ASHLAND INC. annual report, FY2022

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Ashland Inc. — FY2022 Form 10-K Summary

Business context and reporting period

For the fiscal year ended September 30, 2022 (not a standalone fourth-quarter report), Ashland reported as a global specialty additives and materials company serving customers in more than 100 countries. Its continuing reportable segments are Life Sciences, Personal Care, Specialty Additives and Intermediates.

Ashland completed the sale of Performance Adhesives to Arkema on February 28, 2022, for approximately $1.7 billion net of transaction costs. The business is classified as discontinued operations for all periods presented. On August 1, 2022, Ashland Global Holdings Inc. became Ashland Inc. through a legal restructuring.

Financial performance and liquidity

  • Sales: $2.391 billion, up 13% from $2.111 billion. Pricing and mix contributed $289 million to the increase, acquisition and volume effects contributed, and foreign exchange reduced sales by $77 million.
  • Profit: Gross profit was $830 million versus $670 million; gross margin improved to 34.7% from 31.7%. Operating income was $333 million versus $192 million. Continuing-operations net income was $181 million versus $173 million.
  • Reported net income: $927 million, or diluted EPS of $16.41, compared with $220 million, or $3.59, in FY2021. FY2022 included $746 million of income from discontinued operations, including a $726 million after-tax gain on the Performance Adhesives sale; reported net income therefore substantially reflects a one-time divestiture gain.
  • Adjusted EBITDA: $590 million versus $495 million, up $95 million. Management cited disciplined pricing and improved mix, partly offset by higher raw-material and operating costs, unfavorable currency and higher SG&A. Adjusted EBITDA margin was approximately 24.7% based on reported sales and adjusted EBITDA.
  • Cash flow: Cash from continuing operating activities was $193 million, down from $466 million. Capital spending was $113 million, yielding free cash flow of $80 million and ongoing free cash flow of $127 million, versus $361 million and $351 million, respectively, in FY2021. Ongoing free cash flow conversion fell to 22% from 71%. Working-capital outflows, particularly inventory, and higher cash taxes weighed on cash generation.
  • Cash and liquidity: Cash and cash equivalents were $646 million at year-end, including $230 million held by foreign subsidiaries. Available liquidity was $1.326 billion, including cash and $680 million of borrowing capacity. Restricted investments of $374 million are designated for asbestos and environmental obligations, not general corporate use.
  • Debt: Total debt was $1.270 billion, down from $1.970 billion; debt as a percentage of capital employed fell to 28% from 42%. Ashland reported a 1.1x consolidated net leverage ratio and 10.8x interest coverage under its credit agreement and compliance with covenants. No long-term debt maturities, excluding debt issuance costs, were due within four years; $4 million was due in FY2027.
  • Capital returns: Ashland paid $1.27 per share in dividends and repurchased $200 million of shares in FY2022. A new evergreen $500 million repurchase authorization replaced the prior program; the full $500 million remained available at year-end.

Material changes versus prior period

  • Sales grew $280 million year over year, mainly from pricing and mix, while FX was a significant offset. Gross margin expanded by 3.0 percentage points as pricing actions helped recover inflation-related costs.
  • Adjusted EBITDA increased across all four segments: Life Sciences to $218 million from $195 million; Personal Care to $186 million from $161 million; Specialty Additives to $185 million from $158 million; and Intermediates to $100 million from $48 million.
  • Operating cash flow from continuing operations declined by $273 million. Working-capital changes shifted from an $80 million source of cash in FY2021 to a $237 million use in FY2022, including a $141 million inventory outflow.
  • Net interest and other expense rose to $149 million from $56 million, primarily reflecting $102 million of unrealized losses on restricted investments, compared with $21 million of unrealized gains in FY2021.
  • Cash from discontinued operations was $1.252 billion, primarily reflecting sale proceeds, partly offset by operating cash outflows and $339 million of cash taxes related to the transaction.

Outlook, commentary, risks and unusual items

  • FY2023 outlook: Sales of $2.5–$2.7 billion and Adjusted EBITDA of $600–$650 million. Ashland said it could not reconcile forward-looking Adjusted EBITDA to GAAP net income without unreasonable effort.
  • Management reported resilient customer demand but said supply-chain and labor constraints limited its ability to meet demand. Ashland cited continued exposure to inflation and volatility in raw-material and energy costs, and expects such conditions may persist in FY2023.
  • The company reported no manufacturing operations in Russia, Ukraine or Belarus; sales to those countries were less than 1% of consolidated sales and assets. It cited potential broader effects from the conflict, including sanctions, supply interruptions and energy-market volatility.
  • Key risks include economic downturns, pricing pressure and inability to pass through cost increases; supply-chain, energy, severe-weather and climate-related disruptions; cyber and IT incidents; product liability and regulatory compliance; and international, currency and tax risks.
  • Environmental remediation reserves were $211 million, with the upper end of the reasonably possible future-cost range estimated at approximately $465 million. Environmental remediation expense, net of insurance receivables, was $66 million in FY2022 versus $51 million in FY2021.
  • Asbestos reserves totaled $518 million for Ashland and Hercules. The company’s models estimate reasonably possible future defense and settlement costs as high as approximately $456 million for Ashland and $317 million for Hercules; outcomes depend on uncertain long-term assumptions and insurance recoveries.
  • Other notable items included $42 million of gains from sales of excess land and a $22 million pension/postretirement remeasurement gain. Restricted investments recorded $102 million of unrealized losses. These items, the divestiture gain and environmental reserve adjustments affect comparisons of reported results.

Important facts for investors to verify

  • Review continuing-operations performance separately from discontinued operations and the $726 million after-tax Performance Adhesives sale gain.
  • Assess whether pricing and mix can continue to offset input-cost inflation, and whether supply and labor constraints ease enough to support the FY2023 outlook.
  • Track working capital, inventory levels and ongoing free cash flow conversion after the sharp FY2022 decline.
  • Evaluate the assumptions, timing and potential cash effects of environmental and asbestos liabilities, including the role and collectability of insurance recoveries.
  • Confirm that debt covenant headroom and available liquidity remain adequate, while accounting for restricted trust assets and planned capital spending, dividends and share repurchases.