Ashland Global Holdings Inc. — Q1 FY2022 10-Q
Reporting period: Three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020, unless otherwise stated. Amounts are in U.S. dollars. The filing reports Ashland Global Holdings Inc., a specialty additives and materials company. Performance Adhesives is presented as a discontinued operation following the planned sale to Arkema.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Continuing-operations sales | $512 million | $468 million |
| Gross profit / gross margin | $161 million / 31.4% | $147 million / 31.4% |
| Operating income | $42 million | $17 million |
| Continuing-operations income | $32 million | $43 million |
| Discontinued-operations income, net of tax | $16 million | $13 million |
| Net income / diluted EPS | $48 million / $0.83 | $56 million / $0.92 |
| Adjusted EBITDA (non-GAAP) | $106 million | $101 million |
| Continuing-operations cash from operations | $14 million | $81 million |
| Capital expenditures | $15 million | $30 million |
| Free cash flow (non-GAAP) | $(1) million | $51 million |
Sales increased $44 million, driven by $26 million of pricing, $24 million of favorable volume (including Schülke), and $19 million from the acquisition, partly offset by $6 million of unfavorable currency. Cost of sales rose $30 million, including higher price/mix, manufacturing and shipping costs. Gross margin remained 31.4%. Operating income improved from the prior-year period, which included a $9 million capital-project impairment and $14 million facility-sale gain; lower SG&A also contributed. Continuing-operations income declined amid higher net interest and other expense, lower restricted-investment gains, and a less favorable tax comparison. Adjusted EBITDA rose $5 million, which management attributed principally to Schülke, pricing and mix, partly offset by higher plant, manufacturing and shipping costs and unfavorable currency.
Segment sales and operating income were: Life Sciences $170 million and $21 million; Personal Care $147 million and $15 million; Specialty Additives $156 million and $17 million; and Intermediates $53 million and $16 million. Life Sciences operating income fell from $29 million, while Personal Care income was unchanged. Specialty Additives and Intermediates operating income rose from $2 million each in the prior-year quarter, with Intermediates benefiting from higher pricing. These are segment results; intersegment sales are eliminated in consolidated sales.
Cash, debt and liquidity
Cash was $194 million at December 31, 2021, down from $210 million at September 30, 2021. Total debt was $1.969 billion, broadly unchanged from $1.970 billion; it comprised $389 million of short-term debt (including current maturities) and $1.580 billion of long-term debt. Ashland reported $535 million of available liquidity, consisting of cash and $341 million of remaining revolving-credit capacity; no capacity was available under the U.S. receivables sales program or foreign receivables securitization facility. A further $426 million of restricted investments was held for asbestos and environmental obligations and is not general-purpose liquidity.
Operating cash from continuing operations fell to $14 million from $81 million. The filing cites a $72 million cash use from changes in operating assets and liabilities, including higher inventory and lower accrued expenses. Ongoing free cash flow, a company-defined non-GAAP measure, was $26 million versus $74 million; ongoing free-cash-flow conversion was 25% versus 73%. The company was in compliance with debt covenants: net leverage was 3.1x against a 4.0x maximum, and interest coverage was 9.4x against a 3.0x minimum. Credit ratings were BB+ at S&P and Ba1 at Moody’s, both with stable outlooks.
Transactions, outlook and risks
- Performance Adhesives sale: The planned Arkema transaction was valued at $1.65 billion. Ashland expected to close before the end of the quarter ending March 31, 2022, subject to approvals and customary conditions, and estimated net proceeds of $1.2–$1.3 billion. Management intended to invest in core-business growth and consider debt reduction and/or share repurchases. The expected closing and proceeds were forward-looking, not completed results in this filing.
- FY2022 outlook: Unchanged sales outlook of $2.25–$2.35 billion and Adjusted EBITDA outlook of $550–$570 million. Management said its latest forecast was below the midpoint of the Adjusted EBITDA range. The filing does not provide a reconciliation of this forward-looking non-GAAP measure to GAAP net income.
- Operations and demand: Supply-chain and labor constraints limited the ability to meet customer demand. Approximately $20 million of confirmed orders were delayed in late December, with most shipped in early January; Ashland also reported a large backlog of unconfirmed orders it could not commit to supply. Management said liquidity remained adequate and it had not experienced additional major COVID-19-related operating surprises during the quarter.
- Contingencies: Asbestos reserves totaled $518 million ($307 million Ashland-related and $211 million Hercules-related), with related insurance receivables of $146 million. The filing describes potential future asbestos costs above recorded reserves and uncertainty in claim and insurance assumptions. Environmental remediation reserves were $197 million; the estimated upper end of the reasonably possible range for identified sites was approximately $465 million. Other legal matters were described as having immaterial potential losses beyond recorded amounts.
- Other risks and controls: The filing highlights uncertainty from COVID-19, inflation and raw-material costs, supply chains, foreign exchange, indebtedness, litigation and the planned divestiture. Disclosure controls were concluded effective; however, Ashland had not completed its evaluation of Schülke’s controls and anticipated completing it during FY2022, with a risk that deficiencies could be identified.
Most important facts for investors to verify
- Whether and when the Performance Adhesives sale closed, actual net proceeds, and use of proceeds.
- Whether order delays and the unconfirmed backlog converted into shipments and revenue, and whether supply, labor and cost pressures eased.
- Progress toward the FY2022 sales and Adjusted EBITDA outlook, particularly given management’s below-midpoint forecast.
- Operating cash generation, working-capital and inventory trends, and availability of liquidity after the quarter.
- Changes in asbestos and environmental reserves, insurance recoverability, and related legal exposures.
- Completion and findings of the Schülke internal-control assessment.