Ashland Global Holdings Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. Unless otherwise noted, amounts are in U.S. dollars. Ashland completed its separation of Valvoline on May 12, 2017; Valvoline is presented as a discontinued operation for all periods shown. Results therefore are not fully comparable with prior-year continuing operations.
Business context and results
Ashland is a global specialty chemicals company with approximately 6,500 employees and customers in more than 100 countries. Its continuing reportable segments are Specialty Ingredients, Composites, and Intermediates and Solvents (I&S). Specialty Ingredients represented 68% of FY2017 sales. Sales outside North America were 60%.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $3.260 billion | $3.019 billion |
| Gross profit / margin | $888 million / 27.2% | $866 million / 28.7% |
| Operating income (loss) | $142 million | $(127) million |
| Net income (loss) attributable to Ashland | $1 million | $(29) million |
| Diluted EPS attributable to Ashland | $0.01 | $(0.47) |
| Adjusted EBITDA (non-GAAP) | $570 million | $598 million |
| Operating cash flow from continuing operations | $255 million | $372 million |
| Free cash flow (non-GAAP) | $56 million | $141 million |
Consolidated net income was $28 million in FY2017; $27 million was attributable to Valvoline’s former noncontrolling shareholders, leaving $1 million attributable to Ashland. Continuing operations generated a $105 million loss, partly offset by $133 million of income from discontinued operations. Adjusted diluted EPS from continuing operations was $2.44 versus $2.25, excluding identified key items; this is a non-GAAP measure.
Financial position, liquidity, and debt
- Cash and cash equivalents were $566 million at year-end, down from $1.017 billion. $556 million was held by foreign subsidiaries; repatriation could trigger additional U.S. tax.
- Total debt was $2.819 billion, compared with $2.495 billion a year earlier; debt represented 45% of capital employed. Net debt was approximately $2.253 billion.
- Available liquidity, including cash, revolver capacity and receivables securitization capacity, was $1.180 billion, versus $1.839 billion in FY2016. Working capital was $941 million under management’s stated adjusted definition.
- Ashland reported compliance with debt covenants. Its consolidated net leverage ratio was 3.8x against a 4.50x maximum; interest coverage was 4.7x against a 3.0x minimum. Credit ratings were BB (S&P) and Ba2 (Moody’s), both with stable outlooks.
- FY2017 operating cash flow fell year over year and capital expenditures were $199 million. The $680 million Pharmachem purchase was the principal investing cash outflow.
Material changes versus prior period
- Sales rose 8% year over year, driven by $139 million of higher volume, $40 million of improved pricing and $113 million of net acquisition/divestiture effects; unfavorable mix and currency reduced growth.
- Gross margin declined 1.5 percentage points. Higher production costs, mix and unplanned plant shutdowns offset sales growth.
- Adjusted EBITDA declined 5% to $570 million. Management attributed the decline primarily to lower pension and postretirement income in Unallocated and Other after pension-plan transfers to Valvoline, and prior-year corporate costs allocated to Valvoline. Excluding those two effects, management said Adjusted EBITDA would have risen 2%.
- Specialty Ingredients sales increased 6% to $2.216 billion, including $104 million from Pharmachem for the period owned; adjusted EBITDA was $493 million, up $17 million. Composites sales rose to $779 million and operating income to $67 million, while gross margin declined to 19.8%. I&S sales were $265 million; operating loss improved to $12 million from $181 million, which included a $181 million impairment in FY2016. I&S adjusted EBITDA fell to $26 million from $31 million.
- Pharmachem was acquired for $680 million cash on May 17, 2017. The acquisition added $104 million in reported sales and $7 million in operating income during the ownership period; purchase accounting remained preliminary at year-end.
- Ashland issued $1.1 billion of debt under a new credit agreement, including a $600 million term loan B, and redeemed its remaining 3.875% notes due 2018. Total interest and other financing expense increased to $234 million from $173 million, including substantial debt-discount accretion and refinancing costs.
Outlook, commentary, and risks
For FY2018, management forecast Adjusted EBITDA of $560–$590 million for Specialty Ingredients, $85–$95 million for Composites, $40–$50 million for I&S, and $(35)–$(45) million for Unallocated and Other. Other targets included free cash flow above $220 million, Adjusted EPS of $3.20–$3.40, capital expenditures of $195–$205 million, interest expense of $125–$135 million, and an effective tax rate of 8–13%. These are management forecasts, not guarantees.
- Unusual FY2017 items included $95 million of Valvoline separation costs, $13 million of costs from unplanned plant shutdowns (fire and hurricane-related), and $17 million of restructuring charges. Net interest expense included significant debt-related charges.
- Environmental remediation reserves were $163 million; the reasonably possible upper end of future costs was estimated at approximately $416 million. Ashland’s estimate is subject to uncertainty and excludes third-party recoveries.
- Asbestos reserves were $419 million for Ashland and $323 million for Hercules. Related insurance receivables were $155 million and $68 million, respectively. Long-term modeled future costs could be higher than recorded reserves; outcomes depend on claims, settlement costs, insurance recoveries and other assumptions.
- Other principal risks include raw-material and energy price volatility, competitive pricing pressure, supply disruption, international and currency exposure, acquisition integration, product liability, cybersecurity and operational disruptions, tax uncertainty, and substantial indebtedness. The company also warned that the tax treatment of the Valvoline separation could be challenged.
- Management and the auditor reported effective internal control over financial reporting, but Pharmachem was excluded from the control assessment during its first year after acquisition; potential control deficiencies there had not yet been fully evaluated.
Most important facts for investors to verify
- Review the full-year and quarterly statements to distinguish continuing operations from Valvoline discontinued operations and assess the effects of separation-related costs.
- Reconcile reported earnings with non-GAAP Adjusted EBITDA, Adjusted EPS and free cash flow, including the adjustments and their cash or noncash nature.
- Track Pharmachem integration, purchase-price allocation, goodwill and intangible assets, and whether the acquisition achieves expected returns.
- Assess debt maturities, variable-rate exposure, covenant headroom, and the reduction in available liquidity following the acquisition and refinancing.
- Monitor FY2018 guidance delivery alongside I&S market conditions, margins, raw-material costs, and plant reliability.
- Evaluate the range and timing of asbestos, environmental and tax exposures, including the assumptions underlying reserves and expected insurance recoveries.