Ashland Global Holdings Inc. — Q2 FY2019 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2019. Amounts are in U.S. dollars; financial figures are in millions except per-share data. The filing reports Ashland Global Holdings Inc. (Ashland).
Business context and reporting period
Ashland operates primarily in specialty chemicals. Following the planned sale of Composites and the Marl, Germany facility, results for those businesses are presented as discontinued operations. Continuing operations comprise Specialty Ingredients and Intermediates and Solvents; Specialty Ingredients generated 96% of continuing sales in both the quarter and first six months.
Financial performance and position
| Metric | Quarter ended March 31, 2019 | Prior-year quarter | Six months ended March 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Sales | $667 | $672 | $1,243 | $1,253 |
| Gross profit / margin | $198 / 29.7% | $223 / 33.2% | $350 / 28.2% | $402 / 32.1% |
| Operating income | $44 | $63 | $37 | $67 |
| Continuing operations income (loss) | $45 | $42 | $(26) | $10 |
| Net income | $76 | $73 | $28 | $69 |
| Diluted EPS, continuing / total | $0.71 / $1.19 | $0.65 / $1.15 | $(0.41) / $0.45 | $0.15 / $1.08 |
| Adjusted EBITDA (non-GAAP) | $142 | $138 | $242 | $231 |
- Quarterly sales declined $5, primarily from $18 of unfavorable currency effects, partly offset by $8 of pricing and $5 of volume/product mix. Six-month sales fell $10.
- Quarterly gross margin contracted 3.5 percentage points. A planned facility closure drove $20 of restructuring costs in the quarter, including accelerated depreciation; year-to-date closure-related restructuring costs were $47.
- Quarterly net income included $31 from discontinued operations, unchanged from the prior-year quarter. The six-month discontinued-operations contribution was $54, versus $59.
- For continuing operations, six-month operating cash flow was $6, versus a $3 outflow; capital expenditures were $70, resulting in reported free cash flow of $(64), versus $(55). Cash declined to $164 at March 31 from $294 at September 30, 2018.
- Total debt was $2,536, compared with $2,529 at September 30, 2018. Available liquidity, including cash and unused borrowing capacity, was $905. Ashland reported covenant compliance, a net leverage ratio of 3.5 against a 4.5 maximum, and interest coverage of 5.6 against a 3.0 minimum.
Material changes and unusual items
- Specialty Ingredients quarterly sales were $637, down $9; operating income was $70, versus $89. Its Adjusted EBITDA was $148, versus $153, and Adjusted EBITDA margin was 23.2%, down 0.5 percentage points. Intermediates and Solvents quarterly sales were $30, up $4, and operating income was $5, versus $3.
- Ashland adopted fair-value accounting for equity securities. Restricted-investment unrealized gains added $27 to quarterly income; the six-month period recorded $3 of unrealized losses. This change can cause earnings volatility.
- The six-month results included a $18 pension remeasurement gain and $24 of unfavorable Tax Act adjustments, principally the final assessment of transition tax and deferred-tax items. The reported six-month effective tax rate was an unusual negative 2,500%, reflecting discrete tax items and a pretax loss; the adjusted rate excluding specified items was 10%.
- Restructuring, separation and other costs, accelerated depreciation, proxy-related costs, an impairment, and the pension gain affected comparability. Adjusted EBITDA and other adjusted measures are non-GAAP metrics.
Outlook, risks and contingencies
- Updated FY2019 outlook: Specialty Ingredients Adjusted EBITDA of $585–$610; Intermediates and Solvents outlook reaffirmed at $20–$30; Unallocated and other $(45)–$(55). Adjusted diluted EPS was reduced to $2.90–$3.20 from $3.10–$3.40; free cash flow was revised to approximately $165–$175 from approximately $175. Capital expenditure outlook remained approximately $160. Management expected about $250 of depreciation and amortization and $90–$100 of interest expense.
- For Q3 FY2019, management expected adjusted diluted EPS of $0.80–$0.90, assuming a 15% effective tax rate. Management continued to target $120 of annualized cost savings by calendar year-end 2019; $70 had been captured by March 31.
- A sale of Composites and the Marl facility to INEOS, valued at $1.1 billion, was expected to yield approximately $1.0 billion net, primarily for debt reduction and other corporate purposes. Closing was expected by late summer, subject to regulatory approvals and other conditions; Ashland expected to recognize a gain at closing.
- On April 30, 2019, Ashland announced its intention to begin a $200 share repurchase under its existing $1 billion authorization. No shares had been repurchased during the reported quarter.
- Asbestos reserves totaled $638 ($366 Ashland-related and $272 Hercules-related), with related insurance receivables of $190. The filing’s modeled upper estimates for future costs were approximately $600 and $450, respectively, depending on assumptions. Environmental remediation reserves were $179; the reasonably possible upper range for future identified-site costs was approximately $421. These estimates are subject to substantial uncertainty.
- Other risks include the pending divestiture and cost-saving execution, substantial indebtedness, raw-material and foreign-exchange movements, tax uncertainty, and litigation or environmental liabilities. Management said available cash, operating cash flow and borrowing capacity were expected to meet forecast needs; actual results may differ.
Important facts for investors to verify
- Whether the Composites/Marl transaction closed on expected terms and how proceeds were applied to debt and other purposes.
- Progress toward the $120 annualized savings target and whether Specialty Ingredients margins and the revised FY2019 outlook were achieved.
- Cash conversion, working-capital trends, capital spending and liquidity, particularly given negative reported free cash flow.
- Debt covenant headroom and the effect of the announced share repurchase on leverage and cash availability.
- Changes in asbestos and environmental estimates, insurance recoveries, and the assumptions supporting those estimates.
- The impact of investment-security fair-value changes and discrete tax items on reported earnings versus adjusted measures.