Ashland Global Holdings Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. Ashland Global Holdings Inc. is the successor holding company to Ashland Inc. Consolidated results include Valvoline, in which Ashland held approximately 83% during the period.
Financial performance
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Sales | $1.320 billion, up 5.9% year over year | $2.513 billion, up 4.3% |
| Gross profit / margin | $433 million / 32.8%, versus 34.0% | $819 million / 32.6%, versus 33.8% |
| Operating income | $170 million, versus $147 million | $307 million, versus $298 million |
| Net income attributable to Ashland | $92 million, versus $87 million | $91 million, versus $176 million |
| Diluted EPS attributable to Ashland | $1.47, versus $1.38 | $1.46, versus $2.73 |
| Operating cash flow from continuing operations | Not separately provided for the quarter | $62 million, versus $250 million |
| Capital expenditures / free cash flow | Not separately provided for the quarter | $104 million / negative $42 million, versus positive $147 million free cash flow |
Quarterly diluted EPS from continuing operations was $1.42, versus $1.38. Six-month EPS from continuing operations was $1.41, versus $2.76. Adjusted EBITDA, a non-GAAP measure, was $247 million for the quarter (versus $274 million) and $463 million year to date (versus $521 million).
Liquidity, debt and balance sheet
- Cash and cash equivalents were $605 million at March 31, down from $1.188 billion at September 30, 2016. Total available liquidity, including cash and unused borrowing capacity for Ashland and Valvoline, was $1.938 billion, versus $2.445 billion.
- Total debt was $2.923 billion, down from $3.244 billion; debt represented 48% of capital employed, versus 51%. Working capital was $1.356 billion, down from $1.669 billion.
- Cash from continuing operations fell to $62 million, with a $278 million use of cash from changes in operating assets and liabilities. Financing cash outflow was $475 million, including $337 million of long-term debt repayments and $48 million of dividends.
- Ashland reported compliance with debt covenants. Its leverage ratio was 3.1 against a 3.50 maximum, and interest coverage was 4.5 against a 3.0 minimum. Valvoline’s ratios were 1.4 leverage against a 4.5 maximum and 13.5 coverage against a 3.0 minimum.
Material changes and segment performance
- Quarterly sales growth reflected higher volume and pricing, partly offset by currency. Year-to-date growth was driven by volume; pricing and currency each reduced sales by $15 million.
- Specialty Ingredients quarterly sales rose to $544 million and operating income to $74 million. Its gross margin was 34.8%, up 0.2 percentage points; year-to-date operating income rose to $114 million.
- Performance Materials quarterly sales rose to $262 million, but operating income declined to $10 million and gross margin fell to 14.7% from 20.6%, mainly due to higher raw-material costs. Year-to-date operating income declined to $18 million from $43 million.
- Valvoline quarterly sales increased to $514 million and operating income to $106 million; gross margin declined to 38.5% from 40.0%. Year-to-date sales were $1.003 billion and operating income $205 million.
- Consolidated six-month net income attributable to Ashland fell substantially while operating income edged higher, principally because net interest and other financing expense increased to $170 million from $85 million. The current period included a $92 million accelerated debt-discount accretion charge associated with repurchasing 2029 notes.
Outlook, notable events and risks
- Management forecast third-quarter Specialty Ingredients sales of $535 million–$565 million and Adjusted EBITDA of $123 million–$133 million. Fiscal 2017 Specialty Ingredients Adjusted EBITDA was projected at $485 million–$500 million, including an estimated $10 million–$15 million contribution from Pharmachem in the fourth quarter.
- Third-quarter Performance Materials sales were expected at $260 million–$280 million and Adjusted EBITDA at $27 million–$33 million. Fiscal 2017 Adjusted EBITDA guidance was raised to $100 million–$110 million. The expected third-quarter adjusted annual effective tax rate was 10%–15%.
- Management cited greater-than-expected second-quarter raw-material and currency headwinds and described cost discipline and value-based pricing efforts. It said operating cash flow and available resources should be sufficient for planned needs and covenant compliance.
- After quarter-end, Ashland authorized distribution of its remaining 170 million Valvoline shares, targeted for May 12, 2017, subject to customary conditions. It also agreed to acquire Pharmachem for $660 million in cash, expected to close before the end of the June quarter, subject to approvals and other conditions; financing was expected from bank financing and available cash.
- Asbestos reserves totaled $713 million ($397 million Ashland and $316 million Hercules), with related insurance receivables of $207 million. The filing gives possible future costs, under alternative assumptions, as high as approximately $670 million for Ashland claims and $490 million for Hercules claims. Environmental remediation reserves were $167 million; the estimated upper end of the reasonably possible future-cost range was approximately $375 million.
- Key uncertainties include raw-material prices, currency, the Valvoline distribution and Pharmachem closing, substantial indebtedness and covenant constraints, and asbestos, environmental and other legal matters. Management noted that actual asbestos and environmental costs could differ materially from estimates.
Most important facts for investors to verify
- Whether the Valvoline distribution and Pharmachem acquisition closed on the expected terms and timing, and the resulting post-separation debt, liquidity and reporting perimeter.
- Whether working-capital cash use and operating cash generation improved after the six-month period; free cash flow was negative $42 million for the first half.
- Whether Performance Materials recovered margins amid raw-material inflation and whether Specialty Ingredients achieved its guidance despite currency and cost headwinds.
- The recurring versus one-time components of the $170 million six-month financing expense, especially the $92 million accelerated accretion charge.
- Developments in asbestos and environmental claims, reserve assumptions, insurance recoveries and potential cash requirements.