Ashland Global Holdings Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter ended June 30, 2020; comparisons are with the quarter ended June 30, 2019. Year-to-date figures cover the nine months ended June 30. Amounts are in millions of dollars unless stated otherwise.
Business context
Ashland is a global specialty materials company serving consumer and industrial markets. Its five reportable segments are Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents. During fiscal Q2, Ashland reorganized from a functionally led to a business-led structure and recast prior segment results. The Composites business and Marl facility sale closed in August 2019; their results are presented as discontinued operations.
Financial results and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales | $574 | $641 | $1,717 | $1,884 |
| Gross profit / margin | $196 / 34.1% | $207 / 32.3% | $546 / 31.8% | $557 / 29.6% |
| Operating income (loss) | $48 | $43 | $(403) | $80 |
| Continuing operations income (loss) | $50 | $23 | $(491) | $(3) |
| Net income (loss) | $37 | $66 | $(513) | $94 |
| Diluted EPS | $0.61 | $1.05 | $(8.47) | $1.50 |
| Adjusted EBITDA (non-GAAP) | $143 | $140 | $373 | $382 |
- Q3 sales fell 10%, principally from lower volume, which Ashland attributed mainly to reduced global industrial demand amid COVID-19. Q3 adjusted EBITDA increased $3, reflecting improved product mix, lower raw-material costs and cost savings, partly offset by lower volumes.
- The nine-month operating and net losses include a $530 goodwill impairment charge, substantially non-cash. The charge followed the segment realignment and affected Personal Care & Household ($356) and Specialty Additives ($174); management identified no further impairment indicators in Q3.
- Continuing-operations operating cash flow was $153 for the nine months, versus $93 a year earlier. Capital expenditures were $94; reported free cash flow was $59, compared with $(10) in the prior period. Discontinued operations used $97 of cash.
- At June 30, cash was $416, total debt was $1,993, and stockholders’ equity was $3,013. Debt was 40% of capital employed, versus 32% at September 30, 2019. Cash plus remaining revolving-credit capacity provided $766 of available liquidity, including $350 of unused revolver capacity.
- Under its credit agreement, Ashland reported net leverage of 3.0 against a maximum of 4.0 and interest coverage of 7.7 against a minimum of 3.0; it stated it was in compliance with covenants. Credit ratings were BB+ at S&P and Ba1 at Moody’s; S&P’s outlook was negative and Moody’s was stable.
Material changes and management commentary
- Q3 sales declined by $67: volume $(53), pricing $(6), currency $(6), and plant realignment $(2). Lower volumes were concentrated in industrial markets. Gross margin improved year over year despite lower sales.
- Segment Q3 sales were $344 for Consumer Specialties, down $4; $205 for Industrial Specialties, down $60; and $37 for Intermediates and Solvents, down $4. Life Sciences operating income improved to $40; Industrial Specialties operating income decreased to $28.
- Nine-month sales decreased $167, including a $116 volume decline. Lower costs and plant realignment/closure costs reduced reported cost of sales; SG&A also declined, reflecting savings, lower variable compensation and other changes.
- January 2020 refinancing included €500 million of 2.00% notes due 2028, a $250 million term loan, and a new $600 million five-year revolving facility. Refinancing and debt-retirement charges included $59 of premiums and other early-retirement costs. Ashland reported no significant maturities on term loans, revolver or bonds until August 2022.
Outlook, risks and unusual items
- Ashland said COVID-19 had not caused significant financial consequences through the reported period and that operations and cash flows remained stable, with sufficient liquidity. It also emphasized that future effects were uncertain and could depend on customer demand, supply chains, workforce conditions, containment measures and economic and credit-market conditions. No specific financial guidance is provided in the supplied filing text.
- Management said existing cash, operating cash flow, credit availability and potential financing should cover foreseeable working capital, capital expenditures, dividends and debt service, while noting cash needs could change with business conditions or transactions.
- On July 27, 2020, Ashland announced an agreement to sell the Maleic business for $100, subject to customary approvals and closing conditions, with closing expected before calendar year-end 2020.
- Environmental remediation reserves were $198 at June 30; Ashland estimated the upper end of the reasonably possible future cost range at approximately $480. The balance sheet reported an asbestos litigation reserve of $525. Separate disclosed claim reserves were $341 for Ashland-related claims and $235 for Hercules-related claims; estimated future costs could be higher under certain assumptions. These estimates depend on uncertain claims, remediation, insurance and legal outcomes.
- Other notable items include $30 of nine-month severance costs related to executive and business management changes, a $22 remaining severance reserve, and $31 of Q3 gains on restricted investments that helped lower reported net interest and other expense.
Important facts for investors to verify
- Whether COVID-related demand and volume declines persisted after June 30, particularly in industrial markets, and whether margin improvements were sustainable.
- The assumptions and valuation headroom supporting the $530 goodwill impairment, especially the remaining Specialty Additives goodwill and sensitivity to discount and growth rates.
- Debt balances, refinancing costs, borrowing availability, covenant calculations and the effect of S&P’s negative outlook.
- Developments in asbestos and environmental claims, reserves, insurance recoveries and potential costs beyond recorded amounts.
- Closing progress and final proceeds from the proposed $100 Maleic business sale.