Ashland Inc. — Q3 Fiscal 2023 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023. Unless otherwise noted, financial amounts are in U.S. dollars and millions. Ashland is a global specialty ingredients and additives company with four reportable segments: Life Sciences, Personal Care, Specialty Additives and Intermediates.
Financial results and position
| Metric | Q3 FY2023 | Q3 FY2022 | Change |
|---|---|---|---|
| Sales | $546 | $644 | Down $98 (15%) |
| Gross profit / gross margin | $178 / 32.6% | $240 / 37.3% | Margin down 4.7 percentage points |
| Operating income | $62 | $112 | Down $50 |
| Continuing-operations income | $42 | $51 | Down $9 |
| Diluted EPS from continuing operations | $0.79 | $0.93 | Down $0.14 |
| Net income | $50 | $36 | Up $14 |
| Adjusted EBITDA (non-GAAP) | $133 | $174 | Down $41 (24%) |
Quarterly net income included $8 million of income from discontinued operations, compared with a $15 million loss a year earlier. Adjusted EBITDA margin was approximately 24.4%, versus 27.0% in Q3 FY2022.
For the nine months, sales were $1.674 billion versus $1.759 billion; operating income was $182 million versus $254 million; and income from continuing operations was $176 million versus $121 million. Net income was $182 million versus $870 million, with the prior-year period including a $732 million after-tax gain on the Performance Adhesives divestiture. Nine-month diluted EPS from continuing operations was $3.24 versus $2.12.
Cash flow and liquidity: Nine-month operating cash flow from continuing operations was $163 million, capital expenditures were $101 million and free cash flow was $62 million. Company-defined ongoing free cash flow was $113 million. Cash declined $297 million from September 30, 2022, to $349 million, primarily reflecting $300 million of share repurchases, $56 million of dividends and capital spending. Long-term debt was $1.328 billion, up from $1.270 billion. Available liquidity, including cash and unused revolving and foreign receivables facilities, was $1.051 billion; restricted investments of $392 million are designated for asbestos and environmental obligations.
Working capital was $1.094 billion, down from $1.215 billion at September 30, 2022. The company reported compliance with debt covenants; its consolidated net leverage ratio was 1.8 against a maximum of 4.0, and interest coverage was 9.9 against a minimum of 3.0.
Material changes and management commentary
- Management attributed the quarterly sales decline primarily to customer de-stocking: volume reduced sales by $134 million, partly offset by $33 million of pricing and $3 million of favorable foreign exchange. For nine months, volume reduced sales by $221 million and pricing added $170 million.
- Quarterly cost of sales fell by less than sales; higher operating costs, including inventory-control actions, offset much of the benefit from lower volume. Management cited lower volume and higher operating costs as drivers of the reduced gross margin and adjusted EBITDA.
- Quarterly segment sales declined year over year in Life Sciences ($219 million), Personal Care ($146 million), Specialty Additives ($152 million) and Intermediates ($43 million). Life Sciences adjusted EBITDA rose to $72 million from $67 million; Personal Care EBITDA fell to $35 million from $46 million; Specialty Additives adjusted EBITDA fell to $29 million from $57 million; and Intermediates EBITDA fell to $16 million from $33 million.
- Specialty Additives faced weaker demand, including China reopening-related impacts and a slowdown in Europe; unplanned shutdowns at its Nanjing facility affected first-half results. Management also cited continued challenging economic conditions and customer de-stocking.
- Quarterly SG&A included a $12 million Brazilian ICMS tax-credit gain. Net interest and other expense was $3 million, compared with $59 million in the prior-year quarter, largely reflecting restricted-investment gains of $6 million versus losses of $48 million.
Outlook, risks and contingencies
For fiscal 2023, Ashland expected sales of approximately $2.2 billion and Adjusted EBITDA of approximately $500 million, citing continued customer de-stocking and external uncertainty. The company did not provide a reconciliation of this forward-looking non-GAAP EBITDA measure to GAAP net income, citing the difficulty of predicting certain items.
- Asbestos: Reserves were $285 million for Ashland-related claims and $197 million for Hercules-related claims. The filing says modeled future costs could reach approximately $422 million and $288 million, respectively, depending on assumptions. Related insurance receivables totaled $144 million; recoveries depend in part on coverage interpretations and insurer solvency.
- Environmental: Reserves were $204 million; the upper end of the reasonably possible range for identified sites was estimated at approximately $465 million. These estimates are subject to remediation and regulatory uncertainties.
- Other risks: The filing identifies exposure to macroeconomic conditions, raw-material and energy prices, foreign exchange, supply-chain disruption, geopolitical events, legal proceedings, environmental matters, asbestos claims, debt and covenant restrictions, and execution of growth or transaction strategies. Russia, Ukraine and Belarus represented less than 1% of sales and assets; Ashland reported no manufacturing operations in those countries.
- The board authorized a new evergreen $1 billion share repurchase program, replacing the prior program. Ashland repurchased $300 million of shares during the nine months and raised its quarterly dividend 15% to $0.385 per share.
Important facts for investors to verify
- Whether customer de-stocking abates and fiscal 2023 sales and Adjusted EBITDA meet management’s stated outlook.
- Whether pricing, volume and operating-cost trends improve, particularly in Personal Care, Specialty Additives and Intermediates.
- Cash generation and capital spending, alongside continued share repurchases and dividend payments; confirm how liquidity evolves.
- Changes in asbestos and environmental reserves, modeled exposure ranges and expected insurance recoveries.
- The assumptions and adjustments behind non-GAAP Adjusted EBITDA and ongoing free cash flow, and the impact of tax items and restricted-investment gains on reported results.