Ashland Global Holdings Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; fourth-quarter results are noted where relevant. Ashland Global Holdings Inc. became the successor public holding company to Ashland Inc. in September 2016. Consolidated results include Valvoline, in which Ashland held approximately 83% at year-end.
Business context and key financial metrics
Ashland operates Specialty Ingredients, Performance Materials and Valvoline, serving specialty chemical and lubricant markets. Unless stated otherwise, figures below are in U.S. dollars.
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $4.948 billion | $5.387 billion |
| Gross profit / gross margin | $1.627 billion / 32.9% | $1.573 billion / 29.2% |
| Operating income | $327 million | $458 million |
| Net income (loss) attributable to Ashland | $(29) million; diluted EPS $(0.46) | $309 million; diluted EPS $4.48 |
| Adjusted EBITDA (non-GAAP) | $1.074 billion | $1.119 billion |
| Cash from continuing operating activities | $703 million | $89 million |
| Free cash flow (non-GAAP) | $403 million | $324 million |
| Cash and cash equivalents | $1.188 billion | $1.257 billion |
| Total debt | $3.244 billion | $3.729 billion |
FY2016 cash from continuing operations increased substantially from 2015, when cash flow was reduced by a $500 million voluntary pension contribution. The filing reports total available liquidity of $2.445 billion, including cash, borrowing facilities and receivables securitization capacity. Liquid assets were 171% of current liabilities. Ashland’s reported working capital measure was $1.669 billion.
Material changes versus prior periods
- Sales declined 8% year over year. Price reductions lowered sales by $251 million and currency effects by $85 million; divestitures and acquisitions had a net negative impact, while volume and mix reduced sales by $15 million.
- Adjusted EBITDA declined 4%, to $1.074 billion. Specialty Ingredients and Performance Materials weakened; Valvoline improved.
- Gross margin rose to 32.9%, but operating income fell, including a $181 million non-cash impairment in Intermediates/Solvents and $88 million in Valvoline separation costs.
- Valvoline completed an IPO, raising $712 million net. Ashland retained approximately 83% of Valvoline at year-end and intended to distribute its remaining shares in 2017, subject to board approval and other conditions.
- Ashland repurchased $500 million of its shares during the year and paid $97 million in dividends.
Segment performance: Specialty Ingredients sales were $2.089 billion and Adjusted EBITDA was $476 million, down 10% from 2015, primarily reflecting lower energy-market volume and pricing. Performance Materials sales were $930 million; Adjusted EBITDA was $116 million, down 21%, amid lower pricing and weak butanediol conditions. Valvoline sales were $1.929 billion and Adjusted EBITDA was $441 million, up 7%, supported by volume, product mix and lower raw-material costs.
Fourth quarter: Ashland reported an operating loss of $146 million and net loss of $275 million. Results included the $181 million Intermediates/Solvents impairment, $101 million of pension and postretirement remeasurement losses, $42 million of separation costs and $83 million of discrete income-tax expense.
Outlook, risks and contingencies
- For FY2017, management expected Specialty Ingredients Adjusted EBITDA of $480–$510 million, with improved growth and profitability despite low expected global growth.
- Management expected Performance Materials Adjusted EBITDA of $95–$105 million, including an estimated $20 million impact from lower butanediol and derivatives pricing. Butanediol pricing was expected to remain well below prior-year levels through the first three quarters.
- Ashland said operating cash flow and available resources were expected to meet investment and financing needs and support covenant compliance; this depends on assumptions including operating results, working capital, capital spending, pension funding and taxes.
- Year-end debt was $3.244 billion. Ashland reported compliance with debt covenants; its leverage ratio was 2.7 versus a 3.75 maximum, and interest coverage was 3.9 versus a 3.0 minimum. A $150 million subsidiary term loan matured in February 2017. The filing identifies substantial debt, interest-rate exposure and refinancing/access-to-capital risks.
- The planned Valvoline separation remained subject to approvals, timing, tax treatment and other execution risks. Failure to qualify for intended tax-free treatment could create material tax liabilities for Ashland and/or shareholders.
- Asbestos reserves totaled $736 million: $415 million for Ashland-related claims and $321 million for Hercules-related claims. The filing’s modeled high-end estimates of possible future costs were approximately $670 million and $490 million, respectively; actual costs may differ materially. Insurance-recovery assumptions are also relevant.
- Environmental remediation reserves were $177 million, with an estimated upper end of the reasonably possible future-cost range of approximately $380 million. Ashland identified 81 waste-treatment or disposal sites as a potentially responsible party.
- Other risks include competition and pricing pressure, raw-material volatility and supply disruption, foreign currency and international exposure, product liability, cyber and operational disruptions, regulation and tax uncertainty, and the risk of further impairment if business forecasts deteriorate.
FY2016 included significant unusual and non-cash items, including pension remeasurement losses, the Intermediates/Solvents impairment, separation and restructuring costs, divestiture losses, and discrete tax adjustments. The reported 98% effective tax rate was materially affected by these items and other jurisdictional tax factors.
Important facts for investors to verify
- Reconcile reported GAAP earnings with the non-GAAP Adjusted EBITDA and free-cash-flow measures, including the adjustments used.
- Review the assumptions behind the $181 million impairment and management’s FY2017 outlook for Performance Materials and Specialty Ingredients.
- Track completion, tax opinions and shareholder distribution terms for the remaining Valvoline stake, and confirm how separation-related financing and transferred pension liabilities affect each company.
- Assess debt maturities, borrowing availability, covenant headroom and the source and location of cash; $1.013 billion of cash was held by foreign subsidiaries, and repatriation could trigger additional U.S. taxes.
- Monitor asbestos and environmental reserve estimates, insurance recoveries, litigation developments and the potential for additional charges or cash outflows.