Ashland Global Holdings Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing is an annual report, not a standalone “2019 Q4” report; quarterly figures are provided separately. The registrant is Ashland Global Holdings Inc., successor to Ashland Inc. The company reported two continuing segments after its Composites and Marl divestiture: Specialty Ingredients and Intermediates and Solvents.
Business context and key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $2.493 billion | $2.589 billion |
| Gross profit / gross margin | $767 million / 30.8% | $863 million / 33.3% |
| Operating income | $166 million | $102 million |
| Income from continuing operations | $24 million | $19 million |
| Net income attributable to Ashland | $505 million; diluted EPS $8.03 | $114 million; diluted EPS $1.79 |
| Adjusted EBITDA, non-GAAP | $532 million | $515 million |
| Operating cash flow from continuing operations | $228 million | $241 million |
| Capital expenditures / free cash flow, non-GAAP | $154 million / $74 million | $157 million / $84 million |
Specialty Ingredients generated $2.382 billion of sales and $272 million of operating income; its adjusted EBITDA was $558 million and adjusted EBITDA margin was 23.4%. Intermediates and Solvents generated $111 million of sales and $16 million of operating income. Sales outside North America represented 60% of consolidated sales.
At September 30, 2019, cash and cash equivalents were $232 million, working capital was $676 million, and available liquidity (cash, revolving credit and receivables facilities) was $1.032 billion. Total debt was $1.667 billion on the balance sheet; principal outstanding was $1.726 billion. Debt was 32% of capital employed, versus 43% a year earlier. The company reported a 2.6x consolidated net leverage ratio against a maximum covenant level of 4.5x, and 6.1x interest coverage against a 3.0x minimum. It was in compliance with debt covenants.
Material changes versus the prior period
- Sales declined 4% year over year. Lower volume/product mix reduced sales by $58 million and unfavorable currency by $45 million; pricing added $18 million.
- Operating income increased to $166 million from $102 million, while gross margin fell 2.5 percentage points to 30.8%. Lower selling, general and administrative costs, including restructuring savings and lower incentive compensation, contributed to improved operating income.
- Adjusted EBITDA increased $17 million to $532 million, although management said both continuing segments had lower business results, primarily from volume/mix and unfavorable currency, partly offset by lower selling, general and administrative expense.
- Net income rose substantially, but was not representative of recurring continuing-operations earnings: discontinued operations contributed $481 million, including a $372 million after-tax gain on the Composites/Marl sale. Continuing-operations income was $24 million.
- On August 30, 2019, Ashland sold the Composites business, excluding the Maleic business, and the Marl, Germany facility to INEOS for a transaction value of $1.015 billion. Net proceeds were approximately $1 billion; approximately $900 million of debt was repaid by fiscal year-end. The Maleic business was retained but is reported in discontinued operations with the disposed businesses.
- Debt declined by approximately $900 million. Credit ratings were upgraded from BB to BB+ by S&P and from Ba2 to Ba1 by Moody’s; both outlooks were stable.
Outlook, management commentary, risks and unusual items
- Restructuring: Ashland continued to target $120 million in annualized run-rate savings by the end of calendar 2019. It reported $115 million achieved by the end of the September 2019 quarter and expected the remainder by December 31, 2019. The program includes eliminating stranded divestiture costs and improving Specialty Ingredients profitability. Management’s adjusted EBITDA margin target for Specialty Ingredients was 25%–27%; FY2019 margin was 23.4%.
- Liquidity outlook: Management expected operating cash flow, cash on hand and revolving credit to be sufficient for investment and financing needs and covenant compliance, subject to assumptions including operating results, capital spending, working capital and tax payments.
- No clear full-year sales or EPS guidance: The filing does not provide a clear numerical FY2020 sales or earnings forecast. Raw-material volatility, seasonality and global economic conditions may affect performance; Ashland expected raw materials to be available in sufficient quantities but noted cost volatility could continue.
- Environmental and asbestos exposures: Environmental remediation reserves were $186 million; the reasonably possible upper end of future costs for identified sites was estimated at approximately $440 million. Asbestos reserves for Ashland and Hercules totaled $604 million in the notes; projected future costs are highly uncertain, and the company disclosed materially higher possible long-term cost ranges. Insurance recovery estimates depend on coverage and insurer solvency assumptions.
- Other principal risks: Competitive pricing and margin pressure, raw-material and energy costs and supply interruptions, customer or product changes, international and currency exposure, regulation and taxes, product liability, cyber and operational disruptions, and substantial indebtedness. Ashland identified the risk that restructuring savings may be delayed or not achieved.
- Unusual subsequent event: In November 2019, Ashland was named as one of 17 defendants in a lawsuit seeking approximately $100 million related to a plant fire in Israel and allegedly involving a product from the divested Composites business. Ashland had established no reserve and was reviewing the claim and its contractual rights.
- Leadership and headquarters: Guillermo Novo was announced as incoming chairman and CEO, effective December 31, 2019; transition costs were expected in FY2020. The company also planned to move its headquarters to Wilmington, Delaware.
- Tax and other items: FY2019 included $29 million of unfavorable Tax Act adjustments, primarily related to the one-time transition tax. A 66% reported effective tax rate was materially affected by tax-specific items; the company’s non-GAAP effective rate excluding key items was 14%.
Most important facts for investors to verify
- How much of reported FY2019 earnings and cash generation is recurring: separate continuing operations from the $372 million after-tax disposal gain and other discontinued-operations adjustments.
- Whether Ashland completed the remaining restructuring savings and whether Specialty Ingredients’ margin progressed toward the 25%–27% target.
- Whether lower volumes and mix, currency headwinds and weaker gross margin continued after FY2019.
- Debt repayment, maturity concentration (including $1.083 billion scheduled for 2022), liquidity, and covenant headroom following the divestiture.
- Changes in environmental and asbestos reserves, insurance recoveries, and the outcome or allocation of the Israel plant-fire lawsuit.
- Whether the company’s liquidity and earnings assumptions held up amid raw-material volatility, regulatory changes and global market risks.