Ashland Global Holdings Inc. — Q3 FY2019 Form 10-Q
Business context and reporting period. The quarter ended June 30, 2019; fiscal-year-to-date figures cover the nine months ended that date. Ashland is a global specialty chemicals company, reporting Specialty Ingredients and Intermediates and Solvents. Composites and the Marl facility were classified as discontinued operations in connection with a proposed divestiture. Figures below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Continuing-operations sales | $641 | $668 | $1,884 | $1,922 |
| Gross profit | $207 | $229 | $557 | $632 |
| Gross margin | 32.3% | 34.3% | 29.6% | 32.9% |
| Operating income | $43 | $30 | $80 | $98 |
| Income (loss) from continuing operations | $23 | $11 | $(3) | $21 |
| Net income, including discontinued operations | $66 | $36 | $94 | $104 |
| Diluted EPS | $1.05 | $0.56 | $1.50 | $1.64 |
| Adjusted EBITDA (non-GAAP) | $140 | $141 | $382 | $373 |
Quarterly adjusted EBITDA was essentially flat year over year despite lower sales. Specialty Ingredients Q3 sales fell to $613 from $638 and adjusted EBITDA to $146 from $155; its adjusted EBITDA margin was 23.8%, down 0.5 percentage points. Intermediates and Solvents sales were $28 versus $30, with operating income of $5 in both periods. Management attributed the sales decline primarily to foreign exchange and volume/product mix, partly offset by pricing.
Cash flow and liquidity: For the nine months, cash from continuing operating activities was $93, capital expenditures were $103, and reported free cash flow was negative $10 (including $55 of restructuring payments). Cash declined to $132 at June 30 from $294 at September 30, 2018. Available liquidity was $805, comprising cash and unused borrowing capacity.
Debt: Total debt was $2,607, up from $2,529 at September 30, 2018. The filing reports covenant net leverage of 3.6x against a maximum of 4.5x, and interest coverage of 5.6x against a minimum of 3.0x; Ashland said it was in compliance with debt covenants. The 2022 maturity schedule includes $1,279 of debt.
Material changes and unusual items
- Q3 continuing-operations sales declined $27 year over year: currency reduced sales by $13, volume/product mix by $12, and acquisitions/divestitures by $5, partly offset by $3 of pricing. Nine-month sales declined $38.
- Nine-month gross profit was pressured by $38 of accelerated depreciation and $10 of severance and other plant restructuring costs associated with a planned facility closure, as well as higher production and raw-material costs.
- Q3 net income included $43 from discontinued operations, versus $25 a year earlier. The nine-month discontinued-operations result included a $28 pretax gain on a property sale related to the formerly divested Distribution business. Accordingly, consolidated net income does not represent continuing-business earnings alone.
- Ashland recorded $17 of other net periodic benefit income for the nine months, mainly from an $18 pension-plan curtailment gain. The quarter also included a $6 unrealized investment gain in net interest and other expense under newly adopted accounting guidance.
- Reported effective tax rates were highly affected by discrete items: negative 5% for Q3 and 114% for the nine months. The nine-month rate included unfavorable tax adjustments, including completion of the Tax Act assessment.
Outlook, commentary and risks
- FY2019 outlook was reduced: adjusted EBITDA guidance is $560–$570 for Specialty Ingredients, $23–$27 for Intermediates and Solvents, and $(50)–$(55) for Unallocated and other. Adjusted diluted EPS guidance is $2.65–$2.75 and free cash flow guidance is approximately $100–$110, including about $60 of restructuring payments. Fourth-quarter adjusted diluted EPS guidance is $0.92–$1.02.
- Ashland continued to target $120 of annualized cost savings by the end of calendar 2019; it reported $85 of annualized savings achieved by June 30. Specialty Ingredients’ adjusted EBITDA margin target was 25%–27%.
- The proposed sale to INEOS was revised after quarter-end: the purchase price was adjusted to $1.015 billion, with Maleic business assets excluded and retained by Ashland. Ashland expected approximately $0.9 billion of net proceeds, primarily for debt reduction and other corporate purposes, and a pretax gain exceeding $400 upon closing. Closing was expected by late summer, subject to regulatory approvals and other conditions. The Maleic sale arrangement could require a $35 payment to INEOS if Ashland did not sell that business within 18 months of the main transaction closing.
- Key risks include transaction approval and completion, execution of planned cost savings, substantial indebtedness and refinancing needs, and uncertainty in asbestos and environmental claims. At June 30, asbestos reserves were $360 for Ashland-related claims and $257 for Hercules claims; environmental remediation reserves were $192, with the filing estimating possible future costs at identified sites as high as approximately $450. These estimates depend on significant assumptions and may change.
Important facts for investors to verify
- Whether the INEOS transaction closed on the expected terms and timing, and the actual net proceeds, debt reduction, and recognized gain.
- Whether Ashland delivered the reduced FY2019 guidance and achieved the $120 cost-savings target; assess reported and adjusted results separately.
- Continuing-operations cash generation, working-capital movements, capital spending, and the effect of the share repurchase and dividends on liquidity and debt.
- Developments in asbestos and environmental claims, insurance recoveries, and the assumptions underlying recorded reserves.