Ashland Global Holdings Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2018; fiscal year ends September 30. The filing reports Ashland Global Holdings Inc., a global specialty chemicals company. Valvoline was separated in May 2017, so its prior-year results are generally presented as discontinued operations.
Financial performance and position
- Third-quarter sales: $971 million, up 12% from $870 million. Gross profit was $290 million; gross margin increased to 29.9% from 27.0%. Operating income was $66 million versus $37 million.
- Third-quarter earnings: Net income attributable to Ashland was $36 million, or diluted EPS of $0.56, compared with a $33 million loss, or $(0.54) per diluted share, a year earlier. Adjusted EBITDA, a non-GAAP measure, rose 17% to $189 million from $161 million.
- Nine-month results: Sales were $2.787 billion, up 17%; operating income was $200 million versus $105 million. Net income attributable to Ashland was $104 million versus $58 million; diluted EPS was $1.64 versus $0.93. Adjusted EBITDA increased to $504 million from $409 million.
- Cash flow: Nine-month operating cash flow from continuing operations was $129 million, nearly unchanged from $130 million. Capital expenditures were $102 million; reported free cash flow was $27 million versus $4 million. Cash declined $384 million from fiscal-year start to $182 million.
- Debt and liquidity: Total debt was $2.532 billion at June 30, down from $2.819 billion at September 30, 2017. Cash plus disclosed unused revolving-credit and receivables-securitization capacity totaled $976 million. Net leverage under the credit agreement was 3.7x against a 4.5x maximum; interest coverage was 4.9x against a 3.0x minimum. Ashland reported covenant compliance.
- Other measures: Third-quarter comprehensive loss attributable to Ashland was $102 million, principally reflecting a $140 million foreign-currency translation loss. The quarterly dividend increased from $0.225 to $0.25 per share. No shares were repurchased in the quarter; $1 billion remained authorized.
Changes and segment performance
- Sales growth reflected pricing, volume, the Pharmachem acquisition and favorable currency. For the quarter, management attributed $27 million of the increase to pricing, $25 million to volume, $24 million to acquisitions and divestitures, and $22 million to currency.
- Specialty Ingredients’ third-quarter sales were $638 million and operating income $91 million, versus $591 million and $58 million. Adjusted EBITDA margin rose to 24.3%. Pharmachem contributed to growth.
- Composites sales increased to $250 million from $209 million, but operating income was unchanged at $22 million and adjusted EBITDA margin declined to 11.2% from 12.9%.
- Intermediates and Solvents sales rose to $83 million from $70 million; operating income improved to $9 million from $2 million, mainly on improved pricing.
- Debt declined following approximately $470 million of cash repatriation, used primarily to repay debt. The Term Loan B was repriced, reducing its LIBOR margin from 2.00% to 1.75%.
Outlook, commentary and risks
- Fiscal 2018 outlook: Adjusted diluted EPS increased to $3.50–$3.60 from $3.30–$3.50. Adjusted EBITDA outlooks were raised to $570–$580 million for Specialty Ingredients, $95–$100 million for Composites, and $55–$60 million for Intermediates and Solvents. Free cash flow was expected to exceed $170 million, including about $50 million of separation and restructuring payments. Capital expenditure guidance was $195–$200 million; interest expense $123–$125 million; effective tax rate 13%–17%.
- Management expected fourth-quarter adjusted diluted EPS of $0.90–$1.00 and forecast $120 million of annualized cost savings by the end of calendar 2019, including $50 million by year-end 2018. These are company forecasts, not guarantees.
- Ashland expected to explore and pursue divestiture of Composites and its Marl, Germany BDO facility and related merchant products. Transaction completion and anticipated benefits were uncertain.
- The quarter included $37 million of environmental expense, including a $18 million site-related charge. Environmental reserves were $192 million; Ashland estimated the upper end of reasonably possible future costs at about $440 million.
- Asbestos reserves were $385 million for Ashland-related claims and $289 million for Hercules-related claims. Estimated insurance receivables were $142 million and $54 million, respectively. Management cautioned that long-range claim and cost estimates are uncertain; modeled future costs could exceed recorded reserves.
- The Tax Act assessment remained provisional. Ashland recorded a $142 million transition-tax liability and a favorable $126 million deferred-tax remeasurement; it estimated transition tax of about $160 million payable over eight years, with an approximately $13 million first payment due in fiscal 2019’s first quarter.
- Other risks include substantial indebtedness, raw-material costs, currency and economic conditions, environmental and legal matters, and execution of cost reductions and potential divestitures. The company said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the projected fiscal 2018 EPS, free-cash-flow and segment EBITDA targets were achieved, and how much of the announced savings was realized.
- Progress and final terms, if any, for the proposed Composites and Marl facility divestitures.
- Cash conversion and working-capital trends: nine-month operating cash flow was pressured by a $213 million change in operating assets and liabilities.
- Updates to asbestos and environmental reserves, insurance recoveries, and the provisional Tax Act liability.
- Debt maturities, covenant headroom, liquidity, and whether share repurchases are undertaken while maintaining debt-reduction and dividend capacity.