ASHLAND INC. quarterly report, Q3 FY2021

Ashland Global Holdings Inc. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2021; compared with the corresponding 2020 periods. Amounts are in millions except per-share data. Ashland is a specialty materials company operating across consumer and industrial markets.

Financial performance

MetricQ3 2021Q3 2020Nine months 2021Nine months 2020
Sales$637$574$1,786$1,717
Gross profit$198$196$566$546
Operating income (loss)$62$48$174$(403)
Continuing-operations income (loss)$87$50$190$(491)
Net income (loss)$80$37$176$(513)
Diluted EPS, continuing operations$1.40$0.81$3.09$(8.11)
Operating cash flow, continuing operationsNot presented quarterlyNot presented quarterly$403$153
  • Q3 gross margin was 31.1%, down from 34.1%; nine-month gross margin was 31.7%, versus 31.8%.
  • Q3 sales rose $63 (11%), reflecting $31 from volume, $13 from pricing and $19 from currency. Higher volume, including Schülke, and supply-chain, logistics and manufacturing costs contributed to higher cost of sales.
  • Management reported Q3 EBITDA of $122 and Adjusted EBITDA of $148, compared with $97 and $143, respectively, in the prior-year quarter. Nine-month Adjusted EBITDA was $406 versus $373. These are non-GAAP measures.
  • Adjusted diluted EPS was $0.91 for Q3 versus $0.84, and $2.35 for the nine months versus $1.81. These non-GAAP results exclude specified items; Q3 results also included substantial favorable tax items.
  • Q3 segment sales were $193 Life Sciences, $147 Personal Care & Household, $169 Specialty Additives, $94 Performance Adhesives and $49 Intermediates and Solvents. Industrial businesses benefited from recovering demand; Personal Care & Household sales were lower year over year despite the acquisition.

Cash, debt and liquidity

  • Cash and cash equivalents were $262 at June 30, 2021, down from $454 at September 30, 2020. Nine-month cash flow from continuing operations was $403; investing used $343, including $308 net cash paid for Schülke, and financing used $243, including $185 of short-term debt repayments and $52 of dividends.
  • Reported free cash flow was $326, versus $59 a year earlier, after $77 of capital expenditures. The 2021 figure included $90 of cash inflows from the U.S. receivables sales program.
  • Total debt was $1,679, down from $1,853 at September 30, 2020. Available liquidity was $876, plus $27 available under the U.S. receivables sales program. Working capital was $639, versus $734.
  • Ashland reported compliance with its debt covenants: net leverage ratio 2.6x against a 4.0x maximum; interest coverage 8.3x against a 3.0x minimum. The company had no significant term-loan, revolver or bond maturities until August 2022; $421 of debt maturities were scheduled for 2022.

Material changes, outlook and risks

  • On April 30, Ashland completed its $311 all-cash acquisition of Schülke’s personal care business. The preliminary purchase allocation included $129 of goodwill and $185 of intangible assets.
  • Ashland announced a strategic review of Performance Adhesives, including a potential sale, with completion anticipated by the end of calendar 2021.
  • Cost-reduction initiatives target $50 of incremental SG&A and R&D savings and $50 of cost-of-goods-sold productivity savings. By June 30, Ashland said it had achieved more than 91% of the target run-rate savings, or $93 annualized, and expected substantial completion by year-end 2021. No numerical earnings or revenue guidance is provided in the filing.
  • Management described liquidity as strong and said the company could meet operating, investment and financing needs. It also noted ongoing uncertainty from COVID-19, supply-chain disruption, customer demand, raw-material cost inflation, and the potential to recover cost increases through pricing. Q3 had improved industrial-market conditions, but uncertainty remained.
  • Q3 continuing-operations tax benefit was $24, including $33 of favorable discrete items, primarily from resolution of uncertain tax positions. The nine-month tax benefit included $53 of favorable discrete items, principally related to the facility sale and tax positions. Tax benefits materially affected reported earnings.
  • Asbestos reserves totaled $547 at June 30: $326 for Ashland-related claims and $221 for Hercules claims. Management’s models indicate reasonably possible future costs as high as $482 and $334, respectively, depending on assumptions. Environmental remediation reserves were $205; the estimated upper end of reasonably possible future costs for identified sites was approximately $490. These estimates involve significant uncertainty, including claim trends, remediation requirements and insurance recoveries.
  • Other notable items include a $14 gain on sale of a Specialty Additives facility, a $9 capital-project impairment, and the prior-year $530 goodwill impairment. No goodwill impairment indicators were identified in the current nine-month period.
  • Management said disclosure controls were effective. Schülke’s financial reporting controls had not yet been fully evaluated, and the company cautioned that unidentified deficiencies, potentially including a material weakness, could exist. The filing reported no material changes to previously disclosed risk factors.

Important facts for investors to verify

  • How much of sales and earnings growth reflects underlying volume and pricing versus currency and the Schülke acquisition.
  • Whether cost savings can be sustained and offset higher manufacturing, logistics and input costs.
  • The final Schülke purchase-price allocation, integration progress and contribution to Personal Care & Household results.
  • The outcome of the Performance Adhesives strategic review and any effects on future earnings or capital allocation.
  • Cash-flow quality, including the contribution from receivables sales, and the company’s ability to manage 2022 debt maturities and covenant headroom.
  • Sensitivity of asbestos and environmental obligations to revised assumptions, claims, cleanup costs and recoverability of insurance receivables.
  • Whether earnings excluding discrete tax benefits and other adjustments support reported non-GAAP trends.