Ashland Global Holdings Inc. — FY2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2018, with quarterly results for the quarter ended September 30, 2018. Ashland is a global specialty chemicals company operating through Specialty Ingredients, Composites, and Intermediates and Solvents; it serves customers in more than 100 countries. Valvoline is reported as a discontinued operation following its separation in May 2017.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $3.743 billion | $3.260 billion |
| Gross profit / gross margin | $1.075 billion / 28.7% | $897 million / 27.5% |
| Operating income | $227 million | $146 million |
| Income from continuing operations | $105 million | Loss of $105 million |
| Net income attributable to Ashland | $114 million; diluted EPS $1.79 | $1 million; diluted EPS $0.01 |
| Adjusted EBITDA (non-GAAP) | $683 million | $570 million |
| Operating cash flow from continuing operations | $344 million | $273 million |
| Capital expenditures / free cash flow (non-GAAP) | $185 million / $159 million | $199 million / $74 million |
| Cash and cash equivalents at year-end | $294 million | $566 million |
| Total debt at year-end | $2.529 billion | $2.819 billion |
FY2018 sales rose 15%, reflecting acquisition contributions, higher pricing, volume, favorable currency and mix. The reported gross margin improved 1.2 percentage points. Adjusted EBITDA increased 20%; these are management-defined non-GAAP measures and are not substitutes for GAAP results.
By segment, Specialty Ingredients sales were $2.470 billion and operating income was $314 million; Composites sales were $942 million and operating income was $73 million; Intermediates and Solvents sales were $331 million and operating income was $31 million. Specialty Ingredients’ adjusted EBITDA margin was 23.2%, up 1.0 percentage point. Composites’ gross margin fell to 18.8% from 19.8%; Intermediates and Solvents’ gross margin recovered to 18.6% from 6.5%.
Fourth quarter: Sales were $956 million, operating income $27 million, income from continuing operations $11 million, and net income $9 million. Gross margin was 29.4%. Q4 included $56 million of pretax restructuring, separation and other costs, $16 million of asset impairments, a $12 million pension and postretirement remeasurement gain, and $5 million of tax indemnity expense.
Material changes versus the prior comparable period
- Sales increased $483 million. Pharmachem contributed $140 million; pricing added $125 million, volume $109 million, currency $73 million and mix $18 million. Cost of sales rose 13%, slower than sales growth.
- Operating income improved by $81 million; the increase in adjusted EBITDA was broad-based across all three segments. Intermediates and Solvents returned to operating profitability after losses in 2017 and 2016.
- Net interest and financing expense declined to $122 million from $234 million, largely because 2017 included substantial accelerated debt accretion and refinancing costs.
- Operating cash flow rose $71 million and free cash flow rose $85 million. Year-end cash fell by $272 million, partly reflecting debt repayment and ongoing cash uses.
- Total debt declined $290 million. Ashland repaid the $250 million three-year term loan A and $55 million of the five-year term loan A, using cash including approximately $590 million repatriated from abroad.
- Environmental remediation reserves increased to $187 million from $163 million; net environmental remediation expense was $65 million versus $24 million. Total equity was unchanged at $3.406 billion.
Outlook, management commentary, risks and unusual items
- Portfolio sale: On November 15, 2018, Ashland announced a definitive agreement to sell Composites and the Marl, Germany Intermediates and Solvents facility to INEOS Enterprises for a stated transaction value of $1.1 billion. Ashland expected approximately $1 billion of net proceeds, primarily for debt reduction, and anticipated closing before the end of the June 2019 quarter, subject to approvals and other conditions. Ashland will retain the Lima, Ohio facility. The transaction had not closed when the 10-K was filed.
- Restructuring: Ashland targets $120 million of annualized run-rate cost savings by the end of calendar 2019. It reported $20 million achieved by the end of FY2018 and expected another $30 million by year-end 2018, for $50 million total run-rate savings. Approximately $70 million relates to costs allocated to businesses/facilities intended for divestiture or transfer; about $50 million is additional cost reduction, including to support a Specialty Ingredients adjusted EBITDA margin target of 25%–27%.
- Tax: The Tax Cuts and Jobs Act generated provisional estimates, including a $128 million transition-tax amount and a favorable $139 million deferred-tax remeasurement; Ashland said its accounting assessment was incomplete. The recorded net tax effect was described as an unfavorable $2 million adjustment. The filing identifies uncertainty in final calculations and tax positions.
- Leverage and liquidity: Year-end total debt was $2.529 billion, cash was $294 million, and available liquidity was $1.048 billion, including cash, revolving credit and receivables-securitization capacity. Covenant net leverage was 3.4 against a maximum of 4.5; interest coverage was 5.4 against a minimum of 3.0. The filing reports compliance with debt covenants. Scheduled debt maturities are concentrated in FY2022, with $1.224 billion due that year.
- Contingencies: Asbestos reserves were $380 million for Ashland-related claims and $282 million for Hercules-related claims; the filing estimates possible future costs as high as approximately $600 million and $450 million, respectively, depending on assumptions. Environmental reserves were $187 million, with the upper end of the reasonably possible range estimated at approximately $430 million. These estimates are uncertain and depend on claims, remediation requirements, insurance recoveries and other parties’ ability to pay.
- Other principal risks: Raw-material and energy price volatility, inability to pass through cost increases, competition and margin pressure, international and currency exposure, customer concentration in Specialty Ingredients, product liability, regulatory and environmental compliance, cyber and operational disruptions, and substantial indebtedness. Ashland also cited potential execution risks for the planned divestiture and savings program.
Investor verification points
- Confirm the sale’s final consideration, net proceeds, closing conditions and actual use of proceeds; the $1.1 billion value and approximately $1 billion net proceeds were expectations at filing.
- Track realized restructuring savings against the $120 million target, including whether savings are incremental, recurring and achieved without impairing operations or growth.
- Review the full debt note and subsequent filings for refinancing or repayment plans around the $1.224 billion FY2022 maturity, and monitor leverage, interest costs and liquidity after any divestiture.
- Assess the quality and sustainability of earnings: FY2018 GAAP net income included discontinued-operation income and substantial specified key items; compare GAAP results with management’s adjusted measures and reconciliations.
- Monitor updated asbestos and environmental reserve estimates, insurance recoveries, cash payments and any material legal developments.
- Check the final Tax Act accounting and transition-tax payments, as the filing described the FY2018 tax accounting as provisional.