Ashland Global Holdings Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended March 31, 2021. The filing is by Ashland Global Holdings Inc.; the company operates as a specialty materials business serving consumer and industrial markets.
Key financial results
| Metric | Quarter ended Mar. 31, 2021 | Prior-year quarter | Six months ended Mar. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Sales | $598 million | $610 million | $1,149 million | $1,143 million |
| Gross profit / margin | $191 million / 31.9% | $197 million / 32.3% | $368 million / 32.0% | $350 million / 30.6% |
| Operating income (loss) | $71 million | $(468) million | $112 million | $(451) million |
| Net income (loss) | $41 million | $(582) million | $97 million | $(550) million |
| Diluted EPS | $0.66 | $(9.61) | $1.57 | $(9.08) |
| Adjusted EBITDA | $134 million | $142 million | $258 million | $230 million |
| Operating cash flow, continuing operations | Not presented by quarter | $170 million | $13 million | |
| Free cash flow | Not presented by quarter | $115 million | $(53) million |
Adjusted EBITDA margins, calculated as Adjusted EBITDA divided by sales, were approximately 22.4% for the quarter (23.3% prior year) and 22.5% year to date (20.1% prior year). Free cash flow is a company-defined non-GAAP measure.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $373 million, down from $454 million at September 30, 2020. Total debt was $1.659 billion, down from $1.853 billion; long-term debt was $1.571 billion.
- Available liquidity, including cash and unused revolving and foreign receivables-facility capacity, was $983 million. Ashland also reported $107 million available under its U.S. receivables sales program; it had not sold receivables under that program by quarter-end.
- Net working capital was $852 million. The company reported compliance with debt covenants: net leverage ratio 2.4 against a 4.0 maximum, and interest coverage ratio 8.1 against a 3.0 minimum.
- Long-term debt maturities include $421 million in 2022. The company reported no significant maturities on term loans, revolving facilities or bonds until August 2022.
Changes versus comparable periods
- Quarterly sales declined $12 million, mainly from lower volume and pricing, partly offset by favorable currency. Six-month sales rose $6 million, as currency gains more than offset lower volume and pricing.
- Quarterly operating results improved sharply from the prior-year loss, principally because the prior-year quarter included a $530 million non-cash goodwill impairment and $67 million of debt refinancing and accelerated debt costs. These comparisons do not indicate an equivalent increase in underlying earnings: quarterly Adjusted EBITDA declined to $134 million from $142 million.
- Current-quarter Adjusted EBITDA was pressured by lower volume and $11 million of costs from unplanned Gulf Coast plant shutdowns during winter storms. Lower SG&A from cost-reduction initiatives partly offset the pressure.
- For the six-month period, operating cash flow rose to $170 million from $13 million; cash used in continuing investing activities was $20 million, and cash used in continuing financing activities was $233 million, including $195 million of short-term debt repayments.
- Segment trends were mixed: quarterly Consumer Specialties sales fell to $322 million from $343 million, while Industrial Specialties sales increased to $246 million from $240 million. Life Sciences sales were broadly stable; Personal Care & Household declined, while Performance Adhesives and Specialty Additives increased.
Outlook, management commentary and notable items
- Management said liquidity was strong enough to meet operating, investment and financing needs, and expected cash from operations, available facilities and existing balances to support foreseeable working capital, capital expenditure, dividends and debt service. No specific full-year earnings guidance is provided in the supplied filing text.
- Ashland targeted $50 million of incremental SG&A and R&D savings and $50 million of cost-of-goods-sold productivity savings. By March 31 it had achieved over 90% of the targeted run-rate SG&A savings and approximately 80% of productivity savings, or about $86 million in annualized savings; it expected substantial completion by calendar year-end 2021.
- The company signed an agreement to acquire Schülke & Mayr’s personal care business for €262.5 million in cash, subject to approvals and closing conditions, with completion expected before the end of the June 2021 quarter. The acquisition was not yet completed at March 31.
- COVID-19 impacts remained uncertain. Management reported improved conditions in industrial end markets through Q2 FY2021 and described supply-chain and operating performance as resilient, while noting continued risks to demand, supply, staffing and economic conditions.
- Asbestos reserves totaled $540 million: $320 million for Ashland-related claims and $220 million for Hercules. The filing describes reasonably possible long-term costs, on an inflated and undiscounted basis, of up to approximately $520 million and $350 million, respectively. Environmental remediation reserves were $193 million; the estimated upper end of reasonably possible future costs was approximately $460 million.
- Other notable items: a $14 million gain on the sale of a Specialty Additives facility, $5 million of acquisition-related transaction costs, including foreign-exchange derivative losses, and a $9 million capital-project impairment during the six-month period. The company reported no goodwill impairment indicators in the current period.
Important facts for investors to verify
- Whether volume, pricing and storm-related cost pressures persist, and whether the reported savings translate into durable operating improvement.
- Completion terms, funding and expected benefits of the Schülke & Mayr acquisition.
- Cash conversion and working-capital trends, including the distinction between reported liquidity and availability under the receivables sales program.
- Debt refinancing needs and covenant headroom, particularly in light of the 2022 maturities and credit-rating outlooks (Moody’s stable; S&P negative).
- Sensitivity of asbestos and environmental liabilities and related insurance recoveries to claim experience, remediation costs, and insurer collectability.
- Comparability of company-defined Adjusted EBITDA and free cash flow with GAAP results; Adjusted EBITDA excludes selected items and is not a substitute for GAAP earnings or operating cash flow.