Ashland Global Holdings Inc. — Q1 FY2018 10-Q
Reporting period: Three months ended December 31, 2017. Ashland is a global specialty chemicals company reporting three segments: Specialty Ingredients, Composites, and Intermediates and Solvents. Valvoline was separated in May 2017 and is reported as a discontinued operation; accordingly, the prior-year comparison is not on the same continuing-business scope.
Financial performance and position
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Sales | $842 million | $704 million |
| Gross profit / margin | $229 million / 27.2% | $189 million / 26.8% |
| Operating income | $39 million | $15 million |
| Loss from continuing operations | $7 million | $65 million |
| Net loss attributable to Ashland | $4 million; $0.07 diluted loss per share | $1 million; $0.01 diluted loss per share |
| Adjusted EBITDA (non-GAAP) | $136 million | $109 million |
| Cash from continuing operating activities | Used $24 million | Used $60 million |
| Free cash flow (non-GAAP) | Negative $48 million | Negative $93 million |
Sales rose 20%, reflecting acquisitions and divestitures (+$63 million), pricing (+$30 million), currency (+$20 million), volume (+$18 million), and mix (+$7 million). Adjusted EBITDA increased 25%, led by improvement in Intermediates and Solvents and Specialty Ingredients. Reported earnings remained negative, with a 200% effective tax rate largely reflecting income mix and Tax Act-related discrete adjustments.
Segments: Specialty Ingredients sales were $550 million and operating income $42 million; Composites sales were $218 million and operating income $18 million; Intermediates and Solvents sales were $74 million and operating income $8 million, compared with a $7 million operating loss in the prior-year quarter. Segment performance comparisons include the Pharmachem acquisition and other business changes.
Liquidity and debt: Cash was $601 million at December 31, including $581 million held by foreign subsidiaries. Total debt was $2.939 billion, versus $2.819 billion at September 30, 2017; short-term debt rose to $355 million from $235 million. Available liquidity, including cash and unused facilities, was $1.099 billion. Ashland reported covenant compliance, a 3.9x net leverage ratio against a 4.5x maximum, and 4.6x interest coverage against a 3.0x minimum. Cash from continuing operations was reduced by working-capital outflows, including inventory and payables.
Material changes and notable items
- Pharmachem, acquired in May 2017 for $680 million, contributed to year-over-year sales and expense increases; its purchase-price allocation remained preliminary.
- Interest and other financing expense fell to $31 million from $122 million. The prior-year quarter included a $92 million charge from accelerated accretion on debt repurchased in a tender offer.
- The Tax Cuts and Jobs Act produced provisional accounting estimates, including a $126 million favorable deferred-tax remeasurement and a $142 million transition-tax liability. Ashland reported net unfavorable Tax Act-related tax adjustments of $16 million for the quarter and estimated transition-tax payments of approximately $160 million over eight years.
- Environmental expense was elevated: the quarter included $14 million of environmental expense in SG&A; the environmental remediation reserve was $168 million. The filing estimates the upper end of reasonably possible future costs at approximately $412 million.
- Asbestos reserves were $409 million for Ashland and $315 million for Hercules, with related insurance receivables of $151 million and $68 million, respectively. The filing warns that actual claims, costs, and recoveries could differ materially from estimates.
Outlook, risks, and contingencies
- FY2018 Adjusted EBITDA outlook was unchanged: Specialty Ingredients $560–$590 million; Composites $85–$95 million; Intermediates and Solvents $40–$50 million; Unallocated and other negative $35–$45 million. Free cash flow outlook remained above $220 million.
- FY2018 adjusted diluted EPS guidance was reduced from $3.20–$3.40 to $2.90–$3.10. The effective tax-rate outlook increased from 8–13% to 16–20%. For Q2 FY2018, management expected adjusted diluted EPS of $0.80–$0.90, assuming an 18% tax rate.
- Management said cash flow, cash on hand, and revolving credit were expected to be sufficient for operating, investing, and financing needs and covenant compliance. In January 2018, Ashland repatriated approximately $300 million and used it to repay debt.
- Key risks include substantial debt and restrictive covenants; execution and expected benefits of acquisitions and the Valvoline separation; Tax Act effects; raw-material costs, pricing and demand; foreign exchange; asbestos and environmental claims; and other legal proceedings. The filing states that actual results may differ from estimates and forward-looking statements.
- Disclosure controls were deemed effective. Management had not fully evaluated Pharmachem’s financial reporting controls and disclosed a risk that deficiencies could remain unidentified.
Investor verification priorities
- Track the revised FY2018 EPS and tax-rate outlook, and the final accounting for the Tax Act and transition-tax liability.
- Assess working-capital trends and the sustainability of operating cash flow and free cash flow.
- Monitor debt balances, upcoming maturities, covenant headroom, and the effect of the January 2018 debt repayment.
- Review Pharmachem integration, final purchase accounting, and segment margins alongside the acquisition-related contribution to growth.
- Check updates to asbestos and environmental reserves, insurance recoverability, and Pharmachem control evaluation.