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
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine 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 operations | Not presented quarterly | Not 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.