XNYS:ASH Ashland Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

___________________________
 
FORM 10-Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
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 ¨
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 ¨ No þ
At June 30, 2012, there were 78,542,152 shares of Registrant’s Common Stock outstanding.
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
 
 
 
 
 

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions except per share data - unaudited)
2012

 
2011

 
2012

 
2011

SALES
$
2,141

 
$
1,667

 
$
6,149

 
$
4,656

 
 
 
 
 
 
 
 
COSTS AND EXPENSES
 

 
 

 
 

 
 

Cost of sales (a) (b)
1,514

 
1,233

 
4,426

 
3,362

Selling, general and administrative expense (b) (c)
349

 
301

 
1,092

 
778

Research and development expense
30

 
19

 
91

 
58

 
1,893

 
1,553

 
5,609

 
4,198

EQUITY AND OTHER INCOME
15

 
15

 
46

 
42

 
 
 
 
 
 
 
 
OPERATING INCOME
263

 
129

 
586

 
500

Net interest and other financing expense
(53
)
 
(22
)
 
(166
)
 
(88
)
Net gain (loss) on acquisitions and divestitures
5

 
(1
)
 
2

 
20

INCOME FROM CONTINUING OPERATIONS
 

 
 

 
 

 
 

BEFORE INCOME TAXES
215

 
106

 
422

 
432

Income tax expense - Note J
55

 
31

 
112

 
104

INCOME FROM CONTINUING OPERATIONS
160

 
75

 
310

 
328

(Loss) income from discontinued operations (net of
 

 
 

 
 

 
 

income taxes) - Note D (d)
(9
)
 
18

 
(10
)
 
349

NET INCOME
$
151

 
$
93

 
$
300

 
$
677

 
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE - Note M
 

 
 

 
 

 
 

Income from continuing operations
$
2.04

 
$
.96

 
$
3.97

 
$
4.18

(Loss) income from discontinued operations
(.11
)
 
.24

 
(.13
)
 
4.43

Net income
$
1.93

 
$
1.20

 
$
3.84

 
$
8.61

 
 
 
 
 
 
 
 
DILUTED EARNINGS PER SHARE - Note M
 

 
 

 
 

 
 

Income from continuing operations
$
2.00

 
$
.94

 
$
3.90

 
$
4.10

(Loss) income from discontinued operations
(.10
)
 
.23

 
(.13
)
 
4.34

Net income
$
1.90

 
$
1.17

 
$
3.77

 
$
8.44

 
 
 
 
 
 
 
 
DIVIDENDS PAID PER COMMON SHARE
$
.225

 
$
.175

 
$
.575

 
$
.475

 
 
 
 
 
 
 
 
(a)
Includes a noncash charge of $28 million for the nine months ended June 30, 2012 related to the fair value assessment of inventory acquired from International Specialty Products Inc. at the date of acquisition.
(b)
The nine months ended June 30, 2011 include $120 million of income ($37 million and $83 million recognized within the cost of sales and selling, general and administrative expense captions, respectively) related to the actuarial gain on pension and postretirement benefit plans, due to a required plan remeasurement from the Distribution sale, which is further discussed in note (d).
(c)
The three and nine months ended June 30, 2012 include charges of $3 million and $69 million, respectively, related to certain company wide restructuring and integration activities related to recent business realignments through acquisitions, divestitures and joint venture arrangements.
(d)
Includes income of $68 million for the nine months ended June 30, 2011 related to direct results of the Distribution business that was divested on March 31, 2011.  Due to the sale qualifying for discontinued operation treatment, the direct results of this business have been presented within this caption.  In addition, the nine months ended June 30, 2011 include an after-tax gain of $256 million on the sale of the Distribution business.




SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
 

 
June 30

 
September 30

(In millions - unaudited)
2012

 
2011

 
 
 
 
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
597

 
$
737

Accounts receivable (a)
1,474

 
1,482

Inventories - Note G
1,034

 
925

Deferred income taxes
176

 
163

Other assets
72

 
80

 
3,353

 
3,387

NONCURRENT ASSETS
 

 
 

Goodwill - Note H
3,246

 
3,291

Intangibles - Note H
2,015

 
2,134

Asbestos insurance receivable (noncurrent portion) - Note L
452

 
448

Equity and other unconsolidated investments
199

 
193

Other assets
579

 
599

 
6,491

 
6,665

PROPERTY, PLANT AND EQUIPMENT
 

 
 

Cost
4,319

 
4,306

Accumulated depreciation and amortization
(1,565
)
 
(1,392
)
 
2,754

 
2,914

TOTAL ASSETS
$
12,598

 
$
12,966

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
CURRENT LIABILITIES
 

 
 

Short-term debt - Note I
$
45

 
$
83

Current portion of long-term debt - Note I
109

 
101

Trade and other payables
908

 
911

Accrued expenses and other liabilities
560

 
644

 
1,622

 
1,739

NONCURRENT LIABILITIES
 

 
 

Long-term debt (noncurrent portion) - Note I
3,567

 
3,648

Employee benefit obligations - Note K
1,418

 
1,566

Asbestos litigation reserve (noncurrent portion) - Note L
783

 
783

Deferred income taxes
400

 
404

Other liabilities
642

 
691

 
6,810

 
7,092

 
 
 
 
STOCKHOLDERS’ EQUITY
4,166

 
4,135

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
12,598

 
$
12,966

 
 
 
 
(a)
Accounts receivable includes an allowance for doubtful accounts of $27 million and $37 million at June 30, 2012 and September 30, 2011, respectively.






SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

 
 
 
 
 
 
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

 
 
 

(In millions - unaudited)
Common
stock

 
Paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income

(a)
 
Total

BALANCE AT SEPTEMBER 30, 2011
$
1

 
$
627

 
$
3,200

 
$
307

 
 
$
4,135

Total comprehensive income (loss) (b)
 

 
 

 
300

 
(238
)
 
 
62

Dividend on common stock, $.575 per share
 

 
 

 
(45
)
 
 

 
 
(45
)
Common shares issued under stock
 

 
 

 
 

 
 

 
 
 

   incentive and other plans (c)
 

 
14

 
 

 
 

 
 
14

BALANCE AT JUNE 30, 2012
$
1

 
$
641

 
$
3,455

 
$
69

 

$
4,166

 
 
 
 
 
 
 
 
 
 
 
(a)
At June 30, 2012, the after-tax accumulated other comprehensive income of $69 million was comprised of unrecognized prior service credits as a result of certain employee benefit plan amendments of $61 million, net unrealized translation gains of $40 million, and net unrealized losses on interest rate hedges of $32 million.
(b)
Reconciliations of net income to total comprehensive income (loss) follow.
 
Three months ended
 
Nine months ended
 
June 30
 
June 30
(In millions)
2012

 
2011

 
2012

 
2011

Net income
$
151

 
$
93

 
$
300

 
$
677

Unrealized translation gain (loss), net of tax
(190
)
 
65

 
(217
)
 
179

Pension and postretirement obligation adjustment, net of tax
(1
)
 

 
(1
)
 
5

Net unrealized loss on interest rate hedges, net of tax
(14
)
 

 
(20
)
 

Total comprehensive income (loss)
$
(54
)
 
$
158

 
$
62

 
$
861

 
 
 
 
 
 
 
 
(c)
Common shares issued were 456,603 for the nine months ended June 30, 2012.



































SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

 
 
 

 
 
Nine months ended
 
 
June 30
(In millions - unaudited)
 
2012

 
2011

CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES FROM
 
 
 
 
CONTINUING OPERATIONS
 
 
 
 
Net income
 
$
300

 
$
677

Loss (income) from discontinued operations (net of income taxes)
 
10

 
(349
)
Adjustments to reconcile income from continuing operations to
 
 

 
 

cash flows from operating activities
 
 

 
 

Depreciation and amortization
 
320

 
211

Debt issuance cost amortization
 
18

 
22

Deferred income taxes
 
(2
)
 
16

Equity income from affiliates
 
(24
)
 
(15
)
Distributions from equity affiliates
 
3

 
4

Gain from sale of property and equipment
 
(1
)
 
(3
)
Stock based compensation expense
 
19

 
13

Stock contributions to qualified savings plans
 

 
13

Net (gain) loss on acquisitions and divestitures
 
(4
)
 
(20
)
Inventory fair value adjustment related to ISP acquisition
 
28

 

Actuarial gain on pension and postretirement plans
 

 
(120
)
Change in operating assets and liabilities (a)
 
(521
)
 
(360
)
 
 
146

 
89

CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES FROM
 
 

 
 

CONTINUING OPERATIONS
 
 

 
 

Additions to property, plant and equipment
 
(164
)
 
(96
)
Proceeds from disposal of property, plant and equipment
 
10

 
10

Purchase of operations - net of cash acquired
 

 
(7
)
Proceeds from sale of available-for-sale securities
 
4

 

Proceeds from sale of operations or equity investments
 
41

 
44

 
 
(109
)
 
(49
)
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES FROM
 
 

 
 

CONTINUING OPERATIONS
 
 

 
 

Proceeds from issuance of long-term debt
 
2

 
11

Repayment of long-term debt
 
(79
)
 
(306
)
Proceeds from/(repayment of) short-term debt
 
(38
)
 
(10
)
Repurchase of common stock
 

 
(71
)
Cash dividends paid
 
(45
)
 
(37
)
Proceeds from exercise of stock options
 
2

 
3

Excess tax benefits related to share-based payments
 
5

 
3

 
 
(153
)
 
(407
)
CASH (USED) PROVIDED BY CONTINUING OPERATIONS
 
(116
)
 
(367
)
Cash (used) provided by discontinued operations
 
 

 
 

Operating cash flows
 
(17
)
 
7

Investing cash flows
 
(1
)
 
979

Effect of currency exchange rate changes on cash and cash equivalents
 
(6
)
 
9

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(140
)
 
628

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
 
737

 
417

CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
597

 
$
1,045

 
 
 
 
 
(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, 2011.  Results of operations for the period ended June 30, 2012 are not necessarily indicative of results to be expected for the year ending September 30, 2012.  Certain prior period data has been reclassified in the Condensed Consolidated Financial Statements and accompanying footnotes to conform to current period presentation.
Ashland is composed of four reporting segments:  Ashland Specialty Ingredients (Specialty Ingredients), which in previous periods prior to the acquisition of International Specialty Products Inc. had been named Functional Ingredients, Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets).
On August 23, 2011, Ashland completed the acquisition of International Specialty Products Inc. (ISP).  ISP’s operating results are included in the Specialty Ingredients reporting segment, with the exception of ISP’s Elastomers business, which is included within the Performance Materials reporting segment.  See Note B for additional information on the ISP acquisition.  
On March 31, 2011, Ashland completed the sale of substantially all of the assets and certain liabilities of Ashland Distribution (Distribution).  As a result of this sale, the prior period operating results and cash flows related to Distribution have been reflected as discontinued operations.  See Notes C, D and P for additional information on the Distribution divestiture and reporting 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, environmental remediation and asset retirement obligations.  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.
Change in accounting policy regarding pension and other postretirement benefits
During the September quarter in 2011, Ashland elected to change its method of recognizing actuarial gains and losses for its defined benefit pension and other postretirement benefit plans.  Previously, Ashland recognized the actuarial gains and losses as a component of Stockholders’ Equity within the Condensed

6

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

 
 
 
NOTE A  SIGNIFICANT ACCOUNTING POLICIES (continued)
 

Consolidated Balance Sheet on an annual basis and amortized the gains and losses into operating results over the average future service period of active employees within the related plans.  Ashland has elected to immediately recognize the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each year and whenever a plan is determined to qualify for a remeasurement during a year.  The remaining components of pension and other postretirement benefits expense are recorded on a quarterly basis.  While Ashland’s historical policy of recognizing pension and other postretirement benefit expense is acceptable under U.S. GAAP, Ashland believes that the new policy is preferable as it eliminates the delay in recognizing gains and losses within operating results.  This change will also improve transparency within Ashland’s operating results by immediately recognizing the effects of economic and interest rate trends on plan investments and assumptions in the year these gains and losses are actually incurred.  This change in accounting policy has been applied retrospectively, adjusting all prior periods presented.
In conjunction with this change in accounting policy for pension and other postretirement benefits, Ashland also elected to change its method of accounting for certain costs included in inventory.  Ashland has elected to exclude the amount of its pension and other postretirement benefit costs applicable to inactive participants from inventoriable costs and charge them directly to cost of sales.  While Ashland’s historical policy of including all pension and other postretirement benefit costs as a component of inventoriable costs was acceptable, Ashland believes that the new policy is preferable, as inventoriable costs will only include costs that are directly attributable to current manufacturing employees.  Applying this change retrospectively, in connection with the change in accounting for pension and other postretirement benefit costs, did not have a significant impact on previously reported inventory, cost of sales or segment reported results in any of the prior period financial statements.
The effect of the accounting policy changes on the previously reported results for the three and nine months ended June 30, 2011 resulted in increases in net income of $6 million and $150 million, respectively, and increases in diluted earnings per share from net income of $0.08 and $1.87, respectively.
New accounting standards
The adoption of new accounting standards and new accounting standards issued during the current year are included 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, 2011.
In December 2011, the FASB issued accounting guidance related to the offsetting of assets and liabilities on the balance sheet (ASC 210 Balance Sheet). The new guidance requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP. This guidance will become effective for Ashland on October 1, 2013. The adoption of this guidance is not expected to have a material impact on the Condensed Consolidated Financial Statements.
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 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, a business with $410 million of sales for the twelve month period ended September 30, 2011, which has been included within the Performance Materials reportable segment.  The acquisition was recorded by Ashland using the

7

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

 
 
 
NOTE B – ACQUISITIONS (continued)

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.
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 is 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.
Purchase price allocation
The all-cash purchase price of ISP was $2,179 million.  The following table summarizes the values of the assets acquired and liabilities assumed at the date of acquisition.
 
At

Purchase price allocation (in millions)
August 23, 2011

Assets:
 
Cash
$
186

Accounts receivable
286

Inventory
381

Other current assets
51

Intangible assets
1,101

Goodwill
1,237

Property, plant and equipment
1,137

Other noncurrent assets
85

Liabilities:
 

Accounts payable
(175
)
Accrued expenses
(209
)
Debt
(1,196
)
Deferred tax - net
(570
)
Employee benefit obligations
(72
)
Other noncurrent liabilities
(63
)
Total purchase price
$
2,179

 
 

As of June 30, 2012, certain aspects of the initial purchase price allocation for the acquisition were subject to completion, primarily related to in-process research and development (IPR&D) and income tax items.  Adjustments to the current fair value estimates of these items may occur as the process conducted for various valuations and assessments is finalized.  Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
Intangible assets identified
Ashland initially identified $135 million of IPR&D projects within the acquired ISP business that, as of the date of acquisition, had not been established in the market place.  These projects consist of various enhancements of existing products or new potential applications for products.  Ashland used various valuation models based on discounted probable future cash flows on a project-by-project basis in identifying 23 projects as distinct assets.  A strategic assessment and an evaluation of these projects is currently ongoing and is estimated to be finalized during the September 2012 quarter. With the adoption of ASC Topic 805, “Business Combinations,” on October 1, 2009, identified IPR&D acquired in a business combination is capitalized and

8

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

 
 
 
NOTE B – ACQUISITIONS (continued)

tested for impairment annually and when events and circumstances indicate an impairment may have occurred.  As such, these assets have and will continue to be subjected to future impairment or amortization as the individual projects continue through the various stages of the feasibility assessment process.
Ashland also identified approximately $174 million of certain product trade names, within the Specialty Ingredients business, that have been designated as indefinite-lived assets.  Ashland’s designation of an indefinite life for these assets took many factors into consideration, including the current market leadership position of the brands as well as their recognition worldwide in the industry.  The remaining $792 million of identified finite-lived intangible assets are being amortized over the estimated useful life in proportion to the economic benefits consumed.  Ashland considered the useful lives of the customer relationships and developed technology to be 18 years and 8 to 15 years, respectively.  The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future cash flows of the combined company.  In addition, Ashland reviewed certain technological trends and also considered the relative stability in the current ISP customer base.
The following details the total intangible assets identified.
 
 
 
 
Life
Intangible asset type (in millions)
 
Value

 
(years)
Customer relationships - Specialty Ingredients
 
$
266

 
18
Developed technology - Specialty Ingredients
 
498

 
8 - 15
Developed technology - Performance Materials
 
19

 
8 - 15
IPR&D - Specialty Ingredients
 
135

 
Indefinite
Product trade names - Specialty Ingredients
 
174

 
Indefinite
Product trade names - Specialty Ingredients
 
3

 
4
Product trade names - Performance Materials
 
6

 
4
Total
 
$
1,101

 
 
NOTE C– DIVESTITURES
Synlubes business divestiture
In January 2012, Ashland completed the sale of its aviation and refrigerant lubricants business, a polyol/ester-based synlubes (Synlubes) business previously included within the Water Technologies business segment to Monument Chemical Inc., a Heritage Group Company.  Annual sales of the business were approximately $50 million.  Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment.  The transaction resulted in a pretax loss of less than $1 million recognized during the nine months ended June 30, 2012.  
PVAc business divestiture
In January 2012, Ashland completed the sale of its polyvinyl acetate homopolymer and copolymer (PVAc) business previously included within the Performance Materials business segment to Celanese Corporation.  Annual sales of the business were approximately $45 million.  Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment.  The sale included the transfer of the PVAc business, inventory and related technology, but did not include any real estate or manufacturing facilities.  Ashland’s PVAc business included two brands, Flexbond™ and Vinac™ emulsions.  To support the transition, the products will be temporarily toll manufactured by Ashland for Celanese Corporation.  The transaction resulted in a pretax gain of $2 million recognized during the nine months ended June 30, 2012.  


9

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

 
 
 
NOTE C– DIVESTITURES (continued)

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 $256 million during the nine months ended June 30, 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 $11 million for the three months ended June 30, 2011, and $5 million and $26 million for the nine months ended June 30, 2012 and 2011, respectively.
Ashland has 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 is receiving transition service fees for ongoing administrative and other services being provided to Nexeo.  Ashland recognized transition service fees of $6 million and $22 million during the three and nine months ended June 30, 2012, respectively, and $9 million during the three and nine months ended June 30, 2011, which offset costs of providing transition services and are classified within the selling, general and administrative expense caption of the Statements of Consolidated Income.  While the transition service agreements vary in duration depending upon the type of service provided, Ashland will continue to implement cost reductions as the transition services are phased out.
Casting Solutions Joint Venture
In July 2010, Ashland and Süd-Chemie AG (Süd-Chemie) signed an agreement for the formation of an expanded 50/50 global joint venture serving the foundry chemical sector.  The transaction closed on November 30, 2010 and combined three businesses:  (i) Ashland’s Casting Solutions business group, (ii) Süd-Chemie’s Foundry-Products and Specialty Resins business unit, and (iii) Ashland-Südchemie-Kernfest GmbH (ASK), the then existing 50% owned European-based joint venture between Ashland and Süd-Chemie, for which Ashland historically only recognized equity income of the joint venture within its consolidated results.  Upon formation of the expanded global joint venture, Ashland used valuation methodologies for certain contributions that primarily consisted of various discounted cash flow models in recording its equity interest at approximately$120 million.  This investment basis was based on the fair value of the net assets of the Casting Solutions business group as well as the carrying value of Ashland’s 50% equity interest in ASK.
Upon deconsolidation of the Casting Solutions business group, Ashland recognized a pretax gain of $23 million during the nine months ended June 30, 2011.  The gain was attributable to the fair market value of the net assets contributed to the joint venture exceeding the related carrying values.  For the majority of the valuation of the Casting Solutions assets and liabilities, Ashland utilized the discounted cash flow method; however, the adjusted book value method was also used in some areas of the valuation.  The gain was included in the net gain on acquisitions and divestitures caption in the Statements of Consolidated Income.  The values of assets and liabilities contributed on the closing date of the transaction by Ashland to the expanded global joint venture, excluding equity interests, were as follows:

10

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

 
 
 
NOTE C– DIVESTITURES (continued)

 
Assets

(In millions)
(liabilities)

Cash
$
9

Accounts receivable
52

Inventories
21

Property, plant and equipment
34

Goodwill
52

Trade and other payables
(24
)
Other noncurrent assets (liabilities) - net
11

 
$
155

In addition, Ashland determined that the formation of the expanded global joint venture did not change Ashland’s ability to exercise significant influence over operating and financing policies of the joint venture, which could have required a fair market value assessment of assets and liabilities.  Therefore, Ashland accounted for this part of the formation of the expanded global joint venture at historical cost, and no gain or loss was recognized.
Ashland’s equity interest in the expanded joint venture qualifies for equity method accounting treatment under U.S. GAAP.  As a result, beginning on December 1, 2010, the results of the Performance Materials segment no longer includes the sales, cost of sales, selling, general and administrative expense and corresponding taxes related to the Casting Solutions business; however, Ashland includes the financial results of the joint venture within operating income of the Performance Materials segment and in the equity and other income caption of the Statements of Consolidated Income.
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 has 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 Statement of Consolidated Income and Statement of Condensed Consolidated Cash Flows.  Sales recognized for the six month period Distribution was still owned by Ashland during the nine months ended June 30, 2011 were $1,868 million.  The results of operations for the nine months ended June 30, 2011 are included in the table below.  Ashland has made subsequent adjustments to the gain on sale of Distribution, primarily relating to the tax effects of the sale, during the nine months ended June 30, 2012.
Ashland’s divestiture of Ashland Paving And Construction (APAC) during 2006 qualified as a discontinued operation.  As a result, the previous operating results, assets and liabilities related to APAC have been reflected as discontinued operations in the Condensed Consolidated Financial Statements.  Ashland has made subsequent adjustments to the gain on the sale of APAC, primarily relating to the tax effects of the sale, during the nine month period ended June 30, 2011.  Such adjustments to these and other divested businesses may continue to occur in future periods and are reflected in the period they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.
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 the acquisition of Hercules during 2009, a wholly-owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations and continue periodically, primarily

11

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

 
 
 
NOTE D – DISCONTINUED OPERATIONS (continued)

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 Income related to discontinued operations are presented in the following table for the three and nine months ended June 30, 2012 and 2011.
 
Three months ended
June 30
 
Nine months ended
June 30
(In millions)
2012

 
2011

 
2012

 
2011

Income (loss) from discontinued operations (net of tax)
 
 
 
 
 
 
 
Distribution (a)
$
(2
)
 
$
(2
)
 
$
(5
)
 
$
68

Asbestos-related litigation reserves and receivables
(7
)
 
18

 
(1
)
 
19

Electronic chemicals

 
2

 

 
2

Gain (loss) on disposal of discontinued operations (net of tax)
 

 
 

 
 

 
 

Distribution (a)

 

 
(4
)
 
256

APAC

 

 

 
4

Total (loss) income from discontinued operations (net of tax)
$
(9
)
 
$
18

 
$
(10
)
 
$
349

 
 
 
 
 
 
 
 
(a)
For the three and nine months ended June 30, 2011, the pretax income reported for Distribution was expense of $6 million and income of $452 million, respectively.
NOTE E – RESTRUCTURING ACTIVITIES
Ashland periodically implements 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 the expanded global joint venture with Süd-Chemie.  In addition, Ashland is currently taking action to integrate ISP subsequent to its purchase in August 2011.  As a first step to address cost reduction opportunities resulting from these transactions, Ashland announced a voluntary severance offer (VSO) in June 2011 to approximately 1,500 regular, full-time, non-union, U.S.-based employees, primarily within various shared resource groups as well as certain positions within the Specialty Ingredients business, ultimately resulting in 150 employees being formally approved for the VSO.  An involuntary program was also initiated as a further step to capture targeted savings levels from these transactions and other business cost saving initiatives.  The VSO and involuntary program resulted in a severance charge of $34 million during the September 2011 quarter.  The involuntary program continued during 2012 and resulted in an expense of $21 million being recognized within the selling, general and administrative expense caption during the nine months ended June 30, 2012.  Additional charges related to the involuntary program may be incurred in subsequent periods from ongoing efforts to maximize operational efficiencies as a result of these transactions.  As of June 30, 2012, the restructuring reserve for these programs totaled $37 million.
As of June 30, 2012 and 2011, the remaining $2 million and $12 million, respectively, in restructuring reserves for previously announced programs consisted of 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.


12

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

 
 
 
NOTE E – RESTRUCTURING ACTIVITIES (continued)

Facility costs
During the March 2012 quarter, Ashland incurred a $20 million lease abandonment charge related to its exit from an office facility that was retained as part of the Hercules acquisition.  The costs related to the reserve will be paid over the remaining lease term through May 2016.  Also during the March 2012 quarter, in order to maximize operational efficiencies, Ashland abandoned a construction project for a multi-purpose facility in China.  This project abandonment resulted in a $16 million charge which primarily related to expenses incurred for engineering and construction in progress.  Both charges were recognized within the selling, general and administrative expense caption during the nine months ended June 30, 2012.  
The following table details, as of June 30, 2012 and 2011, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves for the nine months ended June 30, 2012 and 2011.  The severance reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet while facility costs reserves are primarily within other noncurrent liabilities.
 
 
 
Facility

 
 
(In millions)
Severance

 
costs

 
Total

Balance as of September 30, 2011
$
45

 
$

 
$
45

Restructuring reserve
21

 
20

 
41

Utilization (cash paid or otherwise settled)
(27
)
 
(2
)
 
(29
)
Balance at June 30, 2012
$
39

 
$
18

 
$
57

 
 
 
 
 
 
Balance as of September 30, 2010
$
26

 
$

 
$
26

Restructuring reserve
(1
)
 

 
(1
)
Utilization (cash paid or otherwise settled)
(13
)
 

 
(13
)
Balance at June 30, 2011
$
12

 
$

 
$
12

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.  The three levels within the fair value hierarchy are described as follows:
Level 1 — Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 — Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date.  Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability.  The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or Ashland’s own financial data such as internally developed pricing models, discounted cash

13

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets (market approach), adjusted for any terms specific to that asset or liability.  For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.
The following table summarizes financial asset instruments subject to recurring fair value measurements as of June 30, 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
$
597

 
$
597

 
$
597

 
$

 
$

Auction rate securities
6

 
6

 

 

 
6

Deferred compensation investments (a)
176

 
176

 
59

 
117

 

Investments of captive insurance company (a)
2

 
2

 
2

 

 

Foreign currency derivatives
1

 
1

 

 
1

 

Total assets at fair value
$
782

 
$
782

 
$
658

 
$
118

 
$
6

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 

 
 

 
 

 
 

Interest rate swap derivatives (b)
$
53

 
$
53

 
$

 
$
53

 
$

Foreign currency derivatives
1

 
1

 

 
1

 

Total liabilities at fair value
$
54

 
$
54

 
$

 
$
54

 
$

 
 
 
 
 
 
 
 
 
 
(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. See further discussion below on the interest rate swap liabilities.
The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2011.

14

 
 
 
 
 
 
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
$
737

 
$
737

 
$
737

 
$

 
$

Auction rate securities
10

 
10

 

 

 
10

Deferred compensation investments (a)
185

 
185

 
76

 
109

 

Investments of captive insurance company (a)
2

 
2

 
2

 

 

Foreign currency derivatives
1

 
1

 

 
1

 

Total assets at fair value
$
935

 
$
935

 
$
815

 
$
110

 
$
10

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Interest rate swap derivatives (b)
$
20

 
$
20

 
$

 
$
20

 
$

 
 
 
 
 
 
 
 
 
 
(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. See further discussion below on the interest rate swap liabilities.
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 the earnings volatility effects of short-term assets and liabilities denominated in currencies other than the functional currency of an entity.
Ashland contracts with counter-parties to buy and sell foreign currencies to offset the impact of exchange rate changes on transactions denominated in non-functional currencies, including short-term inter-company loans.  These 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, 2012 and 2011 within the Statement of Consolidated Income.
 
 
Three months ended

Nine months ended
 
 
June 30
 
June 30
(In millions)
 
2012

 
2011

 
2012

 
2011

Foreign currency derivative gain (loss)
 
$

 
$

 
$
3

 
$

The following table summarizes the fair values of the outstanding foreign currency derivatives as of June 30, 2012 and September 30, 2011 included in other current assets and trade and other payables of the Condensed Consolidated Balance Sheet.

15

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

 
 
June 30

 
September 30

(In millions)
 
2012

 
2011

Foreign currency derivative assets
 
$
1

 
$
1

Notional contract values
 
59

 
62

 
 
 
 
 
Foreign currency derivative liabilities (a)
 
$
1

 
$

Notional contract values
 
46

 
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.  As of June 30, 2012, the total notional values of interest rate swaps related to term loans A and B equaled $1.4 billion and $650 million, respectively, whereas the total notional values were $1.5 billion and $650 million, respectively, at September 30, 2011.  These instruments qualify for hedge accounting treatment and are designated as cash flow hedges whereby Ashland records 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 Income when the hedged item affects net income.  There was no hedge ineffectiveness with these instruments during the three and nine months ended June 30, 2012.
The fair value of Ashland’s interest rate swap assets and liabilities are calculated using standard pricing models.  These models utilize inputs derived from observable market data such as interest rate spot rates and forward rates, and are deemed to be Level 2 measurements within the fair value hierarchy.  Counterparties to these interest rate swap agreements are highly rated financial institutions which Ashland believes carry only a minimal risk of nonperformance.  The following table summarizes the fair values of the outstanding interest rate swap instruments as of June 30, 2012 and September 30, 2011.
 
 
 
 
June 30

 
September 30

(In millions)
 
Consolidated balance sheet caption
 
2012

 
2011

Interest rate swap liabilities
 
Accrued expenses and other liabilities
 
$
16

 
$
17

Interest rate swap liabilities
 
Other noncurrent liabilities
 
37

 
3

The following table summarizes the unrealized loss on interest rate hedges recognized in AOCI during the three and nine months ended June 30, 2012, as well as the loss reclassified from AOCI to the Statement of Consolidated Income during the three and nine months ended June 30, 2012.  The loss reclassified to the Statement of Consolidated Income was recorded in the net interest and other financing expense caption.
 
 
Three months ended

 
Nine months ended

(In millions)
 
June 30, 2012

 
June 30, 2012

Change in unrealized loss in AOCI
 
$
29

 
$
49

Loss reclassified from AOCI to income
 
6

 
16

During 2009, Ashland purchased a three year interest rate cap on a notional amount of $300 million of variable rate debt.  This interest rate cap fixed Ashland’s interest rate on that outstanding variable interest rate debt when LIBOR interest rates equaled or exceeded 7% on a reset date.  This instrument expired during the March 2012 quarter and did not result in any gain or loss.



16

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

 
 
 
NOTE F – FAIR VALUE MEASUREMENTS (continued)

Other financial instruments
At June 30, 2012 and September 30, 2011, Ashland’s long-term debt had a carrying value of $3,676 million and $3,749 million, respectively, compared to a fair value of $3,765 million and $3,953 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, and 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.  The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
 
 
June 30

 
September 30

(In millions)
 
2012

 
2011

Finished products
 
$
687

 
$
620

Raw materials, supplies and work in process
 
408

 
364

LIFO reserve
 
(61
)
 
(59
)
 
 
$
1,034

 
$
925

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 reportable segments and the Composite Polymers/Specialty Polymers/Adhesives and Elastomers reporting units within the Performance Materials reportable segment.  Prior to its sale to Nexeo, Distribution was treated as a separate reporting unit for allocation of goodwill.  Ashland performed its most recent annual goodwill impairment test as of July 1, 2011, and determined at that time that no impairment existed.
The following is a progression of goodwill by segment for the period ended June 30, 2012.
 
 
Specialty

 
Water

 
Performance

 
Consumer

 
 

(In millions)
 
Ingredients

 
Technologies

 
Materials

 
Markets

 
Total

Balance at September 30, 2011
 
$
2,092

 
$
676

 
$
357

 
$
166

 
$
3,291

Acquisitions (a)
 
50

 

 
3

 

 
53

Divestitures (b)
 

 
(6
)
 
(5
)
 

 
(11
)
Currency translation adjustment
 
(46
)
 
(27
)
 
(14
)
 

 
(87
)
Balance at June 30, 2012
 
$
2,096

 
$
643

 
$
341

 
$
166

 
$
3,246

 
 
 
 
 
 
 
 
 
 
 
(a)
The adjustment primarily relates to updates to the post-closing adjustments from the ISP acquisition.
(b)
The reductions to goodwill primarily resulted from Ashland's sale of its Synlubes and PVAc businesses .
Other intangible assets
Intangible assets principally consist of trademarks and trade names, intellectual property, customer lists, 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,

17

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

 
 
 
NOTE H – GOODWILL AND OTHER INTANGIBLES (continued)

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 $598 million and $599 million as of June 30, 2012 and September 30, 2011, respectively.  The $1 million decrease in indefinite-lived intangible assets relates to a trademark that was included as part of Ashland’s sale of its PVAc business.
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.  In conjunction with the July 1, 2011 annual assessment of indefinite-lived intangible assets, Ashland’s models did not indicate any impairment.  Intangible assets were comprised of the following as of June 30, 2012 and September 30, 2011.
 
 
 
June 30, 2012
 
 
Gross
carrying

 
Accumulated

 
Net
carrying

(In millions)
 
amount

 
amortization

 
amount

Trademarks and trade names
 
$
535

 
$
(37
)
 
$
498

Intellectual property
 
841

 
(124
)
 
717

Customer relationships
 
823

 
(158
)
 
665

IPR&D
 
135

 

 
135

Other intangibles
 
35

 
(35
)
 

Total intangible assets
 
$
2,369

 
$
(354
)
 
$
2,015

 
 
September 30, 2011
 
 
Gross
carrying

 
Accumulated

 
Net
carrying

(In millions)
 
amount

 
amortization

 
amount

Trademarks and trade names
 
$
536

 
$
(31
)
 
$
505

Intellectual property
 
848

 
(87
)
 
761

Customer relationships
 
846

 
(116
)
 
730

IPR&D
 
135

 

 
135

Other intangibles
 
35

 
(32
)
 
3

Total intangible assets
 
$
2,400

 
$
(266
)
 
$
2,134

Amortization expense recognized on intangible assets was $29 million and $18 million for the three months ended June 30, 2012 and 2011, respectively and $88 million and $52 million for the nine months ended June 30, 2012 and 2011, respectively, and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Income.  Estimated amortization expense for future periods is $117 million in 2012 (includes nine months actual and three months estimated), $114 million in 2013, $113 million in 2014, $112 million in 2015 and $109 million in 2016.


18

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

 
 
 


NOTE I – DEBT
The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.
 
 
June 30

 
September 30

(In millions)
 
2012

 
2011

Term Loan A, due 2016 (a)
 
$
1,444

 
$
1,500

Term Loan B, due 2018 (a)
 
1,389

 
1,400

9.125% notes, due 2017
 
634

 
633

6.50% junior subordinated notes, due 2029 (b)
 
129

 
128

6.60% notes, due 2027 (b)
 
12

 
12

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

average rate of 8.4% at June 30, 2012 (7.7% to 9.4%)
 
21

 
21

8.80% debentures, due 2012
 
20

 
20

Hercules Nanjing - term notes, due 2013
 
24

 
35

Other international loans, interest at a weighted-average
 
 
 
 

rate of 7.1% at June 30, 2012 (2.2% to 11.8%)
 
45

 
81

Other
 
3

 
2

Total debt
 
3,721

 
3,832

Short-term debt
 
(45
)
 
(83
)
Current portion of long-term debt
 
(109
)
 
(101
)
Long-term debt (less current portion)
 
$
3,567

 
$
3,648

 
 
 
 
 
(a)Senior credit facilities.
(b)Retained instrument from the Hercules acquisition.
The scheduled aggregate maturities of debt by year are as follows:  $40 million remaining in 2012, $156 million in 2013, $176 million in 2014, $173 million in 2015, $1,064 million in 2016 and $664 million in 2017.  Total borrowing capacity remaining under the $1.0 billion revolving credit facility was $905 million, representing a reduction of $95 million for letters of credit outstanding at June 30, 2012.
During the March 2011 quarter, Ashland terminated its accounts receivable securitization facility. In conjunction with the termination, Ashland expensed the remaining debt issuance costs associated with the accounts receivable securitization facility, which were less than $1 million.
On March 31, 2011, Ashland terminated its Term Loan A facility, paying off the outstanding balance of $289 million with funds received from the sale of Distribution. As a result of this termination of the Term Loan A facility, Ashland recognized an $11 million charge for the remaining debt issuance costs related to the loan fees paid to originate the loan, which is included in the net interest and other financing expense caption in the Statements of Consolidated Income for the nine months ended June 30, 2011.
Covenant restrictions
The Senior Credit Facility (Term Loan A, Term Loan B and revolving credit facility) contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and fixed charge coverage ratios, limitations on liens, additional indebtedness, further negative pledges, investments, payment of dividends, mergers, sale of assets and restricted payments, and other customary limitations.  As of June 30, 2012, Ashland is in compliance with all debt agreement covenants.
Financial covenants
The maximum consolidated leverage ratios permitted under the Senior Credit Facility are as follows:  3.75 as of June 30, 2012, 3.50 as of September 30, 2012, 3.00 from the period December 31, 2012 through September 30, 2013 and 2.75 as of December 31, 2013 and each quarter thereafter.  At June 30, 2012, Ashland’s calculation of the consolidated leverage ratio was 2.8 compared to the maximum consolidated leverage ratio permitted under the Senior Credit Facility of 3.75.

19

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

 
 
 


NOTE I – DEBT (continued)
The minimum required consolidated fixed charge coverage ratios under the Senior Credit Facility are 1.50 as of June 30, 2012, 1.75 as of September 30, 2012 and 2.00 as of December 31, 2012 and each quarter thereafter.  At June 30, 2012, Ashland’s calculation of the fixed charge coverage ratio was 2.5 compared to the minimum required consolidated ratio of 1.50.
NOTE J – INCOME TAXES
Current fiscal year
Ashland’s effective tax rate is subject to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations.  The overall effective tax rate was 25.6% for the three months ended June 30, 2012 and includes net discrete tax benefit adjustments of $5 million primarily related to the release of a valuation allowance, adjustments to uncertain tax positions and foreign return to provision adjustments.
The overall effective tax rate of 26.5% for the nine months ended June 30, 2012 includes certain discrete items such as the current quarter discrete items discussed previously, as well as two tax benefits of $7 million and $10 million, respectively, for the $21 million severance and restructuring charge and the $28 million fair value assessment of inventory charge recorded during the current period.
Prior fiscal year
The overall effective tax rate was 29.2% for the three months ended June 30, 2011 and did not include any significant discrete items.
The overall effective tax rate of 24.1% for the nine months ended June 30, 2011 includes certain discrete items that had a significant impact to the rate, such as the tax benefit for state deferred tax asset valuation allowance releases (net of uncertain tax position reserves) of $45 million and tax expense of $6 million for additional taxes associated with the then expected repatriation of proceeds generated from the sale of Distribution. Ashland determined that there was sufficient evidence to reverse the state tax valuation allowances during the March 2011 quarter based on the cumulative effect of the gain on the sale of Distribution, reduced interest expense and forecasted future operating results. In addition, this period included a $15 million tax expense from the gain associated with the fair market value of the Casting Solutions contribution and a $4 million tax benefit associated with research and development tax credits for the 2010 fiscal year.
Unrecognized tax benefits
Changes in unrecognized tax benefits are summarized as follows for the nine months ended June 30, 2012.
 
(In millions)
 

Balance at October 1, 2011
$
160

Increases related to positions taken on items from prior years
9

Decreases related to positions taken on items from prior years
(29
)
Increases related to positions taken in the current year
5

Lapse of the statute of limitations
(2
)
Balance at June 30, 2012
$
143

Ashland expects to settle one or more audits in the next twelve months that will result in a decrease in the amount of accrual for uncertain tax positions of up to $25 million. For the remaining balance as of June 30, 2012, it is reasonably possible that there could be material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax

20

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

 
 
 
NOTE J – INCOME TAXES (continued)

positions, or the expiration of applicable statute of limitations; however, Ashland is not able to estimate the impact of these items at this time.
NOTE K – EMPLOYEE BENEFIT PLANS
As discussed in Notes A and P, Ashland elected during 2011 to change its method of recognizing actuarial gains and losses for its defined benefit pension and postretirement benefit plans.  This accounting change was applied retrospectively, adjusting all prior periods presented.
For the nine months ended June 30, 2012, Ashland contributed $110 million to its U.S. benefit plans and $22 million to its non-U.S. benefit plans.  Ashland expects to make additional contributions to U.S. plans of approximately $31 million and to the non-U.S. plans of $7 million during the remainder of 2012.  The following table details the components of pension and other postretirement benefit costs.
 
 
 
 
 
 
Other postretirement
 
 
Pension benefits
 
benefits
(In millions)
 
2012

 
2011

 
2012

 
2011

Three months ended June 30
 
 
 
 
 
 
 
 
Service cost
 
$
9

 
$
5

 
$
1

 
$

Interest cost
 
51

 
52

 
2

 
4

Curtailment
 
(1
)
 

 

 

Expected return on plan assets
 
(56
)
 
(57
)
 

 

Amortization of prior service credit
 

 

 
(3
)
 
(1
)
Actuarial gain
 

 

 

 

 
 
$
3

 
$

 
$

 
$
3

Nine months ended June 30
 
 

 
 

 
 

 
 

Service cost
 
$
28

 
$
30

 
$
2

 
$
3

Interest cost
 
149

 
150

 
9

 
12

Curtailment
 
(1
)
 
(19
)
 

 
(25
)
Expected return on plan assets
 
(170
)
 
(169
)
 

 

Amortization of prior service credit
 
(1
)
 
(1
)
 
(10
)
 
(4
)
Actuarial gain
 

 
(135
)
 

 
(16
)
 
 
$
5

 
$
(144
)
 
$
1

 
$
(30
)
The Distribution divestiture resulted in a curtailment gain of $44 million, which was recognized as part of the $256 million gain on the sale of Distribution recorded within the discontinued operations caption of the Statements of Consolidated Income for the nine months ended June 30, 2011.  As a result of the curtailment, Ashland was required to remeasure its obligations for the pension and postretirement benefit plans based on updated actuarial assumptions.  This remeasurement resulted in an actuarial gain of $151 million, of which $31 million was recorded within the discontinued operations caption of the Statements of Consolidated Income for the nine months ended June 30, 2011.
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES
Asbestos litigation
Ashland and Hercules, a wholly-owned subsidiary of Ashland, 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

21

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

 
 
 
NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES (continued)

to the results of previously conducted third party epidemiological studies estimating the number of people likely to develop asbestos-related diseases.  Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos.  Using that information, HR&A estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims.  Changes in asbestos-related liabilities and receivables are recorded within the discontinued operations caption in the Statements of Consolidated 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.
 
 
Nine months ended
 
 
 
 
 
 
 
 
June 30
 
  Years ended September 30
(In thousands)
 
2012

 
2011

 
2011

 
2010

 
2009

Open claims - beginning of period
 
72

 
83

 
83

 
100

 
115

New claims filed
 
2

 
2

 
2

 
2

 
2

Claims settled
 
(1
)
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Claims dismissed
 
(4
)
 
(9
)
 
(12
)
 
(18
)
 
(16
)
Open claims - end of period
 
69

 
75

 
72

 
83

 
100

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 $529 million at June 30, 2012 compared to $543 million at September 30, 2011.
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)
 
2012

 
2011

 
2011

 
2010

 
2009

Asbestos reserve - beginning of period
 
$
543

 
$
537

 
$
537

 
$
543

 
$
572

Reserve adjustment
 
11

 
41

 
41

 
28

 
5

Amounts paid
 
(25
)
 
(28
)
 
(35
)
 
(34
)
 
(34
)
Asbestos reserve - end of period
 
$
529

 
$
550

 
$
543

 
$
537

 
$
543

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.

22

 
 
 
 
 
 
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 which approximately 84% have a credit rating of B+ or higher by A. M. Best, as of June 30, 2012.  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 2010, Ashland entered into a new agreement with a number of London market insurance companies with respect to coverage for asbestos-related insurance claims.  As a result, a $12 million increase to the Ashland asbestos receivable was recorded within the Condensed Consolidated Balance Sheet, which had a $9 million (after-tax) effect on the Statement of Consolidated Income within the discontinued operations caption.  During the nine months ended June 2012, 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 current period was recognized as an after-tax gain of $6 million within discontinued operations of the Statement of Consolidated Income since Ashland’s policy is to not record asbestos receivables for any carriers that are insolvent.  In addition, Ashland had agreed to arbitrate a dispute regarding whether there is a significant deductible in the London market companies’ policies in three policy periods that must be satisfied before the policies begin providing coverage for Riley Stoker asbestos claims.  The London market companies had contended that Ashland must bear certain self-insured retentions in respect of Riley Stoker asbestos liabilities before the London coverage attaches in these three years, and Ashland disputed that such self-insured retentions must be satisfied.  The parties conducted an arbitration hearing on this dispute in June 2011, and a decision was rendered by the arbitrator in October 2011 that essentially supported Ashland’s previously stated position on these claims.
At June 30, 2012, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $426 million, of which $54 million relates to costs previously paid.  Receivables from insurers amounted to $431 million at September 30, 2011.  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.
 
 
Nine months ended
 
 
 
 
 
 
 
 
June 30
 
Years ended September 30
(In millions)
 
2012

 
2011

 
2011

 
2010

 
2009

Insurance receivable - beginning of period
 
$
431

 
$