Ashland Global Holdings Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017 unless noted. Amounts are in U.S. dollars. Results reflect continuing operations unless stated otherwise. Following the announced sale, Composites and the Marl facility are reported as discontinued operations.
Financial performance
- Sales: $576 million, down $5 million (about 1%). Pricing and mix added $13 million, offset by $9 million each from currency and lower volume.
- Profitability: Gross profit was $152 million versus $179 million; gross margin fell to 26.4% from 30.8%. Operating loss was $7 million versus operating income of $5 million. Net loss was $48 million, or $0.76 per diluted share, compared with a $4 million loss, or $0.07 per share.
- Continuing and discontinued results: Continuing-operations loss was $71 million versus $32 million. Discontinued operations contributed $23 million of after-tax income versus $28 million; Composites and Marl contributed $25 million in both periods.
- Adjusted results: Adjusted EBITDA, a non-GAAP measure, rose 8% to $100 million from $93 million. Adjusted diluted EPS from continuing operations was $0.14 versus $0.03. These measures exclude items identified by management and are not GAAP results.
- Cash flow: Continuing-operations operating cash outflow was $9 million versus $31 million. Capital expenditures were $33 million versus $21 million; free cash flow was negative $42 million versus negative $52 million. Discontinued operations used $60 million of cash, versus $12 million.
- Liquidity and debt: Cash was $149 million, down from $294 million at September 30, 2018. Total debt was $2.504 billion, down from $2.529 billion. Available liquidity, including cash and unused borrowing capacity, was $942 million versus $1.048 billion. The company reported covenant compliance; net leverage was 3.5x against a 4.5x maximum, and interest coverage was 5.5x against a 3.0x minimum.
Segments and material changes
- Specialty Ingredients: Sales increased to $553 million from $550 million, but operating income fell to $26 million from $42 million. Gross margin declined to 27.1% from 31.5%, including the effects of a planned facility closure and restructuring. Adjusted EBITDA was $112 million versus $105 million, and adjusted EBITDA margin rose to 20.3% from 19.1%.
- Intermediates and Solvents: Continuing-operations sales fell to $23 million from $31 million; operating income was zero versus $3 million. Lower volume and a planned facility shutdown weighed on results.
- Cost reduction: Ashland reported $50 million of annualized run-rate savings achieved by December 31, 2018, including $30 million captured in the quarter. It continued to target $120 million of run-rate savings by the end of calendar 2019.
- Cash and equity: Cash declined by $145 million during the quarter, driven in part by discontinued-operations cash use and continuing-operations outflows. Equity decreased $101 million to $3.305 billion, reflecting the net loss, currency translation losses, dividends, and pension-related adjustments.
Outlook, unusual items, and risks
- Divestiture: Ashland agreed to sell Composites and the Marl facility to INEOS for a stated transaction value of $1.1 billion. It expected net proceeds of about $1.0 billion, primarily for debt reduction, and closing before the end of the June 2019 quarter, subject to approvals and other conditions. Ashland expected to recognize a gain at closing.
- FY2019 outlook: Adjusted EBITDA guidance was $610–$635 million for Specialty Ingredients, $20–$30 million for Intermediates and Solvents, and negative $50–$60 million for Unallocated and other. Other targets included adjusted diluted EPS of $3.10–$3.40, free cash flow of about $175 million, capital expenditures of about $160 million, and interest expense of $85–$95 million. The free-cash-flow outlook includes about $40 million of restructuring and separation payments. Q2 adjusted diluted EPS guidance was $0.80–$0.90. Guidance is non-GAAP; the filing does not provide a forward reconciliation to GAAP.
- Significant earnings items: Adoption of fair-value accounting for equity securities led to a $30 million unrealized investment loss in financing expense. The quarter also included $27 million of Specialty Ingredients plant restructuring charges, including $19 million of accelerated depreciation, and an $18 million pension curtailment gain. Final Tax Act accounting adjustments were unfavorable; the filing cites $30 million of unfavorable tax discrete items, including the transition-tax assessment.
- Contingencies: Asbestos reserves were $369 million for Ashland-related claims and $276 million for Hercules-related claims; the company disclosed possible future costs as high as approximately $600 million and $450 million, respectively, on an inflated, undiscounted basis under certain model assumptions. Environmental remediation reserves were $184 million, with the upper end of the reasonably possible future-cost range estimated at approximately $424 million. Estimates depend on uncertain claims, cleanup requirements, recoveries, and other assumptions.
- Other risks and accounting: The filing highlights substantial indebtedness, divestiture execution and stranded-cost risks, raw-material and currency exposures, and legal, asbestos, and environmental matters. The new lease standard, effective for Ashland in FY2020, was expected to significantly affect the balance sheet and disclosures.
Investor verification priorities
- Confirm the Composites/Marl divestiture closed on the expected terms and whether proceeds were applied to debt as planned.
- Track progress toward the $120 million cost-savings target and whether savings translate into improved margins without continued material restructuring charges.
- Assess recurring earnings and cash generation apart from the $30 million investment loss, pension gain, restructuring, and tax discrete items.
- Monitor liquidity, the large 2022 debt maturity, covenant headroom, and the expected use of divestiture proceeds.
- Review developments in asbestos and environmental claims, including reserve assumptions and the collectability of related insurance recoveries.