Ashland Global Holdings Inc. (successor to Ashland Inc.) — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparative period is the three months ended December 31, 2015. Ashland operates specialty chemicals businesses and retained an approximately 83% interest in Valvoline after its September 2016 IPO. Management intended to distribute its remaining Valvoline shares in 2017, after March-quarter earnings.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Sales | $1.193 billion | $1.163 billion |
| Gross profit / gross margin | $386 million / 32.4% | $392 million / 33.7% |
| Operating income | $137 million | $151 million |
| Net income attributable to Ashland | Loss of $1 million; diluted EPS $(0.01) | Income of $89 million; diluted EPS $1.35 |
| Adjusted EBITDA (non-GAAP) | $215 million | $247 million |
| Operating cash flow from continuing operations | $12 million | $66 million |
| Free cash flow (non-GAAP) | $(31) million | $13 million |
Consolidated net income was $10 million, including $11 million attributable to Valvoline noncontrolling shareholders; therefore, Ashland-attributable results were a $1 million loss. Net interest and other financing expense rose to $132 million from $42 million. Income tax was a $6 million benefit, compared with $20 million expense. Ashland paid a $0.39-per-share dividend in both periods.
Sales increased $30 million, primarily from $55 million of higher volume and $13 million from acquisitions and divestitures, partly offset by lower pricing of $29 million, unfavorable currency of $5 million, and product mix of $4 million. Cost of sales rose $36 million, so gross profit declined $6 million.
Segment results
| Segment | Sales, current vs. prior | Operating income, current vs. prior |
|---|---|---|
| Specialty Ingredients | $482 million vs. $476 million | $40 million vs. $38 million |
| Performance Materials | $222 million vs. $231 million | $8 million vs. $24 million |
| Valvoline | $489 million vs. $456 million | $99 million vs. $92 million |
Performance Materials was the main segment weakness: gross margin fell to 15.4% from 22.1%, affected by lower pricing and $9 million of costs from a planned plant shutdown. Specialty Ingredients’ gross margin declined to 32.0% from 32.9%. Valvoline’s gross margin was 37.9% versus 38.3%; volume growth and the Oil Can Henry’s acquisition supported its sales.
Financial position and liquidity
- Cash and cash equivalents were $704 million at December 31, 2016, down from $1.188 billion at September 30, 2016. The quarterly cash decrease was $484 million.
- Total debt was $2.932 billion, down from $3.244 billion; long-term debt including current maturities was $2.840 billion. Debt represented 49% of capital employed, versus 51% at September 30.
- Working capital was $1.333 billion, down from $1.669 billion. Cash, cash equivalents and receivables equaled 154% of current liabilities.
- Available liquidity, including cash and unused borrowing capacity, was $1.999 billion. Ashland reported $742 million of remaining capacity under its revolving facility; Valvoline had $428 million under its revolver and $50 million under its receivables facility.
- Capital expenditures were $43 million. Operating cash flow from continuing operations was reduced in part by a $156 million change in operating assets and liabilities, including seasonal payments and accrual movements.
Ashland was in compliance with debt covenants. Its consolidated leverage ratio was 3.1 against a maximum of 3.75 for the period, tightening to 3.5 beginning March 31, 2017; interest coverage was 4.4 against a 3.0 minimum. Valvoline’s ratios were 1.2 leverage against a 4.5 maximum and 13.6 interest coverage against a 3.0 minimum.
Material changes, outlook and key risks
- Debt-related unusual item: A December tender offer repurchased $182 million par value of 6.50% junior subordinated notes due 2029 for $177 million. Accelerated accretion of debt discount produced a $92 million charge, partly offset by a $5 million net gain. This was the principal reason financing expense increased sharply and also increased noncash debt-cost amortization.
- Separation costs: Valvoline separation costs were $28 million, versus $6 million a year earlier. A $10 million gain from remeasurement after discontinuing certain post-employment health and life benefits partly offset operating costs.
- Outlook: Fiscal 2017 Specialty Ingredients Adjusted EBITDA guidance remained $480–$510 million. For fiscal Q2, the company expected sales of $530–$545 million and an Adjusted EBITDA margin of 24%–25%. Fiscal 2017 Performance Materials Adjusted EBITDA guidance remained $95–$105 million; Q2 sales guidance was $230–$250 million with a 9.5%–10.5% Adjusted EBITDA margin. Management expected butanediol and related derivatives pricing to remain well below prior-year levels through the first three fiscal quarters. The filing provides no comparable segment guidance for Valvoline in the cited outlook.
- Asbestos and environmental matters: Recorded asbestos reserves totaled $724 million ($406 million Ashland and $318 million Hercules), with related insurance receivables of $212 million. The filing describes reasonably possible future costs, on inflated and undiscounted bases, of up to approximately $670 million for Ashland claims and $490 million for Hercules claims, depending on assumptions. Environmental remediation reserves were $174 million; the upper end of the reasonably possible range for identified sites was estimated at approximately $380 million.
- Other risks and contingencies: Management cited uncertainty around completing the Valvoline separation and distribution, business disruption, substantial indebtedness and restrictive covenants, market and raw-material conditions, acquisitions and divestitures, and legal and environmental proceedings. Ashland stated its operating cash flow and other resources should be sufficient to meet requirements, subject to assumptions including operating results, working capital, capital spending, pension funding and taxes.
Investor verification priorities
- Track the planned Valvoline share distribution, separation-related costs, and post-separation financial reporting and capital structure.
- Assess recurring earnings and cash generation excluding the $92 million debt-accounting charge, separation expenses and other identified items; compare GAAP results with the company’s non-GAAP Adjusted EBITDA.
- Monitor Performance Materials pricing, shutdown effects and margin recovery, and whether Specialty Ingredients meets its stated fiscal-year and Q2 targets.
- Review debt maturities—particularly $686 million scheduled for 2018—covenant headroom, and liquidity after the quarter’s substantial debt repayments and cash decline.
- Evaluate asbestos insurance recoverability and the assumptions behind asbestos and environmental reserve estimates, including the disclosed potential ranges.