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ASHLAND INC. - Quarter Report: 2020 December (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended December 31, 2020

OR

 

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 333-211719

ASHLAND GLOBAL HOLDINGS INC.

(a Delaware corporation)

I.R.S. No. 81-2587835

 

8145 Blazer Drive

Wilmington, Delaware 19808

Telephone Number (302) 995-3000

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.01 per share

ASH

New York Stock Exchange

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

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  No 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).   Yes  No 

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

 

Large Accelerated Filer

 

 

Accelerated Filer

 

Non-Accelerated Filer

 

 

Smaller Reporting Company

 

 

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

At December 31, 2020, there were 60,667,388 shares of Registrant’s Common Stock outstanding.

 

 

 

 


 

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

 

 

 

Three months ended

 

 

 

December 31

 

(In millions except per share data - unaudited)

 

2020

 

 

2019

 

Sales

 

$

552

 

 

$

533

 

Cost of sales

 

 

374

 

 

 

380

 

Gross profit

 

 

178

 

 

 

153

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

 

106

 

 

 

99

 

Research and development expense

 

 

15

 

 

 

16

 

Intangibles amortization expense

 

 

21

 

 

 

21

 

Equity and other income

 

 

5

 

 

 

 

Operating income

 

 

41

 

 

 

17

 

 

 

 

 

 

 

 

 

 

Net interest and other expense (income)

 

 

(6

)

 

 

10

 

Net income on divestitures

 

 

14

 

 

 

3

 

Income from continuing operations before income taxes

 

 

61

 

 

 

10

 

Income tax expense (benefit)

 

 

 

 

 

(24

)

Income from continuing operations

 

 

61

 

 

 

34

 

Loss from discontinued operations (net of income taxes)

 

 

(5

)

 

 

(2

)

Net income

 

$

56

 

 

$

32

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

Basic earnings per share - Note M

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.00

 

 

$

0.57

 

Income (loss) from discontinued operations

 

 

(0.08

)

 

 

(0.03

)

Net income

 

$

0.92

 

 

$

0.54

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share - Note M

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.99

 

 

$

0.56

 

Income (loss) from discontinued operations

 

 

(0.08

)

 

 

(0.03

)

Net income

 

$

0.91

 

 

$

0.53

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

Net income

 

$

56

 

 

$

32

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Unrealized translation gain

 

 

48

 

 

 

38

 

Other comprehensive income

 

 

48

 

 

 

38

 

Comprehensive income

 

$

104

 

 

$

70

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In millions - unaudited)

 

December 31

2020

 

 

September 30

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

335

 

 

$

454

 

Accounts receivable (a)

 

 

409

 

 

 

471

 

Inventories - Note F

 

 

537

 

 

 

529

 

Other assets

 

 

100

 

 

 

87

 

Current assets held for sale - Note B

 

 

 

 

 

6

 

Total current assets

 

 

1,381

 

 

 

1,547

 

Noncurrent assets

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Cost

 

 

3,310

 

 

 

3,265

 

Accumulated depreciation

 

 

1,748

 

 

 

1,700

 

Net property, plant and equipment

 

 

1,562

 

 

 

1,565

 

Goodwill - Note G

 

 

1,792

 

 

 

1,758

 

Intangibles - Note G

 

 

1,001

 

 

 

1,013

 

Operating lease assets, net - Note I

 

 

137

 

 

 

137

 

Restricted investments - Note E

 

 

316

 

 

 

301

 

Asbestos insurance receivable (b) - Note L

 

 

130

 

 

 

136

 

Deferred income taxes

 

 

26

 

 

 

26

 

Other assets

 

 

397

 

 

 

394

 

Total noncurrent assets

 

 

5,361

 

 

 

5,330

 

Total assets

 

$

6,742

 

 

$

6,877

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Short-term debt - Note H

 

$

93

 

 

$

280

 

Trade and other payables

 

 

217

 

 

 

233

 

Accrued expenses and other liabilities

 

 

252

 

 

 

277

 

Current operating lease obligations - Note I

 

 

23

 

 

 

23

 

Total current liabilities

 

 

585

 

 

 

813

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

Long-term debt - Note H

 

 

1,601

 

 

 

1,573

 

Asbestos litigation reserve - Note L

 

 

498

 

 

 

513

 

Deferred income taxes

 

 

222

 

 

 

229

 

Employee benefit obligations - Note K

 

 

157

 

 

 

157

 

Operating lease obligations - Note I

 

 

124

 

 

 

124

 

Other liabilities

 

 

433

 

 

 

432

 

Total noncurrent liabilities

 

 

3,035

 

 

 

3,028

 

Commitments and contingencies - Note L

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

3,122

 

 

 

3,036

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

6,742

 

 

$

6,877

 

 

 

 

 

 

 

 

 

 

 

(a)

Accounts receivable includes an allowance for credit losses of $3 million at both December 31, 2020 and September 30, 2020.

 

(b)

Asbestos insurance receivable includes an allowance for credit losses of $3 million at December 31, 2020.

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 

3


 

 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

 

Common

 

 

Paid-in

 

 

Retained

 

 

comprehensive

 

 

 

 

 

(In millions - unaudited)

 

stock

 

 

capital

 

 

earnings

 

 

income (loss) (a)

 

 

Total

 

BALANCE AT SEPTEMBER 30, 2020

 

$

1

 

 

$

769

 

 

$

2,649

 

 

$

(383

)

 

$

3,036

 

Adoption of new accounting pronouncement (b)

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

(2

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

56

 

 

 

 

 

 

 

56

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

48

 

Regular dividends, $0.275 per common share

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

 

(17

)

Common shares issued under stock incentive and other plans (c)

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

BALANCE AT DECEMBER 31, 2020

 

$

1

 

 

$

770

 

 

$

2,686

 

 

$

(335

)

 

$

3,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

At December 31, 2020 and September 30, 2020, the after-tax accumulated other comprehensive loss of $335 million and $383 million, respectively, was each comprised of net unrealized translation losses of $333 million and $381 million, respectively, and unrecognized prior service costs as a result of certain employee benefit plan amendments of $2 million, each.

(b)

Represents the cumulative-effect adjustment, net of tax, for the adoption of the new accounting pronouncement related to the measurement of credit losses on financial instruments. 

(c)

Common shares issued were 99,194 for the three months ended December 31, 2020

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 

4


 

 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS

 

 

 

Three months ended

 

 

 

December 31

 

(In millions - unaudited)

 

2020

 

 

2019

 

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM

   CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Net income

 

$

56

 

 

$

32

 

Loss from discontinued operations (net of income taxes)

 

 

5

 

 

 

2

 

Adjustments to reconcile income from continuing operations to

 

 

 

 

 

 

 

 

cash flows from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

62

 

 

 

61

 

Original issue discount and debt issuance costs amortization

 

 

1

 

 

 

2

 

Deferred income taxes

 

 

(5

)

 

 

(12

)

Gain from sales of property and equipment

 

 

(4

)

 

 

 

Stock based compensation expense

 

 

4

 

 

 

4

 

Income from restricted investments

 

 

(23

)

 

 

(13

)

Net income on divestitures

 

 

(14

)

 

 

 

Impairments

 

 

9

 

 

 

 

Pension contributions

 

 

(2

)

 

 

(1

)

Change in operating assets and liabilities (a)

 

 

17

 

 

 

(109

)

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

 

 

106

 

 

 

(34

)

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM

   CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(30

)

 

 

(29

)

Proceeds from disposal of property, plant and equipment

 

 

5

 

 

 

 

Proceeds from sale or restructuring of operations

 

 

14

 

 

 

 

Net purchase of funds restricted for specific transactions

 

 

(1

)

 

 

(1

)

Reimbursement from restricted investments

 

 

8

 

 

 

10

 

Proceeds from sales of securities

 

 

42

 

 

 

4

 

Purchase of securities

 

 

(42

)

 

 

(4

)

Total cash flows used by investing activities from continuing operations

 

 

(4

)

 

 

(20

)

CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM

   CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Proceeds from (repayment of) short-term debt

 

 

(187

)

 

 

14

 

Cash dividends paid

 

 

(17

)

 

 

(16

)

Stock based compensation employee withholding taxes paid in cash

 

 

(3

)

 

 

(5

)

Total cash flows used by financing activities from continuing operations

 

 

(207

)

 

 

(7

)

CASH PROVIDED (USED) BY CONTINUING OPERATIONS

 

 

(105

)

 

 

(61

)

Cash provided (used) by discontinued operations

 

 

 

 

 

 

 

 

Operating cash flows

 

 

(14

)

 

 

(17

)

Investing cash flows

 

 

(3

)

 

 

2

 

Total cash provided (used) by discontinued operations

 

 

(17

)

 

 

(15

)

Effect of currency exchange rate changes on cash and cash equivalents

 

 

3

 

 

 

1

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(119

)

 

 

(75

)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

 

 

454

 

 

 

232

 

CASH AND CASH EQUIVALENTS - END OF PERIOD

 

$

335

 

 

$

157

 

 

 

 

 

 

 

 

 

 

(a)

Excludes changes resulting from operations acquired, sold or held for sale.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 

5


 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and Securities and Exchange Commission (SEC) regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland Global Holdings Inc. and consolidated subsidiaries (Ashland) Annual Report on Form 10-K for the fiscal year ended September 30, 2020. Results of operations for the period ended December 31, 2020 are not necessarily indicative of the expected results for the remaining quarters in the fiscal year. All amounts are presented in millions except per-share amounts.

Ashland’s reportable segments include the consumer specialty businesses: Life Sciences and Personal Care & Household; the industrial specialty businesses: Specialty Additives and Performance Adhesives; and Intermediates and Solvents. Unallocated and Other includes corporate governance activities and certain legacy matters.  For additional information, see Note Q.

 

Use of estimates, risks and uncertainties

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

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

New accounting pronouncements

A description of new U.S. GAAP accounting standards issued or adopted during the current year is required in interim financial reporting. A detailed listing of new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The following standards relevant to Ashland were either issued or adopted in the current fiscal year or will become effective in a subsequent period.  

6


 

In June 2016, the FASB issued amended accounting guidance related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. This guidance became effective for Ashland on October 1, 2020. As a result, Ashland recorded a $3 million increase in its allowance for credit losses, primarily related to asbestos receivables, and a $2 million decrease to retained earnings, net of tax, reflecting the cumulative effect on retained earnings.

Under the new expected credit loss model, Ashland records an allowance for credit losses inherent in its receivables from revenue transactions and reinsurance recoverables. The allowance for credit losses is a valuation account deducted from the amortized cost basis of the assets to present their net carrying value at the amount expected to be collected. Ashland estimates expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. When measuring expected credit losses, Ashland pools assets with similar country risk and credit risk characteristics. Each period the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets. For the three months ending December 31, 2020, no significant credit losses were incurred within the Statements of Consolidated Comprehensive Income (Loss).  

 

NOTE B – DIVESTITURES

Composites and Marl facility

On August 30, 2019, Ashland completed the sale of its Composites business (excluding the Maleic business) and butanediol manufacturing facility in Marl, Germany to INEOS Enterprises (INEOS). 

On September 30, 2020, Ashland completed the sale of its Maleic business to AOC.  Net proceeds from the sale were approximately $98 million.

Since this disposal group signifies a strategic shift in Ashland’s business and had a major effect of Ashland’s operations and financial results, the operating results and cash flows related to Composites and the Marl facility, including the Maleic business, have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income (Loss) and Statements of Condensed Consolidated Cash Flows. See Note C of the Notes to Condensed Consolidated Financial Statements for the results of operations for Composites and the Marl facility, including the Maleic business, for all periods presented.

Subsequent to the completion of the sale, Ashland is providing certain transition services to INEOS for a fee. While the transition services are expected to vary in duration depending upon the type of service provided, Ashland expects to reduce certain costs as the transition services are completed. Ashland recognized transition service fee income of $3 million during the three months ended December 31, 2020 and 2019.

Other manufacturing facility sales

During the three months ended December 31, 2020, Ashland completed the sale of a Specialty Additives facility, the assets and liabilities of which were classified as held for sale as of September 30, 2020.  Net proceeds from the sale were approximately $14 million in the current quarter ($20 million in total including a deposit received in fiscal year 2020) and the Company recognized a pre-tax gain of $14 million recorded within the Net income on divestitures caption in the Statements of Consolidated Comprehensive Income (Loss).

NOTE C– DISCONTINUED OPERATIONS

Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income (Loss) for all periods presented.

Components of amounts reflected in the Statements of Consolidated Comprehensive Income (Loss) related to discontinued operations are presented in the following table for the three months ended December 31, 2020 and 2019.

7


 

 

 

Three months ended

 

 

 

December 31

 

(In millions)

 

2020

 

 

2019

 

Income (loss) from discontinued operations (net of tax)

 

 

 

 

 

 

 

 

Composites/Marl facility

 

$

 

 

$

 

Valvoline

 

 

 

 

 

(1

)

Water Technologies

 

 

 

 

 

(1

)

Distribution

 

 

(1

)

 

 

 

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

   taxes)

 

 

 

 

 

 

 

 

Composites/Marl facility

 

 

(4

)

 

 

 

 

 

$

(5

)

 

$

(2

)

 

 

 

 

 

 

 

 

 

 

The following table presents a reconciliation of the captions within Ashland's Statements of Consolidated Comprehensive Income (Loss) for the income (loss) from discontinued operations attributable to Composites and the Marl facility for the three months ended December 31, 2019. The Maleic business, which was sold during fiscal 2020 to AOC, was operated under the Composites business and Marl facility disposal group and is therefore reported in discontinued operations.

 

 

Three months ended

 

 

 

December 31

 

(In millions)

 

2019

 

Income (loss) from discontinued operations attributable

   to Composites/Marl facility

 

 

 

 

Sales

 

$

12

 

Cost of sales

 

 

(10

)

Selling, general and administrative expense

 

 

(2

)

Equity and other income

 

 

2

 

Pretax income of discontinued operations

 

 

2

 

Income tax expense

 

 

(2

)

Income from discontinued operations

 

$

 

 

 

NOTE D – RESTRUCTURING ACTIVITIES

 

Company-wide restructuring activities

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

Fiscal 2020 and 2021 restructuring costs

During the three months ended December 31, 2020 and 2019, Ashland incurred severance expense of $8 million and $3 million, respectively, attributable to executive management changes and business management changes within the organization. As of December 31, 2020, the severance reserve associated with this transition was $36 million.

The following table details at December 31, 2020 and 2019, the amount of restructuring severance reserves related to this program. The severance reserves were primarily recorded within accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet as of December 31, 2020 and December 31, 2019.

 

(In millions)

Severance costs

 

Balance at of September 30, 2020

 

39

 

Restructuring reserve

 

8

 

Utilization (cash paid)

 

(11

)

Balance at December 31, 2020

$

36

 

 

8


 

 

(In millions)

Severance costs

 

Balance at of September 30, 2019

 

 

Restructuring reserve

 

3

 

Utilization (cash paid)

 

 

Balance at December 31, 2019

$

3

 

Fiscal 2018 restructuring costs

During fiscal 2018, Ashland initiated a company-wide cost reduction program as a result of ongoing strategic asset plans and activities. As part of this restructuring program, Ashland announced a voluntary severance offer to certain qualifying employees that was formally approved during 2018. Additionally, during fiscal 2018, an involuntary program for employees was also initiated as part of the restructuring program. These programs resulted in additional severance expense of $1 million for the three months ended December 31, 2019 which was primarily recorded within the selling, general and administrative expense caption of the Statement of Consolidated Comprehensive Income (Loss). As of December 31, 2020, the severance reserve for the company-wide restructuring program was zero.

The following table details at December 31, 2019, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves during the three months ended December 31, 2019. The severance reserve was primarily recorded within accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet as of December 31, 2019.

(In millions)

Severance costs

 

Balance at of September 30, 2019

 

7

 

Restructuring reserve

 

1

 

Utilization (cash paid)

 

(3

)

Balance at December 31, 2019

$

5

 

 

NOTE E – FAIR VALUE MEASUREMENTS

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

Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

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

9


 

The following table summarizes financial instruments subject to recurring fair value measurements as of December 31, 2020.

 

 

 

Carrying

 

 

Total

fair

 

 

Quoted prices

in active

markets for

identical

assets

 

 

Significant

other

observable

inputs

 

 

Significant

unobservable

inputs

 

(In millions)

 

value

 

 

value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

335

 

 

$

335

 

 

$

335

 

 

$

 

 

$

 

Restricted investments (a)

 

 

346

 

 

 

346

 

 

 

346

 

 

 

 

 

 

 

Investment of captive insurance company (b)

 

 

8

 

 

 

8

 

 

 

8

 

 

 

 

 

 

 

Total assets at fair value

 

$

689

 

 

$

689

 

 

$

689

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

 

$

1

 

 

$

1

 

 

$

 

 

$

1

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Included in restricted investments is $30 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets.

 

(b)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.

The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2020.

 

 

 

Carrying

 

 

Total

fair

 

 

Quoted prices

in active

markets for

identical

assets

 

 

Significant

other

observable

inputs

 

 

Significant

unobservable

inputs

 

(In millions)

 

value

 

 

value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

454

 

 

$

454

 

 

$

454

 

 

$

 

 

$

 

Restricted investments (a)

 

 

331

 

 

 

331

 

 

 

331

 

 

 

 

 

 

 

Investment of captive insurance company (b)

 

 

9

 

 

 

9

 

 

 

9

 

 

 

 

 

 

 

Foreign currency derivatives

 

 

1

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Total assets at fair value

 

$

795

 

 

$

795

 

 

$

794

 

 

$

1

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

 

$

3

 

 

$

3

 

 

$

 

 

$

3

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Included in restricted investments is $30 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets.

 

(b)

Included in other noncurrent assets in the Condensed Consolidated Balance Sheets.

10


 

 

Restricted investments

Investment income and realized gains and losses on these company-restricted investments are reported within the net interest and other expense caption on the Statements of Consolidated Comprehensive Income (Loss). The following table provides a summary of the activity within the investment portfolio as of December 31, 2020 and September 30, 2020:

 

(In millions)

 

December 31

2020

 

 

September 30

2020

 

Original cost

 

$

335

 

 

$

335

 

Accumulated adjustments, net (a)

 

 

(50

)

 

 

(30

)

Adjusted cost, beginning of year

 

 

285

 

 

 

305

 

Investment income (b)

 

 

5

 

 

 

10

 

Net unrealized gain (c)

 

 

52

 

 

 

46

 

Realized gains (c)

 

 

11

 

 

 

2

 

Settlement funds

 

 

1

 

 

 

3

 

Disbursements

 

 

(8

)

 

 

(35

)

Fair value

 

$

346

 

 

$

331

 

 

 

 

 

 

 

 

 

 

 

 

(a)

The accumulated adjustments include investment income, realized gains, disbursements and settlements recorded in previous periods.

 

 

(b)

Investment income for the demand deposit includes interest income as well as dividend income transferred from the equity and fixed income mutual funds.

 

 

(c)

Presented under the original cost method.

 

The following table presents gross unrealized gains and losses for the restricted investment securities as of December 31, 2020 and September 30, 2020:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In millions)

 

Adjusted Cost

 

 

Unrealized Gain

 

 

Unrealized Loss

 

 

Fair Value

 

As of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposit

 

$

9

 

 

$

 

 

$

 

 

$

9

 

Equity mutual fund

 

 

101

 

 

 

38

 

 

 

 

 

 

139

 

Fixed income mutual fund

 

 

184

 

 

 

14

 

 

 

 

 

 

198

 

 

 

$

294

 

 

$

52

 

 

$

 

 

$

346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposit

 

$

7

 

 

$

 

 

$

 

 

$

7

 

Equity mutual fund

 

 

116

 

 

 

31

 

 

 

(1

)

 

 

146

 

Fixed income mutual fund

 

 

162

 

 

 

16

 

 

 

 

 

 

178

 

 

 

$

285

 

 

$

47

 

 

$

(1

)

 

$

331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents the investment income, net gains and losses realized and disbursements related to the investments within the portfolio for the three months ended December 31, 2020 and 2019.

 

 

 

Three months ended

 

 

 

December 31

 

(In millions)

 

2020

 

 

2019

 

Investment income

 

$

5

 

 

$

4

 

Net gains (losses) unrealized (a)

 

 

18

 

 

 

9

 

Disbursements

 

 

(8

)

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

(a)

Ashland determined that all unrealized gains and (losses) were related to equity securities with readily determinable fair values. Due to the new accounting guidance adopted in the first quarter of fiscal year 2019, the net unrealized gains and (losses) during the year ended September 30, 2019 and forward were recorded within the net interest and other expense caption in the Statements of Consolidated Income (Loss).

 

 

11


 

 

Foreign currency derivatives

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 on certain assets and liabilities, including short-term inter-company loans, denominated in currencies other than Ashland’s functional currency of an entity. These derivative contracts generally require exchange of one foreign currency for another at a fixed rate at a future date and generally have maturities of less than twelve months. All contracts are valued at fair value with net changes in fair value recorded within the selling, general and administrative expense caption. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in non-functional currencies. The following table summarizes the net gains and losses recognized during the three months ended December 31, 2020 and 2019 within the Statements of Consolidated Comprehensive Income (Loss).

 

 

 

Three months ended

 

 

 

December 31

 

(In millions)

 

2020

 

 

2019

 

Foreign currency derivative gains (losses)

 

$

3

 

 

$

1

 

 

 

The following table summarizes the fair values of the outstanding foreign currency derivatives as of December 31, 2020 and September 30, 2020 included in accounts receivable and accrued expenses and other liabilities of the Condensed Consolidated Balance Sheets.

 

 

 

December 31

 

 

September 30

 

(In millions)

 

2020

 

 

2020

 

Foreign currency derivative assets

 

$

 

 

$

1

 

Notional contract values

 

 

168

 

 

 

170

 

 

 

 

 

 

 

 

 

 

Foreign currency derivative liabilities

 

$

1

 

 

$

3

 

Notional contract values

 

 

221

 

 

 

215

 

 

 

Other financial instruments

At December 31, 2020 and September 30, 2020, Ashland's long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $1,616 million and $1,588 million, respectively, compared to a fair value of $1,806 million and $1,708 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.

 

NOTE F – INVENTORIES

Inventories are carried at the lower of cost or net realizable value. Inventories are primarily stated at cost using the weighted-average cost method. In addition, certain inventories are valued at cost using the last-in, first-out (LIFO) method.

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

 

(In millions)

 

December 31, 2020

 

 

September 30, 2020

 

Finished products

 

$

341

 

 

$

336

 

Raw materials, supplies and work in process

 

 

196

 

 

 

193

 

 

 

$

537

 

 

$

529

 

 

 

12


 

 

NOTE G – GOODWILL AND OTHER INTANGIBLES

Goodwill

Ashland tests goodwill and other indefinite-lived intangible assets for impairment annually as of July 1 and when events and circumstances indicate an impairment may have occurred. Ashland tests goodwill and other indefinite-lived intangible assets for impairment by comparing the estimated fair value of the reporting units (for goodwill) and other indefinite-lived intangible assets to the related carrying value. If the carrying amount of a reporting unit or other indefinite-lived intangible asset exceeds its estimated fair value, Ashland records an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed to the associated carrying amount of goodwill.

Ashland’s assessment of an impairment on any of these assets classified currently as having indefinite lives, including goodwill, could change in future periods if significant events happen and/or circumstances change that effect the previously mentioned assumptions such as: a significant change in projected business results, a divestiture decision, increase in Ashland’s weighted-average cost of capital rates, decrease in growth rates or assumptions, economic deterioration that is more severe or of a longer duration than anticipated, or another significant economic event.

Ashland’s reporting units align with its reportable segments. Ashland determined that its reporting units are Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents.  

No indicators of impairment were identified in the first quarter of Fiscal 2021.

 

The following is a progression of goodwill by reportable segment for the three months ended December 31, 2020.

 

(In millions)

Life Sciences

 

 

Personal Care & Household

 

(a)

Specialty Additives

 

(a)

Performance Adhesives

 

 

Intermediates and Solvents

 

(a)

Total

 

Balance at September 30, 2020

$

861

 

 

$

 

 

$

444

 

 

$

453

 

 

$

 

 

$

1,758

 

Currency translation

 

21

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

34

 

Balance at December 31, 2020

$

882

 

 

$

 

 

$

457

 

 

$

453

 

 

$

 

 

$

1,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

13


 

 

As of December 31, 2020 and September 30, 2020, there were accumulated impairments of $356 million, $174 million and $90 million related to the Personal Care & Household, Specialty Additives and Intermediates and Solvents reportable segments, respectively.

 

Other intangible assets

Intangible assets principally consist of trademarks and trade names, intellectual property and customer and supplier relationships. Intangible assets classified as finite are amortized on a straight-line basis over their estimated useful lives. The cost of trademarks and trade names is amortized principally over 3 to 25 years, intellectual property over 5 to 25 years, and customer and supplier relationships over 3 to 24 years.

Ashland annually reviews, as of July 1, indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

Trademarks and trade names are valued using a “relief-from-royalty” valuation method compared to the carrying value. No indicators of impairment were identified in the first quarter of Fiscal 2021.

Intangible assets were comprised of the following as of December 31, 2020 and September 30, 2020.

 

 

December 31, 2020

 

 

Gross

 

 

 

 

 

 

Net

 

 

carrying

 

 

Accumulated

 

 

carrying

 

(In millions)

amount

 

 

amortization

 

 

amount

 

Definite-lived intangibles

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

$

66

 

 

$

(33

)

 

$

33

 

Intellectual property

 

731

 

 

 

(460

)

 

 

271

 

Customer and supplier relationships

 

770

 

 

 

(351

)

 

 

419

 

Total definite-lived intangibles

 

1,567

 

 

 

(844

)

 

 

723

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived intangibles

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

278

 

 

 

 

 

 

278

 

Total intangible assets

$

1,845

 

 

$

(844

)

 

$

1,001

 

 

 

September 30, 2020

 

 

Gross

 

 

 

 

 

 

Net

 

 

carrying

 

 

Accumulated

 

 

carrying

 

(In millions)

amount

 

 

amortization

 

 

amount

 

Definite-lived intangibles

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

$

66

 

 

$

(32

)

 

$

34

 

Intellectual property

 

721

 

 

 

(442

)

 

 

279

 

Customer and supplier relationships

 

757

 

 

 

(335

)

 

 

422

 

Total definite-lived intangibles

 

1,544

 

 

 

(809

)

 

 

735

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived intangibles

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

278

 

 

 

 

 

 

278

 

Total intangible assets

$

1,822

 

 

$

(809

)

 

$

1,013

 

 

Amortization expense recognized on intangible assets was $21 million for both the three months ended December 31, 2020 and 2019, respectively, and is included in the Intangibles Amortization Expense caption of the Statements of Consolidated Comprehensive Income (Loss). Estimated amortization expense for future periods is $87 million in 2021 (includes three months actual and nine months estimated), $86 million in 2022, $86 million in 2023, $72 million in 2024 and $69 million in 2025. Actual amounts may change from such estimated amounts due to fluctuations in foreign currency exchange rates, additional intangible asset acquisitions and divestitures, potential impairment, accelerated amortization, or other events.

 

14


 

NOTE H – DEBT

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

 

(In millions)

 

December 31, 2020

 

 

September 30, 2020

 

4.750% notes, due 2022

 

$

411

 

 

$

411

 

2.00% Senior Notes, due 2028 (Euro 500 million principal)

 

 

614

 

 

 

587

 

6.875% notes, due 2043

 

 

282

 

 

 

282

 

Term loan A

 

 

250

 

 

 

250

 

Accounts receivable securitizations

 

 

69

 

 

 

177

 

6.50% junior subordinated notes, due 2029

 

 

55

 

 

 

55

 

Revolving credit facility

 

 

 

 

 

80

 

Other (a)

 

 

13

 

 

 

11

 

Total debt

 

 

1,694

 

 

 

1,853

 

Short-term debt (includes current portion of long-term debt)

 

 

(93

)

 

 

(280

)

Long-term debt (less current portion)

 

$

1,601

 

 

$

1,573

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes $15 million of debt issuance cost discounts as of both December 31, 2020 and September 30, 2020. Additionally, as of December 31, 2020 and September 30, 2020, Other includes a European short-term loan facility with an outstanding balance of $24 million and $23 million, respectively. 

 

The scheduled aggregate maturities of long-term debt by year (including the current portion and excluding debt issuance costs) are as follows as of December 31, 2020: zero remaining in 2021, $421 million in 2022, $22 million in 2023, $44 million in 2024 and $175 million in 2025.

Available borrowing capacity

The borrowing capacity remaining under the 2020 $600 million Revolving Credit Facility was $580 million due to a reduction of $20 million for letters of credit outstanding as of December 31, 2020. Ashland's total borrowing capacity at December 31, 2020 was $694 million, which included $114 million of available capacity from the two accounts receivable securitization facilities.

Covenants related to current Ashland debt agreements

Ashland's debt contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional subsidiary indebtedness, restrictions on subsidiary distributions, investments, mergers, sale of assets and restricted payments and other customary limitations. As of December 31, 2020, Ashland is in compliance with all debt agreement covenant restrictions.

The maximum consolidated net leverage ratio permitted under Ashland's most recent credit agreement (the 2020 Credit Agreement) is 4.0. At December 31, 2020, Ashland’s calculation of the consolidated net leverage ratio was 2.6.

The minimum required consolidated interest coverage ratio under the 2020 Credit Agreement during its entire duration is 3.0. At December 31, 2020, Ashland’s calculation of the interest coverage ratio was 7.8.

 

NOTE I – LEASING ARRANGEMENTS

Ashland determines if an arrangement is or contains a lease at contract inception and determines its classification as an operating or finance lease at lease commencement. Ashland leases certain office buildings, transportation equipment, warehouses and storage facilities, and equipment. All of Ashland’s leases are operating leases. Real estate leases represent approximately 89% of the total lease liability. Operating lease assets and obligations are reflected within operating lease assets, net; current operating lease obligations; and non-current operating lease obligations captions on the Condensed Consolidated Balance Sheets.

15


 

Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost recognized within our Statements of Consolidated Comprehensive Income (Loss) were as follows:

 

 

 

 

 

Three months ended

 

 

 

 

 

December 31

 

(In millions)

 

Location

 

2020

 

 

2019

 

Lease cost:

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

Selling, General & Administrative

 

$

3

 

 

$

5

 

Operating lease cost

 

Cost of Sales

 

 

4

 

 

 

4

 

Variable lease cost

 

Cost of Sales

 

 

1

 

 

 

1

 

Short-term leases

 

Cost of Sales

 

 

1

 

 

 

 

Total lease cost

 

 

 

$

9

 

 

$

10

 

The following table summarizes Ashland’s lease assets and liabilities as presented in the Condensed Consolidated Balance Sheet:

 

(In millions)

 

December 31, 2020

 

 

September 30, 2020

 

Assets

 

 

 

 

 

 

 

 

Operating lease assets, net

 

$

137

 

 

$

137

 

Total lease assets

 

 

137

 

 

 

137

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current operating lease obligations

 

$

23

 

 

$

23

 

Non-current operating lease obligations

 

 

124

 

 

 

124

 

Total lease liabilities

 

$

147

 

 

$

147

 

 

 

 

 

 

 

 

 

 

Ashland often has options to renew lease terms for buildings and other assets.  The exercise of lease renewal options are generally at Ashland’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at Ashland’s discretion. Ashland evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for operating leases as of December 31, 2020 and September 30, 2020 was approximately 15 years for each period.

Residual value guarantees are not common within Ashland’s lease agreements nor are restrictions or covenants imposed by leases. Ashland has elected the practical expedient to combine lease and non-lease components. The discount rate implicit within the leases is generally not determinable. Therefore, Ashland determines the discount rate based on its incremental borrowing rate.  The incremental borrowing rate is determined using a buildup method resulting in an estimated range of secured borrowing rates matching the lease term and the currency of the jurisdiction in which lease payments are made, adjusted for impacts of collateral.  Consideration was given to Ashland’s own relevant debt issuances as well as debt instruments of comparable companies with similar credit characteristics. The weighted average discount rate used to measure operating lease liabilities as of December 31, 2020 and September 30, 2020 was 2.9%. There are no leases that have not yet commenced but that create significant rights and obligations for Ashland.

Right-of-use assets exchanged for new operating lease obligations were $2 million and less than $1 million for the three months ended December 31, 2020 and 2019, respectively.

Cash paid for amounts included in the measurement of operating lease liabilities:

 

 

Three months ended

 

 

 

December 31

 

(In millions)

 

2020

 

 

2019

 

Operating cash flows from operating leases

 

$

7

 

 

$

9

 

 

 

16


 

 

Maturity Analysis of Lease Liabilities

Maturities of lease liabilities are shown below as of December 31, 2020 and September 30, 2020:

(In millions)

 

 

 

December 31,

2020

 

 

September 30,

2020

 

Remainder of 2021

 

$

20

 

 

$

28

 

2022

 

 

37

 

 

 

35

 

2023

 

 

17

 

 

 

17

 

2024

 

 

14

 

 

 

13

 

2025

 

 

12

 

 

 

11

 

Thereafter

 

$

90

 

 

$

88

 

Total lease payments

 

 

190

 

 

 

192

 

Less amount of lease payment representing interest

 

 

(43

)

 

 

(45

)

Total present value of lease payments

 

$

147

 

 

$

147

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE J – INCOME TAXES

Current fiscal year

Ashland’s effective tax rate in any interim period is subject to adjustments related to discrete items and the mix of domestic and foreign operating results. The overall effective tax rate was zero for the three months ended December 31, 2020. The current quarter tax rate was impacted by jurisdictional income mix, as well as $13 million from favorable tax discrete items primarily related to the Specialty Additives facility sale.

Prior fiscal year

The overall effective tax rate was a benefit of 240% for the three months ended December 31, 2019. The quarter tax rate was primarily impacted by jurisdictional income mix, as well as $27 million from favorable tax discrete items primarily related to the Swiss Tax Reform.

Unrecognized tax benefits

Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2020.

 

(In millions)

 

 

 

Balance at October 1, 2020

$

171

 

Increases related to positions taken in the current year

 

7

 

Balance at December 31, 2020

$

178

 

 

From a combination of statute expirations and audit settlements in the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of between $50 million and $60 million for continuing operations. 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

Plan contributions

For the three months ended December 31, 2020, Ashland contributed $2 million to its non-U.S. pension plans and zero to its U.S. pension plans. Ashland expects to make additional contributions of approximately $3 million to its non-U.S. plans and $2 million to its U.S. pension plans during the remainder of fiscal 2021.

17


 

Components of net periodic benefit costs (income)

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

 

 

 

Pension benefits

 

 

Other postretirement

benefits

 

(In millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Three months ended December 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1

 

 

$

1

 

 

$

 

 

$

 

Interest cost

 

 

2

 

 

 

2

 

 

 

 

 

 

1

 

Expected return on plan assets

 

 

(2

)

 

 

(3

)

 

 

 

 

 

 

Curtailment

 

 

 

 

 

 

 

 

 

 

 

 

Total net periodic benefit costs

 

$

1

 

 

$

 

 

$

 

 

$

1

 

 

For segment reporting purposes, service cost is proportionately allocated to each segment, excluding the Unallocated and other segment, and is recorded within the selling, general and administrative expense and cost of sales captions on the Statements of Consolidated Comprehensive Loss (Income). All other components are recorded within the other net periodic benefit income caption on the Statements of Consolidated Comprehensive Loss (Income).

NOTE L  LITIGATION, CLAIMS AND CONTINGENCIES

Asbestos litigation

Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley) and the acquisition of Hercules in November 2008. Although Riley, a former subsidiary, was neither a producer nor a manufacturer of asbestos, its industrial boilers contained some asbestos-containing components provided by other companies. Hercules, an indirect wholly-owned subsidiary of Ashland, 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 sold by one of Hercules’ former subsidiaries to a limited industrial market.

To assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions for Ashland and Hercules asbestos claims, Ashland retained Nathan Associates Inc. (Nathan). The methodology used by Nathan 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, Nathan estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims. Changes in asbestos-related liabilities and receivables are recorded on an after-tax basis within the discontinued operations caption in the Statements of Consolidated Comprehensive Income (Loss).

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. The amount and timing of settlements and number of open claims can fluctuate from period to period. A summary of Ashland asbestos claims activity, excluding Hercules claims, follows.

 

18


 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

 

Years ended September 30

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2018

 

Open claims - beginning of year

 

 

49

 

 

 

53

 

 

 

53

 

 

 

53

 

 

 

54

 

New claims filed

 

 

1

 

 

 

 

 

 

2

 

 

 

2

 

 

 

2

 

Claims settled

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(1

)

Claims dismissed

 

 

(1

)

 

 

(2

)

 

 

(5

)

 

 

(1

)

 

 

(2

)

Open claims - end of period

 

 

49

 

 

 

51

 

 

 

49

 

 

 

53

 

 

 

53

 

 

 

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 Nathan.

During the most recent annual update of this estimate completed during fiscal year 2020, it was determined that the liability for Ashland asbestos-related claims should be increased by $13 million. Total reserves for asbestos claims were $325 million at December 31, 2020 compared to $335 million at September 30, 2020.

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

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

 

Years ended September 30

 

(In millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2018

 

Asbestos reserve - beginning of year

 

$

335

 

 

$

352

 

 

$

352

 

 

$

380

 

 

$

419

 

Reserve adjustment

 

 

 

 

 

 

 

 

13

 

 

 

1

 

 

 

(8

)

Amounts paid

 

 

(10

)

 

 

(10

)

 

 

(30

)

 

 

(29

)

 

 

(31

)

Asbestos reserve - end of period (a)

 

$

325

 

 

$

342

 

 

$

335

 

 

$

352

 

 

$

380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

19


 

 

Included $29 million classified in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets as of both December 31, 2020 and September 30, 2020.

 

Ashland asbestos-related receivables

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

For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. A substantial portion of the estimated receivables from insurance companies are expected to be due from domestic insurers.

At December 31, 2020, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $98 million (excluding the Hercules receivable for asbestos claims) compared to $103 million at September 30, 2020. During fiscal year 2020, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed. This model update resulted in a $1 million increase in the receivable for probable insurance recoveries.

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

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

 

Years ended September 30

 

(In millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2018

 

Insurance receivable - beginning of year

 

$

103

 

 

$

123

 

 

$

123

 

 

$

140

 

 

$

155

 

Receivable adjustment (a)

 

 

(2

)