Ashland Global Holdings Inc. — Form 10-Q Summary
Business context and reporting period
First quarter of fiscal 2021, the three months ended December 31, 2020; comparable period is the three months ended December 31, 2019. Ashland is a specialty materials company operating across Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents. All financial amounts below are in U.S. dollars, in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Sales | $552 | $533 |
| Gross profit / gross margin | $178 / 32.2% | $153 / 28.7% |
| Operating income | $41 | $17 |
| Income from continuing operations | $61 | $34 |
| Net income | $56 | $32 |
| Diluted EPS | $0.91 | $0.53 |
| Adjusted EBITDA (non-GAAP) | $124 | $88 |
| Operating cash flow, continuing operations | $106 | $(34) |
| Capital expenditures | $30 | $29 |
| Free cash flow (company-defined, non-GAAP) | $76 | $(63) |
Cash and cash equivalents were $335 at December 31, 2020, down from $454 at September 30, 2020. Total debt was $1,694, versus $1,853 at September 30; debt as a percentage of capital employed was 35%, down from 38%. Available liquidity, including cash and unused credit and receivables-facility capacity, was $1,029. Working capital was $802. The company reported a 2.6 net leverage ratio and 7.8 interest coverage ratio, within covenant limits of 4.0 maximum and 3.0 minimum, respectively.
Material changes versus prior comparable period
- Sales increased $19, reflecting $14 higher volume and $11 favorable currency effects, partly offset by $6 lower pricing.
- Gross margin rose 3.5 percentage points. Management attributed improved results primarily to higher volumes, improved pricing/mix, lower costs, and favorable foreign exchange.
- Operating income increased $24 and adjusted EBITDA increased $36. The comparison includes unusual gains and charges; see below.
- Continuing-operations operating cash flow improved to $106 from an outflow of $34, helped by working-capital changes, which provided $17 versus using $109 in the prior-year quarter.
- Segment trends were mixed: Consumer Specialties sales were $296 (up $4) and operating income $44 (up $11); Industrial Specialties sales were $231 (up $18) and operating income $22 (up $3). Intermediates and Solvents operating income improved to $2 from a $12 loss. Specialty Additives operating income fell to $2 from $9, including a $9 capital-project impairment.
Management commentary, outlook, risks, and unusual items
- Management said the consumer businesses remained resilient and industrial and Intermediates and Solvents demand improved through the quarter after COVID-19-related pressure. It reported no additional major pandemic-related operating surprises and described supply-chain operations as robust, while cautioning that the pandemic’s duration and business effects remain uncertain.
- A business redesign and productivity program targets $50 of incremental annualized selling, general and administrative savings and $50 of cost-of-goods-sold productivity savings. By December 31, Ashland reported about $78 of combined annualized run-rate savings and expected substantial completion by fiscal year-end 2021.
- On January 19, 2021, Ashland announced a definitive agreement to acquire Schülke & Mayr’s personal care business for €262.5 in cash, subject to customary closing conditions and regulatory approvals; closing was expected before the end of the quarter ending June 30, 2021.
- Current-quarter items included a $14 gain on the sale of a Specialty Additives facility, a $9 capital-project impairment, $12 of restructuring and other costs, and $18 of gains on restricted investments. Income tax expense was zero; management cited $13 of favorable discrete tax items, primarily related to the facility sale. Prior-year results included a $24 tax benefit and $9 of restricted-investment gains.
- Asbestos reserves totaled $549 ($325 Ashland and $224 Hercules); related insurance receivables were $144. The filing estimates possible future inflated, undiscounted costs as high as about $520 for Ashland claims and $350 for Hercules, depending on assumptions. Environmental remediation reserves were $195, with a reasonably possible upper-range estimate of about $470. These estimates involve substantial uncertainty.
- Management said liquidity was sufficient for foreseeable working capital, capital spending, dividends, debt service, and pending acquisitions. No specific earnings or cash-flow guidance for the remainder of fiscal 2021 is provided in the supplied filing text. Key risks include COVID-19, economic and end-market conditions, raw-material costs, acquisitions and divestitures, substantial indebtedness, and asbestos, environmental, and other legal claims.
Important facts for investors to verify
- Reconcile reported earnings and adjusted EBITDA with the impact of facility-sale proceeds, investment gains, restructuring costs, and the capital-project impairment.
- Assess whether the reported $78 of annualized savings is realized, and whether the company completes its restructuring and productivity initiatives on schedule.
- Check the Schülke & Mayr acquisition’s closing status, funding, integration costs, and expected contribution to results.
- Monitor cash conversion, working capital, debt levels, and covenant headroom, particularly given the cash decline during the quarter and upcoming debt maturities.
- Review developments in asbestos and environmental claims, insurance recoverability, and the assumptions underlying the related reserves.