Ashland Global Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2017 (fiscal Q3). Ashland Global Holdings Inc. is the successor to Ashland Inc. Following the May 12, 2017 distribution of its remaining Valvoline shares, Ashland reports Valvoline as a discontinued operation.
Financial performance and position
- Revenue: Continuing-operations sales were $870 million for the quarter, up 10% from $790 million, and $2.38 billion for nine months, up 5% from $2.265 billion. Quarterly growth reflected higher volume and pricing and Pharmachem; the acquisition contributed $36 million to sales in the nine-month period.
- Profitability: Quarterly gross profit was $235 million versus $236 million; gross margin fell to 27.0% from 29.9%. Operating income declined to $37 million from $57 million. Ashland reported a $33 million quarterly net loss attributable to Ashland, or diluted loss per share of $0.54, versus net income of $71 million, or $1.13 per diluted share. Continuing-operations diluted EPS was a loss of $0.26.
- Nine-month results: Operating income was $108 million versus $144 million; net income attributable to Ashland was $58 million versus $247 million, and diluted EPS was $0.93 versus $3.87. Continuing operations recorded a $53 million loss; discontinued operations contributed $138 million of income.
- Adjusted EBITDA: Management’s non-GAAP measure was $161 million for the quarter versus $167 million, and $409 million for nine months versus $454 million. These figures exclude specified items and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow from continuing operations was $114 million, down from $235 million. Capital expenditures were $126 million, resulting in reported free cash flow of negative $12 million versus positive $85 million. Working-capital changes contributed to the decline.
- Liquidity: Cash was $492 million at June 30, down from $1.017 billion at September 30, 2016. Ashland reported total available liquidity of $1.117 billion, including cash and unused revolving and receivables-securitization capacity. Working capital was $950 million.
- Debt: Total debt was $2.813 billion, compared with $2.495 billion at September 30, 2016. Net interest and other financing expense was $51 million for the quarter and $203 million for nine months, versus $40 million and $125 million, respectively. Nine-month expense included $92 million of accelerated accretion related to the 2029 notes tender offer. The company reported covenant leverage of 4.0 against a maximum of 4.50 and interest coverage of 4.6 against a minimum of 3.0; it said it was in compliance.
Material changes and business developments
- Ashland completed the distribution of its remaining 83% stake in Valvoline on May 12, 2017. Valvoline results and cash flows are classified as discontinued operations for all periods presented, so comparisons of consolidated totals reflect a changed business perimeter.
- Ashland acquired Pharmachem Laboratories for $680 million in cash on May 17, 2017, adding it to Specialty Ingredients. Since closing, Pharmachem contributed $36 million in sales and $4 million in operating income. The purchase-price allocation remained preliminary.
- The company arranged new credit facilities, including a $600 million term loan B, and redeemed its remaining approximately $659 million of 3.875% notes due 2018. The facilities are secured and subject to financial and other covenants.
- Segment results were mixed. Quarterly sales rose in Specialty Ingredients to $591 million and Composites to $209 million; Intermediates and Solvents sales were $70 million. Quarterly operating income was $58 million, $22 million and $2 million, respectively. For nine months, Intermediates and Solvents recorded an $8 million operating loss, compared with $5 million income a year earlier.
- The quarterly dividend was reset to $0.225 per share after the Valvoline separation, from $0.39 previously. Ashland said the combined distributions from Ashland and Valvoline were approximately equal to the pre-separation Ashland dividend.
Outlook, commentary and risks
- Fiscal Q4 guidance: Specialty Ingredients sales of $590–$610 million and adjusted EBITDA of $135–$145 million; Composites sales of $200–$210 million and adjusted EBITDA of $20–$25 million; Intermediates and Solvents sales of $75–$85 million and adjusted EBITDA of $10–$15 million.
- Fiscal 2017 outlook: Specialty Ingredients expected adjusted EBITDA at the upper end of its previously communicated $485–$500 million range, supported by pricing initiatives and Pharmachem. Management also cited expectations for continued volume growth, pricing and product-mix improvement across segments.
- Risks include substantial indebtedness and covenant restrictions; realizing expected benefits from Pharmachem and the Valvoline separation; raw-material costs and the ability to pass increases through pricing; foreign exchange; and legal, environmental and asbestos claims.
- Asbestos reserves totaled $752 million ($424 million Ashland and $328 million Hercules), with $224 million of related insurance receivables. Management’s modeled possible future costs could reach approximately $660 million for Ashland claims and $510 million for Hercules claims, depending on assumptions. Environmental remediation reserves were $173 million; the estimated upper end of reasonably possible future costs was approximately $420 million.
- A Specialty Ingredients manufacturing facility closure generated $13 million of charges, including accelerated depreciation; the company said no further charges for that facility were expected. Ashland also recorded a $4 million additional loss on the sale of a China joint-venture interest.
- Management said Pharmachem’s financial-reporting controls had not yet been fully evaluated; deficiencies, including potentially significant deficiencies or a material weakness, might not yet have been identified. Disclosure controls were otherwise assessed as effective, and the filing reported no material changes in risk factors from the prior annual report.
Key facts investors should verify
- How much of revenue growth and future earnings reflects organic performance versus Pharmachem and other acquisitions, and how segment margins develop.
- The drivers and sustainability of weaker operating cash flow, negative free cash flow, and the decline in cash and total liquidity.
- Debt repayment capacity, interest costs, covenant headroom and the effect of variable-rate borrowing.
- The assumptions behind asbestos and environmental reserves and insurance recoveries, including potential exposure beyond recorded amounts.
- Progress in evaluating Pharmachem’s internal controls and completing the preliminary acquisition accounting.
- Whether the stated fourth-quarter segment ranges and fiscal-year Specialty Ingredients outlook are achieved.