Ashland Global Holdings Inc. — Q3 FY2022 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended June 30, 2022. Ashland is a global specialty additives and materials company, reporting Life Sciences, Personal Care, Specialty Additives, and Intermediates. Performance Adhesives was sold to Arkema on February 28, 2022, and is presented as a discontinued operation. Unless noted otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Sales | $644 | $543 | $1,759 | $1,520 |
| Gross profit / margin | $240 / 37.3% | $173 / 31.9% | $620 / 35.2% | $480 / 31.6% |
| Operating income | $77 | $45 | $212 | $111 |
| Income from continuing operations | $51 | $72 | $121 | $139 |
| Net income | $36 | $80 | $870 | $176 |
| Diluted EPS, continuing operations | $0.93 | $1.17 | $2.12 | $2.27 |
| Adjusted EBITDA (non-GAAP) | $174 | $129 | $443 | $346 |
- Quarterly sales increased 19%; pricing/product mix contributed $97 million, volume $18 million, acquisition $12 million, while foreign exchange reduced sales by $26 million. Gross margin expanded 5.4 percentage points.
- Management attributed improved operating performance chiefly to pricing and mix amid inflation. Adjusted EBITDA increased 35% for the quarter. Segment sales and operating income rose year over year in all four reporting segments; Intermediates recorded the strongest proportional operating-income growth.
- Quarterly net income fell despite higher operating income, primarily reflecting $59 million of net interest and other expense, including a $48 million loss on restricted investments, and a $15 million loss from discontinued operations. Prior-year quarter included a $26 million income tax benefit.
- Nine-month net income included a $732 million after-tax gain on the Performance Adhesives sale. Continuing-operations income declined year over year; nine-month results also included $72 million of realized restricted-investment losses versus $26 million of gains in the prior-year period.
Cash flow, balance sheet and capital allocation
- Continuing-operations operating cash flow was $14 million for the nine months, down from $314 million; capital expenditure was $67 million, producing free cash flow of negative $53 million. Company-defined ongoing free cash flow was $34 million versus $228 million, and conversion was 8% versus 66%.
- Management cited increased working capital—particularly inventory held amid supply-chain constraints and inflation, and higher receivables—as a principal cash-flow headwind. Cash taxes were also higher. Total cash increased $419 million to $629 million, substantially due to approximately $1.7 billion of net proceeds from the divestiture, partly offset by debt repayments, repurchases, and taxes.
- At June 30, cash was $629 million, total debt $1.302 billion, and equity $3.266 billion. Debt declined from $1.970 billion at September 30, 2021; there was no short-term debt, and Ashland reported no long-term debt maturities within five years.
- Available liquidity was reported at $1.315 billion, including cash and borrowing capacity under the revolving credit facility and foreign receivables facility; $58 million of additional availability existed under the U.S. receivables sales program. Restricted investments of $407 million are designated for asbestos and environmental obligations and are not general-purpose cash.
- Ashland reported compliance with debt covenants; net leverage was 1.2x against a 4.0x maximum and interest coverage was 9.7x against a 3.0x minimum. On July 22, 2022, it entered a new five-year, $600 million revolving credit agreement.
- The company repurchased $200 million of shares during the nine months and authorized a new evergreen $500 million repurchase program. The quarterly dividend increased 12% to $0.335 per share.
Outlook, commentary and risks
- Ashland raised its FY2022 outlook: sales to $2.35–$2.40 billion from $2.25–$2.35 billion, and Adjusted EBITDA to $580–$590 million from $550–$570 million. The revised outlook assumes fourth-quarter foreign-exchange headwinds of approximately $30 million to sales and $10 million to Adjusted EBITDA. The filing does not provide a reconciliation of forward-looking Adjusted EBITDA to GAAP net income.
- Management said strong customer demand continued, but supply-chain and labor constraints limited its ability to fulfill orders; a large backlog of unconfirmed orders remained. It described liquidity and operating cash resources as adequate for current needs.
- Management expects approximately $83 million of cash tax payments in the final quarter of FY2022 related to the Performance Adhesives sale.
- Key contingencies include asbestos claims and environmental remediation. At June 30, asbestos reserves totaled $530 million across Ashland and Hercules; modeled possible future costs could reach approximately $456 million and $317 million, respectively, depending on assumptions. Environmental remediation reserves were $226 million, while the upper end of the reasonably possible range was approximately $480 million. These estimates are uncertain and may change.
- Other risks include inflation and raw-material costs, foreign-exchange movements, economic and supply-chain disruption, COVID-19, the Ukraine/Russia conflict, and legal, environmental and product-liability matters. Sales to Ukraine, Russia and Belarus represented less than 1% of sales.
Important facts for investors to verify
- Whether pricing and product mix continue to offset inflation, and whether supply constraints ease enough to convert the unconfirmed order backlog into sales.
- The quality and sustainability of cash generation, particularly working-capital movements and the expected sale-related tax payments.
- Performance against the revised FY2022 sales and Adjusted EBITDA outlook, including the assumed fourth-quarter currency headwind.
- Restricted-investment portfolio performance and its effect on reported interest and other expense.
- Future developments in asbestos and environmental claims, reserve assumptions, insurance recoveries and cash payments.
- Use of divestiture proceeds, including further debt reduction, share repurchases and investment in continuing businesses.