Ashland Global Holdings Inc. — Q1 fiscal 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019. The filing reports Ashland Global Holdings Inc., a global specialty materials company. Results are presented after the August 2019 divestiture of most of Composites and the Marl facility as discontinued operations; prior-period figures were reclassified where applicable.
Financial performance
- Revenue: $533 million, down $43 million (7%) from $576 million. The filing attributes the decline mainly to lower volume and mix ($28 million), plant realignments ($7 million), currency ($4 million) and pricing ($4 million).
- Profit and margins: Gross profit was $153 million versus $152 million; gross margin rose to 28.7% from 26.4%. Operating income was $17 million versus an operating loss of $7 million. Net income was $32 million ($0.53 diluted EPS), compared with a net loss of $48 million ($0.76 loss per diluted share). Continuing-operations income was $34 million versus a $71 million loss.
- Adjusted performance: Adjusted EBITDA was $88 million, down 12% from $100 million. Adjusted diluted EPS from continuing operations was $0.13 versus $0.14. The large GAAP earnings improvement was influenced by a $24 million income-tax benefit, including $27 million of favorable discrete tax items, primarily related to Swiss tax reform.
- Segments: Specialty Ingredients sales fell to $505 million from $553 million; operating income rose to $44 million from $26 million, while Adjusted EBITDA declined to $102 million from $112 million. Intermediates and Solvents sales rose to $28 million from $23 million, but it recorded a $12 million operating loss, attributed mainly to Lima facility changeover costs and lost production absorption.
- Cash flow: Continuing-operations operating cash flow was negative $34 million versus negative $9 million. Capital expenditures were $29 million, resulting in free cash flow of negative $63 million versus negative $42 million. Working-capital changes used $94 million of cash, primarily reflecting payment timing and inventory needs. Cash declined $75 million during the quarter to $157 million.
- Liquidity and debt: Available liquidity was $950 million, including cash and unused borrowing capacity. Total debt was $1.681 billion, compared with $1.667 billion at September 30, 2019. Ashland reported compliance with debt covenants; net leverage was 2.9x against a 4.5x maximum, and interest coverage was 5.9x against a 3.0x minimum.
- Other metrics: Quarterly dividend was $0.275 per share. Working capital was $656 million, down from $676 million at September 30, 2019.
Material changes and outlook
- Sales declined, but lower SG&A, a prior-year plant closure charge, and improved gross margin helped operating income turn positive. Consolidated Adjusted EBITDA nevertheless fell, reflecting lower Specialty Ingredients volumes and the Intermediates and Solvents facility changeover.
- Ashland said it achieved the targeted $120 million in annualized cost savings from its company-wide restructuring program by December 31, 2019. It also plans to move to a business-led organization in Q2 fiscal 2020 and realign segment reporting.
- Management stated that operating cash flow and other available resources, including cash and revolving credit, are expected to be sufficient for investing and financing needs and covenant compliance. The filing provides no quantified full-year earnings or revenue guidance.
- In January 2020, Ashland replaced its credit agreement with a new $600 million revolving facility and a $250 million delayed-draw term loan, and issued €500 million of 2.00% notes due 2028. Tender offers retired portions of existing notes; Ashland expected to recognize more than $60 million of expense related to premiums and accelerated debt-cost amortization and accretion.
- Management was monitoring Specialty Ingredients’ performance and competitive pricing pressures for potential goodwill impairment; no interim impairment was identified at December 31, 2019. The filing cautions that quarterly results are not necessarily indicative of the full fiscal year.
Risks, contingencies and unusual items
- Asbestos: Reserves were $342 million for Ashland-related claims and $247 million for Hercules-related claims. The company disclosed that modeled future costs could be as high as approximately $600 million and $450 million, respectively, depending on assumptions. Associated insurance receivables were estimated at $122 million and $49 million. Estimates depend on uncertain claim activity, disease severity, litigation outcomes and insurer solvency.
- Environmental matters: Reserves were $179 million, with probable insurance receivables of $12 million. Ashland estimated the upper end of the reasonably possible future cost range for identified sites at approximately $430 million. It reported involvement at 80 waste sites and other current or former facilities and properties.
- Other disclosed risks include substantial indebtedness, economic and raw-material cost conditions, foreign exchange, divestiture execution, legal claims, and environmental and product-liability matters. Management said potential losses on other pending claims beyond recorded amounts were considered immaterial at quarter-end.
- The quarter’s reported tax benefit was unusually large relative to pretax income. The Swiss tax reform benefit was based on income projections and remained subject to Swiss tax authority approval.
Important facts for investors to verify
- Whether the decline in Specialty Ingredients volumes and the Lima changeover costs are temporary, and how these factors affect subsequent margins and Adjusted EBITDA.
- Whether operating cash flow improves as working-capital outflows normalize, and whether liquidity remains adequate after the January refinancing and debt tenders.
- The final refinancing costs, resulting debt balance, interest expense and covenant headroom after the January 2020 transactions.
- Whether the Swiss tax benefit is confirmed and how future tax rates compare with the quarter’s unusually favorable reported rate.
- Updates to asbestos and environmental reserve assumptions, insurance recoverability, and potential impairment risk as the organization and reporting units change.