Ashland Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, three months ended December 31, 2022. Comparative period is the quarter ended December 31, 2021; balance-sheet comparisons are to September 30, 2022. Amounts are in U.S. dollars unless noted. Ashland is a global specialty ingredients and additives company with four reportable segments: Life Sciences, Personal Care, Specialty Additives and Intermediates. Performance Adhesives was sold in February 2022 and is reported as discontinued operations.
Financial results and key metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $525 million | $512 million | Up $13 million, or about 3% |
| Gross profit / margin | $165 million / 31.4% | $161 million / 31.4% | Margin unchanged |
| Operating income | $37 million | $42 million | Down $5 million |
| Income from continuing operations | $42 million | $32 million | Up $10 million |
| Net income | $40 million | $48 million | Down $8 million |
| Diluted EPS | $0.73 | $0.83 | Continuing-operations diluted EPS was $0.76 vs. $0.55 |
| Adjusted EBITDA (non-GAAP) | $108 million | $106 million | Up $2 million |
| Operating cash flow, continuing operations | $(29) million | $14 million | Down $43 million |
| Free cash flow (non-GAAP) | $(52) million | $(1) million | Lower by $51 million |
Sales growth reflected $62 million of favorable pricing, offset by $25 million lower volume and $24 million of unfavorable foreign exchange. Gross margin held steady as price and mix gains offset higher operating costs. Net income was lower primarily because discontinued operations contributed a $2 million loss versus $16 million of income in the prior-year quarter. Current-quarter continuing income also benefited from $21 million of gains on restricted investments, included in net interest and other income.
Segment sales and operating income were: Life Sciences $207 million and $34 million; Personal Care $138 million and $11 million; Specialty Additives $143 million and $1 million; and Intermediates $54 million and $20 million. Life Sciences and Intermediates operating income increased year over year; Personal Care and Specialty Additives declined.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $532 million, down from $646 million at September 30, 2022. Total assets were $6.259 billion and stockholders’ equity was $3.318 billion.
- Debt was $1.316 billion, compared with $1.270 billion at September 30; there was no short-term debt. Debt represented 28% of capital employed. No long-term debt (excluding issuance costs) is due in the next four years; $4 million is scheduled for fiscal 2027.
- Cash used by continuing operations was $83 million, including $29 million of operating cash use, $27 million of investing cash use and $27 million of financing cash use. Capital expenditures were $23 million; dividends paid were $18 million. Discontinued operations used a further $34 million of cash.
- Working capital was $1.260 billion, up $45 million from September 30, primarily reflecting higher inventories and lower accrued expenses. Inventories rose to $724 million from $629 million.
- Available liquidity, as defined by Ashland, was $1.219 billion: $532 million cash, $581 million available under its revolving credit facility and $106 million under its foreign receivables securitization facility. The U.S. receivables sales program had no available liquidity. Restricted investments of $404 million are designated for asbestos and environmental obligations and are not unrestricted cash.
- Ashland reported covenant compliance, a 1.3 consolidated net leverage ratio against a 4.0 maximum, and 10.8 interest coverage against a 3.0 minimum. Credit ratings were BB+ (S&P) and Ba1 (Moody’s), both with stable outlooks.
Material changes, outlook and risks
- Segment and market trends: Life Sciences benefited from strong global demand for pharmaceutical ingredients. Personal Care and Specialty Additives faced weaker demand associated with China’s reopening, European economic weakness and distributor destocking. Specialty Additives also incurred planned maintenance and an extended unplanned shutdown at its Nanjing facility.
- Profitability and unusual items: SG&A rose $11 million to $93 million, including $8 million of environmental-related expense and a $4 million impairment charge on a Specialty Additives facility pending sale. Adjusted EBITDA was $108 million, while reported EBITDA was $93 million; the company’s non-GAAP adjustments include environmental, restructuring and impairment items.
- Fiscal 2023 outlook: Management maintained sales guidance of $2.5–$2.7 billion and Adjusted EBITDA guidance of $600–$650 million, while noting its forecast was below the midpoint of the EBITDA range. The filing does not provide a reconciliation of forward-looking Adjusted EBITDA to GAAP net income.
- Legal and environmental contingencies: Asbestos reserves were $292 million for Ashland-related claims and $209 million for Hercules-related claims; related insurance receivables were $99 million and $51 million, respectively. The company says modeled future costs could reach approximately $456 million and $317 million, respectively, depending on assumptions. Environmental remediation reserves were $206 million, with a recorded $20 million insurance receivable; the reasonably possible upper end of future costs for identified sites was estimated at approximately $460 million.
- Other risks: Management cited uncertainty from inflation, raw-material costs, foreign exchange, economic weakness, COVID-19 effects, supply-chain disruption, the Ukraine/Russia conflict, litigation and Ashland’s substantial indebtedness. Sales to Ukraine, Russia and Belarus represented less than 1% of consolidated sales. Management stated that liquidity was adequate for foreseeable needs. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether volume and demand recover in Personal Care and Specialty Additives, and whether Nanjing operations normalize.
- Progress against the $2.5–$2.7 billion sales and $600–$650 million Adjusted EBITDA outlook, particularly given management’s below-midpoint forecast.
- Working-capital conversion and cash generation, including the effects of inventory, accrued expenses and discontinued-operation cash use.
- Changes in asbestos and environmental estimates, insurance recoveries and the assumptions underlying potential future costs.
- Reconciliation and composition of reported EBITDA, Adjusted EBITDA and investment gains when assessing underlying performance.