Ashland Global Holdings Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Ashland is a global specialty chemicals company with three reportable segments: Specialty Ingredients, Composites, and Intermediates and Solvents. Valvoline was separated in May 2017 and is presented as discontinued operations in the prior-year comparisons.
Financial performance
| Metric | Three months ended March 31, 2018 | Prior-year quarter | Six months ended March 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Sales | $974 | $806 | $1,816 | $1,510 |
| Gross profit / margin | $275 / 28.2% | $228 / 28.3% | $504 / 27.8% | $417 / 27.6% |
| Operating income | $95 | $53 | $133 | $68 |
| Income from continuing operations | $66 | $29 | $59 | $(37) |
| Net income attributable to Ashland | $73 | $92 | $69 | $91 |
| Diluted EPS from continuing operations | $1.04 | $0.46 | $0.93 | $(0.59) |
| Adjusted EBITDA (non-GAAP) | $179 | $138 | $315 | $248 |
Quarterly sales rose about 21%, reflecting acquisition contributions, favorable currency, pricing, and higher volume. Quarterly operating income and Adjusted EBITDA improved, while net income attributable to Ashland declined because the prior-year quarter included substantially more income from discontinued operations, principally Valvoline. For the six-month comparison, prior-year net interest expense included a $92 million debt-refinancing charge; lower expense helped continuing results improve year over year.
- Segments, quarter: Specialty Ingredients sales were $646 and operating income $89; Composites sales were $238 and operating income $19; Intermediates and Solvents sales were $90 and operating income $4. Each segment’s sales and operating income increased year over year.
- Cash flow, six months: Cash flow from continuing operating activities was approximately zero, versus a $2 million outflow in the prior-year period. Working-capital changes used $189 million, including $108 million from receivables. Capital expenditures were $60 million; reported free cash flow was negative $60 million. Cash and cash equivalents decreased $341 million to $225 million.
- Debt and liquidity: Total debt was $2.638 billion, down from $2.819 billion at September 30, 2017. Available liquidity, including cash and unused borrowing capacity, was $1.044 billion. Debt covenants were met; net leverage was 3.8 against a 4.5 maximum, and interest coverage was 4.8 against a 3.0 minimum.
- Balance sheet: Current assets were $1.713 billion and current liabilities $712 million. Working capital, as defined by Ashland, was $1.012 billion. Cash included $207 million held by foreign subsidiaries.
Material changes and notable items
- Sales growth included Pharmachem, acquired in May 2017, as well as pricing, volume, and currency gains. The company reported $63 million of Pharmachem-related quarterly sales growth and $121 million for the six-month period.
- Composites and Intermediates and Solvents benefited from improved pricing. Intermediates and Solvents’ quarterly gross margin increased to 13.4% from 5.5%, while Specialty Ingredients’ quarterly gross margin eased to 33.6% from 34.8%.
- In March, Ashland said it would explore strategic alternatives for Composites and its Marl, Germany, BDO manufacturing facility and related merchant products, and said it currently expects to divest these assets.
- Ashland announced a program to eliminate $120 million of corporate and Specialty Ingredients costs, with full run-rate savings expected by the end of calendar 2019. The filing describes approximately $70 million related to costs allocated to the assets under strategic review and approximately $50 million of additional savings.
- The new U.S. tax law produced provisional estimates including a $126 million favorable deferred-tax remeasurement and a $142 million transition-tax charge. The company had not completed its accounting assessment; it estimated approximately $160 million of transition tax payable over eight years.
Outlook, risks and contingencies
- FY2018 outlook: Adjusted diluted EPS was raised to $3.30–$3.50 from $2.90–$3.10. Adjusted EBITDA outlook was raised to $565–$585 million for Specialty Ingredients, $90–$100 million for Composites, and $50–$60 million for Intermediates and Solvents; Unallocated and other was unchanged. Free cash flow remained above $220 million. Capital expenditures remained $195–$205 million.
- Management expected Q3 FY2018 adjusted diluted EPS of $0.95–$1.05 and assumed a 17% effective tax rate for that quarter. Ashland said cash flow and available resources were expected to be sufficient for operating, investing, and financing requirements, subject to its assumptions.
- Asbestos reserves were $713 million in total for Ashland and Hercules, with related insurance receivables of $217 million. The filing gives possible future costs, on an inflated and undiscounted basis, of up to approximately $660 million for Ashland claims and $510 million for Hercules claims, depending on assumptions. Estimates are uncertain and could increase.
- Environmental remediation reserves were $164 million; the upper end of the reasonably possible range of future costs for identified sites was estimated at approximately $409 million. Other legal matters were assessed as immaterial at the reporting date, though losses exceeding recorded amounts were considered reasonably possible.
- Other identified risks include substantial indebtedness, raw-material and currency fluctuations, execution of cost reductions and potential divestitures, acquisition integration, and legal, environmental, asbestos, weather, and cyber risks. Management reported effective disclosure controls; Pharmachem’s controls had not yet been fully evaluated.
Key facts for investors to verify
- Whether the announced divestiture plans and $120 million cost program proceed as expected, and their timing and net impact on earnings.
- Whether the raised FY2018 adjusted EPS and segment Adjusted EBITDA outlooks are achieved; these are non-GAAP measures.
- How working-capital use, capital spending, and free cash flow develop after the reported near-zero continuing operating cash flow and negative $60 million free cash flow.
- Final tax-law accounting, including the transition-tax estimate and payment schedule.
- Changes in asbestos and environmental estimates, insurance recoverability, and covenant headroom.