
39

 
31

 
71

 
61

Equity and other income
18

 
16

 
32

 
30

Operating income
205

 
179

 
381

 
323

 
 
 
 
 
 
 
 
Net interest and other financing expense
145

 
56

 
189

 
113

Net gain (loss) on acquisitions and divestitures
7

 
1

 
7

 
(3
)
Income from continuing operations before income taxes
67

 
124

 
199

 
207

Income tax expense - Note J
12

 
34

 
42

 
57

Income from continuing operations
55

 
90

 
157

 
150

Loss from discontinued operations (net of
 
 
 
 
 
 
 
income taxes) - Note D
(2
)
 
(2
)
 
(3
)
 
(1
)
Net income
$
53

 
$
88

 
$
154

 
$
149

 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
Basic earnings per share - Note M
 

 
 

 
 

 
 

Income from continuing operations
$
0.70

 
$
1.15

 
$
1.99

 
$
1.93

Loss from discontinued operations
(0.03
)
 
(0.03
)
 
(0.04
)
 
(0.02
)
Net income
$
0.67

 
$
1.12

 
$
1.95

 
$
1.91

 
 
 
 
 
 
 
 
Diluted earnings per share - Note M
 

 
 

 
 

 
 

Income from continuing operations
$
0.68

 
$
1.13

 
$
1.95

 
$
1.89

Loss from discontinued operations
(0.02
)
 
(0.03
)
 
(0.03
)
 
(0.02
)
Net income
$
0.66

 
$
1.10

 
$
1.92

 
$
1.87

 
 
 
 
 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
0.225

 
$
0.175

 
$
0.450

 
$
0.350

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income
$
53

 
$
88

 
$
154

 
$
149

Other comprehensive income (loss), net of tax - Note N
 
 
 
 
 
 
 
Unrealized translation gain (loss)
(66
)
 
85

 
(21
)
 
(26
)
Pension and postretirement obligation adjustment
(3
)
 

 
(7
)
 

Net change in interest rate hedges
35

 
(1
)
 
38

 
(6
)
Other comprehensive income (loss)
(34
)
 
84

 
10

 
(32
)
Comprehensive income
$
19

 
$
172

 
$
164

 
$
117








SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
March 31

 
September 30

(In millions - unaudited)
2013

 
2012

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
468

 
$
523

Accounts receivable (a)
1,450

 
1,481

Inventories - Note G
930

 
1,008

Deferred income taxes
119

 
116

Other assets
78

 
81

Total current assets
3,045

 
3,209

Noncurrent assets
 

 
 

Property, plant and equipment
 
 
 
Cost
4,564

 
4,478

Accumulated depreciation and amortization
1,776

 
1,646

Net property, plant and equipment
2,788

 
2,832

Goodwill - Note H
3,333

 
3,342

Intangibles - Note H
1,871

 
1,936

Asbestos insurance receivable (noncurrent portion) - Note L
441

 
449

Equity and other unconsolidated investments
222

 
217

Other assets
551

 
539

Total noncurrent assets
9,206

 
9,315

Total assets
$
12,251

 
$
12,524

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Short-term debt - Note I
$
456

 
$
344

Current portion of long-term debt - Note I
20

 
115

Trade and other payables
767

 
877

Accrued expenses and other liabilities
527

 
577

Total current liabilities
1,770

 
1,913

Noncurrent liabilities
 

 
 

Long-term debt (noncurrent portion) - Note I
3,033

 
3,131

Employee benefit obligations - Note K
1,757

 
1,839

Asbestos litigation reserve (noncurrent portion) - Note L
739

 
771

Deferred income taxes
224

 
208

Other liabilities
571

 
633

Total noncurrent liabilities
6,324

 
6,582

 
 
 
 
Stockholders’ equity
4,157

 
4,029

 
 
 
 
Total liabilities and stockholders’ equity
$
12,251

 
$
12,524

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $19 million and $24 million at March 31, 2013 and September 30, 2012, respectively.





SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS EQUITY

 
 
 

(In millions - unaudited)
Common
stock

 
Paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income

(a)
Total

BALANCE AT SEPTEMBER 30, 2012
$
1

 
$
647

 
$
3,163

 
$
218


$
4,029

Total comprehensive income
 

 
 
 
154

 
10


164

Dividend on common stock, $.45 per share
 

 
 

 
(36
)
 
 

 
(36
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 

   incentive and other plans (b)
 

 

 
 

 
 

 

BALANCE AT MARCH 31, 2013
$
1

 
$
647

 
$
3,281

 
$
228


$
4,157

 
 
 
 
 
 
 
 
 
 
(a)
At March 31, 2013, the after-tax accumulated other comprehensive income of $228 million was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $78 million and net unrealized translation gains of $150 million.
(b)
Common shares issued were 208,352 for the six months ended March 31, 2013.

















































SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
Six months ended
 
March 31
(In millions - unaudited)
2013

 
2012

CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES FROM
 
 
 
CONTINUING OPERATIONS
 
 
 
Net income
$
154

 
$
149

Loss from discontinued operations (net of income taxes)
3

 
1

Adjustments to reconcile income from continuing operations to
 

 
 

cash flows from operating activities
 

 
 

Depreciation and amortization
212

 
212

Debt issuance cost amortization
57

 
12

Purchased in-process research and development impairment
4

 

Deferred income taxes
(5
)
 
3

Equity income from affiliates
(14
)
 
(14
)
Distributions from equity affiliates
5

 
1

Gain from sale of property and equipment
(1
)
 
(1
)
Stock based compensation expense
17

 
13

Net (gain) loss on acquisitions and divestitures
(7
)
 
1

Inventory fair value adjustment related to ISP acquisition

 
28

Change in operating assets and liabilities (a)
(186
)
 
(377
)
 
239

 
28

CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES FROM
 

 
 

CONTINUING OPERATIONS
 

 
 

Additions to property, plant and equipment
(117
)
 
(98
)
Proceeds from disposal of property, plant and equipment
3

 
3

Proceeds from sale of operations or equity investments

 
42

Proceeds from sale of available-for-sale securities

 
4

 
(114
)
 
(49
)
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
(2,518
)
 
(57
)
Proceeds from/(repayment of) short-term debt
113

 
(28
)
Debt issuance costs
(36
)
 

Cash dividends paid
(36
)
 
(27
)
Proceeds from exercise of stock options
1

 
2

Excess tax benefits related to share-based payments
4

 
3

 
(152
)
 
(105
)
CASH (USED) PROVIDED BY CONTINUING OPERATIONS
(27
)
 
(126
)
Cash used by discontinued operations
 

 
 

Operating cash flows
(31
)
 
(8
)
Effect of currency exchange rate changes on cash and cash equivalents
3

 
(4
)
DECREASE IN CASH AND CASH EQUIVALENTS
(55
)
 
(138
)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
523

 
737

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
468

 
$
599

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




SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

5

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

 
 
 



NOTE A  SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation  
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations.  In the opinion of management, all adjustments (consisting of normal recurring 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 March 31, 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 hydrocarbon-based products and other 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 parents 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.

6

 
 
 
 
 
 
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 $2,179 million 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 (Senior Credit Facility).  The 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 the March 2013 quarter, 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 March 2012 quarter.  
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

7

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

 
 
 
NOTE C– DIVESTITURES (continued)

sale included the transfer of the PVAc business, inventory and related technology, but did not include any real estate or manufacturing facilities.  Ashland’s PVAc business included two brands, Flexbond™ and Vinac™ emulsions.  To support the transition, the products are being temporarily toll manufactured by Ashland for Celanese Corporation.  The transaction resulted in a pretax gain of $2 million recognized during the March 2012 quarter.  
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 six months ended March 31, 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 $8 million and $16 million, respectively, during the three and six months ended March 31, 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
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.  As a result, 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 six months ended March 31, 2012.
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 and continue

8

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

 
 
 
NOTE D – DISCONTINUED OPERATIONS (continued)

periodically, primarily reflecting updates to the original estimates.  See Note L for more information related to the adjustments on asbestos liabilities and receivables.
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 six months ended March 31, 2013 and 2012.
 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2013

 
2012

 
2013

 
2012

(Loss) income from discontinued operations (net of tax)
 
 
 
 
 
 
 
Distribution
$
(2
)
 
$
(2
)
 
$
(2
)
 
$
(3
)
Asbestos-related litigation reserves and receivables

 

 
(1
)
 
6

Loss on disposal of discontinued operations (net of tax)
 

 
 

 
 

 
 

Distribution

 

 

 
(4
)
Total loss from discontinued operations (net of tax)
$
(2
)
 
$
(2
)
 
$
(3
)
 
$
(1
)

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 $25 million being recognized within the selling, general and administrative expense caption during the six months ended March 31, 2012.  As of March 31, 2013 and 2012, the remaining restructuring reserve for these programs totaled $18 million and $46 million, respectively.
As of March 31, 2013 and 2012, the remaining $1 million and $6 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 and the 2010 Performance Materials restructuring, which consisted of several plant closings and an operational redesign to eliminate excess capacity.
Facility costs
During the three and six months ended March 31, 2012, 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

9

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

 
 
 
NOTE E – RESTRUCTURING ACTIVITIES (continued)

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 three and six months ended March 31, 2012.  As of March 31, 2013 and 2012, the remaining restructuring reserve for these programs totaled $9 million and $19 million, respectively.
The following table details, as of March 31, 2013 and 2012, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves for the six months ended March 31, 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
1

 

 
1

Utilization (cash paid or otherwise settled)
(11
)
 
(6
)
 
(17
)
Balance at March 31, 2013
$
19

 
$
9

 
$
28

 
 
 
 
 
 
Balance as of September 30, 2011
$
45

 
$

 
$
45

Restructuring reserve
25

 
20

 
45

Utilization (cash paid or otherwise settled)
(18
)
 
(1
)
 
(19
)
Balance at March 31, 2012
$
52

 
$
19

 
$
71

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 March 31, 2013.

10

 
 
 
 
 
 
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
$
468

 
$
468

 
$
468

 
$

 
$

Deferred compensation investments (a)
180

 
180

 
54

 
126

 

Investments of captive insurance company (a)
2

 
2

 
2

 

 

Foreign currency derivatives
2

 
2

 

 
2

 

Total assets at fair value
$
652

 
$
652

 
$
524

 
$
128

 
$

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Foreign currency derivatives
$
4

 
$
4

 
$

 
$
4

 
$

 
 
 
 
 
 
 
 
 
 
(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

11

 
 
 
 
 
 
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 six months ended March 31, 2013 and 2012 within the Statements of Consolidated Comprehensive Income.
 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2013

 
2012

 
2013

 
2012

Foreign currency derivative (loss) gain
$
(2
)
 
$
2

 
$
(1
)
 
$
3

The following table summarizes the fair values of the outstanding foreign currency derivatives as of March 31, 2013 and September 30, 2012 included in other current assets and trade and other payables of the Condensed Consolidated Balance Sheets.
 
March 31

 
September 30

(In millions)
2013

 
2012

Foreign currency derivative assets
$
2

 
$
1

Notional contract values
76

 
168

 
 
 
 
Foreign currency derivative liabilities (a)
$
4

 
$

Notional contract values
183

 
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 three and six months ended March 31, 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 six months ended March 31, 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

12

 
 
 
 
 
 
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 six months ended March 31, 2013 and 2012, as well as the loss reclassified from AOCI to the Statements of Consolidated Comprehensive Income, 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, during the three and six months ended March 31, 2013 and 2012. The loss reclassified to the Statements of Consolidated Comprehensive Income was recorded in the net interest and other financing expense caption.
 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2013

 
2012

 
2013

 
2012

Change in unrealized loss in AOCI
$
3

 
$
6

 
$
3

 
$
20

Loss reclassified from AOCI to income
60

 
5

 
65

 
10

Other financial instruments
At March 31, 2013 and September 30, 2012, Ashland’s long-term debt had a carrying value of $3,053 million and $3,246 million, respectively, compared to a fair value of $3,253 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 six months ended March 31, 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.
The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
March 31

 
September 30

(In millions)
2013

 
2012

Finished products
$
657

 
$
675

Raw materials, supplies and work in process
305

 
376

LIFO reserve
(32
)
 
(43
)
 
$
930

 
$
1,008




13

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

 
 
 

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.  Ashland has determined that its reporting units for allocation of goodwill include 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 quarter ended March 31, 2013.
 
Specialty

 
Water

 
Performance

 
Consumer

 
 

(In millions)
Ingredients

 
Technologies

 
Materials

 
Markets

 
Total

Balance at September 30, 2012
$
2,202

 
$
659

 
$
315

 
$
166

 
$
3,342

Currency translation adjustment
(5
)
 
(5
)
 
1

 

 
(9
)
Balance at March 31, 2013
$
2,197

 
$
654

 
$
316

 
$
166

 
$
3,333


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 March 31, 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 three and six months ended March 31, 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.  Intangible assets were comprised of the following as of March 31, 2013 and September 30, 2012.
 
 
March 31, 2013
 
Gross

 
 
 
Net

 
carrying

 
Accumulated

 
carrying

(In millions)
amount

 
amortization

 
amount

Trademarks and trade names
$
535

 
$
(43
)
 
$
492

Intellectual property
842

 
(160
)
 
682

Customer relationships
831

 
(203
)
 
628

IPR&D
69

 

 
69

Other intangibles
35

 
(35
)
 

Total intangible assets
$
2,312

 
$
(441
)
 
$
1,871



14

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

 
 
 

NOTE H – GOODWILL AND OTHER INTANGIBLES (continued)
 
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 March 31, 2013 and 2012 and $58 million and $59 million for the six months ended March 31, 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 $115 million in 2013 (includes six months actual and six 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.
 
March 31

 
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
331

 
300

6.50% junior subordinated notes, due 2029 
130

 
129

Revolving credit facility (a)
85

 

9.125% notes, due 2017
76

 
76

Other international loans, interest at a weighted-
 

 
 

average rate of 7.0% at March 31, 2013 (5.0% to 10.8%)
65

 
69

Medium-term notes, due 2013-2019, interest at a weighted-
 

 
 

average rate of 8.4% at March 31, 2013 (7.7% to 9.4%)
21

 
21

8.80% debentures, due 2012

 
20

Other
6

 
14

Total debt
3,509

 
3,590

Short-term debt
(456
)
 
(344
)
Current portion of long-term debt
(20
)
 
(115
)
Long-term debt (less current portion)
$
3,033

 
$
3,131

 
 
 
 
(a)Senior credit facilities.

15

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

 
 
 
NOTE I – DEBT (continued)

The scheduled aggregate maturities of debt by year are as follows:  $51 million remaining in 2013, $21 million in 2014, $339 million in 2015, $600 million in 2016 and $78 million in 2017.  The borrowing capacity remaining under the $1.2 billion new senior unsecured revolving credit facility was $1,024 million, due to an outstanding balance of $85 million, as well as a reduction of $91 million for letters of credit outstanding at March 31, 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 will 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 will be accreted into the 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, which replaced the previous $1.0 billion senior secured revolving credit facility established in conjunction with the ISP acquisition on August 23, 2011.
Ashland used the net proceeds from its issuance of the senior notes, along with the initial $85 million borrowing on the senior unsecured revolving credit facility and cash on hand, (i) to pay in full the $1.41 billion outstanding principal of the term loan A facility, (ii) to pay in full the $1.03 billion outstanding principal of the term loan B facility, (iii) to pay $52 million to terminate the interest rate swaps associated with the term loan A and term loan B facilities, (iv) to pay accrued interest, fees and expenses under the prior senior secured credit facility and (v) to pay $36 million in fees and expenses with respect to the issuance of the senior notes and entry into the senior unsecured revolving 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 three and six months ended March 31, 2013. The $36 million of new fees and expense will be amortized proportionately for each tranche of the senior notes and the new senior unsecured revolving credit facility.
As a result of the repayment of term loan A and term loan B and the termination of the senior secured revolving 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 three and six months ended March 31, 2013.
Covenant restrictions
The new senior unsecured revolving 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 March 31, 2013, Ashland is in compliance with all debt agreement covenant restrictions.

16

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

 
 
 
NOTE I – DEBT (continued)

Financial covenants
The maximum consolidated leverage ratio permitted under the new senior unsecured revolving credit facility during its entire duration is 3.25.  At March 31, 2013, Ashland’s calculation of the consolidated leverage ratio was 2.6, which is below the maximum consolidated leverage ratio permitted under the new senior unsecured revolving credit facility of 3.25.
The minimum required consolidated interest coverage ratio under the new senior unsecured revolving credit facility during its entire duration is 3.00.  At March 31, 2013, Ashland’s calculation of the interest coverage ratio was 7.0, 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 17.9% for the three months ended March 31, 2013 and was impacted by a $33 million tax benefit related to the $99 million charge from interest rate swap terminations and accelerated debt issuance and other costs and a $6 million tax benefit for fiscal year 2012 research and development credits as a result of tax legislation that became effective in the current quarter. These favorable discrete items were partially offset by unfavorable tax discrete adjustments of $13 million, primarily related to recording a reserve for an unrecognized tax benefit associated with a foreign tax audit.
The overall effective tax rate of 21.1% for the six months ended March 31, 2013 includes certain discrete items such as 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 and a foreign income tax rate change recorded during the current period.
Prior fiscal year
The overall effective tax rate was 27.4% for the three months ended March 31, 2012 and included net discrete tax benefit adjustments of $5 million primarily related to a state uncertain tax position reserve release and non-taxable income associated with corporate owned life insurance.
The overall effective tax rate of 27.5% for the six months ended March 31, 2012 also included two tax benefits of $8 million and $10 million, respectively, for the $25 million severance and restructuring charge and the $28 million fair value assessment of inventory charge recorded during the prior year period.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the six months ended March 31, 2013.
 (In millions)
 

Balance at October 1, 2012
$
124

Increases related to positions taken on items from prior years
16

Increases related to positions taken in the current year
3

Lapse of the statute of limitations
(5
)
Settlement of uncertain tax positions with tax authorities
(1
)
Balance at March 31, 2013
$
137


17

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

 
 
 
NOTE J – INCOME TAXES (continued)

In the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of up to $10 million each for both continuing operations and discontinued operations related 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 six months ended March 31, 2013, Ashland contributed $57 million to its U.S. pension plans and $9 million to its non-U.S. pension plans.  After completion of its annual update for demographic changes and based on the new provisions of the Moving Ahead for Progress in the 21st Century Act, Ashland now expects to make additional contributions to U.S. plans of approximately $50 million and to the non-U.S. plans of approximately $10 million during the remainder of 2013.  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 March 31
 
 
 
 
 
 
 
Service cost (a)
$
11

 
$
9

 
$
1

 
$
1

Interest cost (b)
44

 
50

 
2

 
3

Expected return on plan assets (b)
(60
)
 
(57
)
 

 

Amortization of prior service credit (b)
(1
)
 

 
(5
)
 
(4
)
 
$
(6
)
 
$
2

 
$
(2
)
 
$

 
 
 
 
 
 
 
 
Six months ended March 31
 

 
 

 
 

 
 

Service cost (a)
$
23

 
$
19

 
$
1

 
$
2

Interest cost (b)
88

 
99

 
4

 
6

Expected return on plan assets (b)
(119
)
 
(114
)
 

 

Amortization of prior service credit (b)
(1
)
 
(1
)
 
(11
)
 
(7
)
 
$
(9
)
 
$
3

 
$
(6
)
 
$
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,

18

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

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.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
  Years ended September 30
(In thousands)
2013

 
2012

 
2012

 
2011

 
2010

Open claims - beginning of period
66

 
72

 
72

 
83

 
100

New claims filed
1

 
1

 
2

 
2

 
2

Claims settled

 

 
(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.  During the most recent annual update of this estimate, completed during the June 2012 quarter, it was determined that the liability for asbestos claims should be increased by $11 million.  Total reserves for asbestos claims were $505 million at March 31, 2013 compared to $522 million at September 30, 2012.
A progression of activity in the asbestos reserve is presented in the following table.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
  Years ended September 30
(In millions)
2013

 
2012

 
2012

 
2011

 
2010

Asbestos reserve - beginning of period
$
522

 
$
543

 
$
543

 
$
537

 
$
543

Reserve adjustment

 

 
11

 
41

 
28

Amounts paid
(17
)
 
(19
)
 
(32
)
 
(35
)
 
(34
)
Asbestos reserve - end of period
$
505

 
$
524

 
$
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, 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.

19

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

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 69% 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 March 31, 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.
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.  
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 March 31, 2013, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $416 million, of which $68 million relates to costs previously paid.  Receivables from insurers amounted to $423 million at September 30, 2012.  During the June 2012 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 an additional $19 million increase in the receivable for probable insurance recoveries.
A progression of activity in the Ashland insurance receivable is presented in the following table.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
Years ended September 30
(In millions)
2013

 
2012

 
2012

 
2011

 
2010

Insurance receivable - beginning of period
$
423

 
$
431

 
$
431

 
$
421

 
$
422

Receivable adjustment

 

 
19

 
42

 
36

Amounts collected
(7
)
 
(17
)
 
(27
)
 
(32
)
 
(37
)
Insurance receivable - end of period
$
416

 
$
414

 
$
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

20

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

settlements and number of open claims can fluctuate significantly from period to period.  A summary of Hercules’ asbestos claims activity follows.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
  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

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.  During the most recent annual update of this estimate, completed during the June 2012 quarter, it was determined that the liability for Hercules asbestos related claims should be increased by $30 million.  Total reserves for asbestos claims were $306 million at March 31, 2013 compared to $320 million at September 30, 2012.
A progression of activity in the asbestos reserve is presented in the following table.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
Years ended September 30
(In millions)
2013

 
2012

 
2012

 
2011

 
2010

Asbestos reserve - beginning of period
$
320

 
$
311

 
$
311

 
$
375

 
$
484

Reserve adjustment (a)

 

 
30

 
(48
)
 
(93
)
Amounts paid
(14
)
 
(11
)
 
(21
)
 
(16
)
 
(16
)
Asbestos reserve - end of period
$
306

 
$
300

 
$
320

 
$
311

 
$
375

 
 
 
 
 
 
 
 
 
 
(a)    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, increases in the asbestos reserve are 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 March 31, 2013.
As of March 31, 2013 and September 30, 2012, the receivables from insurers amounted to $55 million and $56 million, respectively.  As previously mentioned, during the June 2012 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 $9 million increase in the receivable for probable insurance recoveries.

21

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

A progression of activity in the Hercules insurance receivable is presented in the following table.
 
Six months ended
 
 
 
 
 
 
 
March 31
 
Years ended September 30
(In millions)
2013

 
2012

 
2012

 
2011

 
2010

Insurance receivable - beginning of period
$
56

 
$
48

 
$
48

 
$
68

 
$
118

Receivable adjustment (a)

 

 
9

 
(20
)
 
(50
)
Amounts collected
(1
)
 
(1
)
 
(1
)
 

 

Insurance receivable - end of period
$
55

 
$
47

 
$
56

 
$
48

 
$
68

 
 
 
 
 
 
 
 
 
 
(a)    Includes a reduction of $28 million during 2010 for purchase accounting adjustments as part of the purchase price allocation for the Hercules acquisition.
Asbestos litigation cost projection
Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict.  In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, 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 $830 million for the Ashland asbestos-related litigation and approximately $500 million for the Hercules asbestos-related litigation (or approximately $1.3 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 March 31, 2013, such locations included 80 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 87 are being actively remediated.
Ashland’s reserves for environmental remediation amounted to $211 million at March 31, 2013 compared to $228 million at September 30, 2012, of which $170 million at March 31, 2013 and $187 million at September 30, 2012 were classified in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.

22

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

The following table provides a reconciliation of the changes in the environmental contingencies and asset retirement obligations during the six months ended March 31, 2013 and 2012.
 
Six months ended
 
March 31
(In millions)
2013

 
2012

Reserve - beginning of period
$
228

 
$
246

Disbursements, net of cost recoveries
(25
)
 
(21
)
Revised obligation estimates and accretion
7

 
10

Foreign currency translation
1

 

Reserve - end of period
$
211

 
$
235

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 March 31, 2013 and September 30, 2012, Ashland’s recorded receivable for these probable insurance recoveries was $25 million and $26 million, respectively.
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 six months ended March 31, 2013 and 2012.
 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions)
2013

 
2012

 
2013

 
2012

Environmental expense
$
3

 
$
4

 
$
5

 
$
8

Accretion
1

 
1

 
2

 
2

Legal expense
1

 

 
1

 
1

Total expense
5

 
5

 
8

 
11

 
 
 
 
 
 
 
 
Insurance receivable
1

 
(1
)
 
(1
)
 
(3
)
Total expense, net of receivable activity (a)
$
6

 
$
4

 
$
7

 
$
8

 
 
 
 
 
 
 
 
(a)
Net expense of $2 million for the three and six months ended March 31, 2013 and $2 million and $3 million, respectively, for the three and six months ended March 31, 2012 relates to divested businesses which qualified for treatment as discontinued operations and for which the environmental liabilities were retained by Ashland.  This amount is classified within the loss from discontinued operations caption of the Statements of Consolidated Comprehensive Income.
Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the costs.  Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites.  Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range

23

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

of future costs for identified sites could be as high as approximately $420 million.  No individual remediation location is significant, as the largest reserve for any site is 12% or less of the remediation reserve.
Insurance settlement
In March 2011, a disruption in the supply of a key raw material for Ashland occurred at a supplier. For a period of time while the raw material was not available from this supplier, an alternative source was used, but at a higher cost to Ashland. During the March 2013 quarter, Ashland finalized its settlement with the insurers and received full payment in the amount of $31 million. The insurance settlement resulted in net gains of $22 million being recognized within the cost of sales caption of the Statements of Consolidated Comprehensive Income during the December 2012 quarter.
Other legal proceedings and claims
In addition to the matters described above, there are other various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries.  Such actions are with respect to commercial matters, product liability, toxic tort liability, and other environmental matters, which seek remedies or damages, some of which are for substantial amounts.  While Ashland cannot predict with certainty the outcome of such actions, it believes that adequate reserves have been recorded and losses already recognized with respect to such actions were immaterial as of March 31, 2013 and September 30, 2012.  There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, Ashland believes that such potential losses were immaterial as of March 31, 2013.
NOTE M  EARNINGS PER SHARE
The following is the computation of basic and diluted earnings per share (EPS) from continuing operations.  Stock options, SARs and warrants available to purchase shares outstanding for each reporting period whose grant price was greater than the average market price of Ashland Common Stock for each applicable period were not included in the computation of income from continuing operations per diluted share because the effect of these instruments would be antidilutive.  The total number of these shares outstanding was approximately 0.6 million as of March 31, 2013 compared to 1.0 million at March 31, 2012.  Earnings per share is reported under the treasury stock method.  While certain non-vested stock awards granted prior to January 2010 qualify as participating securities, the effect on earnings per share calculated under the two class method is not significant.

24

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

 
 
 
NOTE M EARNINGS PER SHARE (continued)

 
Three months ended
 
Six months ended
 
March 31
 
March 31
(In millions except per share data)
2013

 
2012

 
2013

 
2012

Numerator
 
 
 
 
 
 
 
Numerator for basic and diluted EPS – Income
 
 
 
 
 
 
 
from continuing operations
$
55

 
$
90

 
$