Ashland Global Holdings Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 31, 2020; amounts are in millions except per-share data. The quarter was the second quarter of Ashland’s fiscal year. The filing reports Ashland Global Holdings Inc., a specialty materials company, and presents Composites and the Marl facility as discontinued operations.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Sales | $610 | $667 | $1,143 | $1,243 |
| Gross profit / margin | $197 / 32.3% | $198 / 29.7% | $350 / 30.6% | $350 / 28.2% |
| Operating income (loss) | $(468) | $44 | $(451) | $37 |
| Continuing-operations income (loss) | $(575) | $45 | $(541) | $(26) |
| Net income (loss) | $(582) | $76 | $(550) | $28 |
| Diluted EPS | $(9.61) | $1.19 | $(9.08) | $0.45 |
| Adjusted EBITDA (non-GAAP) | $142 | $142 | $230 | $242 |
- Quarterly sales fell $57 (9%), driven by lower volume ($35), plant realignment ($8), currency ($7) and pricing ($7). Six-month sales declined $100, with volume the largest factor.
- Gross profit was nearly unchanged in dollars, while gross margin improved year over year. SG&A declined to $103 from $115 in the quarter and to $202 from $236 for six months, reflecting cost savings and lower restructuring-related and other costs.
- A non-cash goodwill impairment of $530 drove most of the reported operating loss: $356 related to Personal Care & Household and $174 to Specialty Additives. Goodwill was reduced to zero for Personal Care & Household and to $435 for Specialty Additives.
- Q2 net interest and other expense was $117, versus $3 of income a year earlier. It included $59 of debt-repurchase premiums/refinancing costs, $8 of accelerated debt issuance and discount costs, and a $29 loss on restricted investments (versus a $29 gain in the prior-year quarter).
- Operating cash flow from continuing operations was $13 for six months, compared with $6 a year earlier. Capital spending was $66; free cash flow, as defined by Ashland, was negative $53, compared with negative $64. Working-capital changes used $163 of cash.
Balance sheet, debt and liquidity
- At March 31, 2020, cash and cash equivalents were $353, total debt was $2,006, and stockholders’ equity was $2,983. Cash increased from $232 at September 30, 2019; total debt rose from $1,667.
- Available liquidity, including cash and unused revolving and receivables-securitization capacity, was $692. Remaining borrowing capacity was $339; the revolving facility had $338 available. Ashland said it had no major loan maturities until 2022.
- Ashland reported compliance with debt covenants. Net leverage was 3.1 against a maximum of 4.0; interest coverage was 7.7 against a minimum of 3.0.
- In January, Ashland entered a new five-year credit agreement with a $600 revolving facility and $250 term loan, issued €500 million of 2.00% notes due 2028, and repurchased existing notes. Debt refinancing activity included $59 of premiums and contributed to higher reported debt and financing cash flows.
- Restricted investments were $301 at quarter-end. The $353 cash balance included $160 held by foreign subsidiaries, which Ashland said had no significant remittance restrictions.
Material changes, outlook and risks
- Adjusted EBITDA was flat at $142 in the quarter, as lower volumes were offset by lower SG&A. For six months, it declined to $230 from $242. Segment results were uneven: Life Sciences remained profitable, while reported losses in Personal Care & Household and Specialty Additives included the impairment; Intermediates and Solvents also weakened.
- Ashland reorganized from a functionally led to a business-led structure and established five reportable segments. The realignment prompted new reporting-unit impairment testing. Management attributed impairment to lower growth and margins, including in Personal Care & Household following Oral Care and Avoca acquisitions, and in Specialty Additives’ construction and energy markets.
- Management said COVID-19 had not caused significant financial consequences through March 31 and operations and cash flows remained stable. It cautioned that the pandemic’s future effects were uncertain, citing potential impacts on demand, supply chains, employees, financial markets, liquidity and asset values. No quantified full-year guidance is provided in the supplied filing text.
- Asbestos reserves were $337 for Ashland-related claims and $242 for Hercules-related claims; related insurance receivables were $109 and $49, respectively. Ashland estimated possible future costs, on an inflated and undiscounted basis, as high as approximately $600 for Ashland claims and $450 for Hercules claims, depending on assumptions.
- Environmental remediation reserves were $178; the estimated upper end of the reasonably possible future cost range was approximately $425. Management noted estimation uncertainty for both environmental and asbestos obligations. The filing also identifies other claims but says potential losses above recorded amounts were believed immaterial as of March 31.
- The quarterly dividend was $0.275 per share. The filing does not provide a clear quantified forward operating outlook; management said cash, operating cash flow, available facilities and potential financing should fund foreseeable needs, while noting requirements may change.
Important facts for investors to verify
- How demand, volumes, pricing and margins evolved after March 31, particularly given COVID-19 uncertainty.
- Whether the goodwill valuation assumptions and projected cash flows for Specialty Additives and other reporting units remain supportable.
- Cash generation, working-capital needs, accessible liquidity and covenant headroom, including the effect of further operating deterioration.
- Debt refinancing terms, maturities, interest costs and the company’s ability to service debt while maintaining dividends.
- Future asbestos and environmental claims, reserve revisions, and the collectability and timing of related insurance recoveries.
- Underlying segment performance and the comparability of adjusted EBITDA, a non-GAAP measure, with reported GAAP results.