Ashland Global Holdings Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing includes quarterly information, but the annual results summarized here cover the full fiscal year. Amounts are in U.S. dollars unless noted.
Business context
Ashland is a global specialty materials company serving consumer and industrial markets, with approximately 4,500 employees and customers in more than 100 countries. It reorganized from a functionally led to a business-led structure during FY2020 and recast its reporting segments: Life Sciences, Personal Care and Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents. Sales outside North America were 60% of total sales.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $2.326 billion | $2.493 billion |
| Gross profit / gross margin | $707 million / 30.4% | $767 million / 30.8% |
| Operating income (loss) | ($388) million | $166 million |
| Continuing operations income (loss) | ($491) million | $24 million |
| Net income (loss) | ($508) million | $505 million |
| Adjusted EBITDA (non-GAAP) | $528 million | $532 million |
| Operating cash flow from continuing operations | $313 million | $228 million |
| Capital expenditures / free cash flow (non-GAAP) | $138 million / $175 million | $154 million / $74 million |
Sales declined 7%, principally from weaker industrial demand associated with COVID-19, lower pricing, currency effects and plant realignment. Adjusted EBITDA was nearly flat as improved product mix, lower raw-material costs and lower selling, general and administrative expense partly offset weaker demand. Reported results included a $530 million non-cash goodwill impairment, $51 million of inventory-control charges and $67 million of debt restructuring costs. Diluted loss per share was $8.39; adjusted diluted EPS was $2.80 (non-GAAP).
Segments and material changes
- Consumer Specialties: Sales fell to $1.323 billion from $1.383 billion. Adjusted EBITDA rose to $345 million from $339 million. Life Sciences operating income increased to $123 million; Personal Care and Household recorded a $296 million operating loss, largely due to a $356 million goodwill impairment.
- Industrial Specialties: Sales declined to $899 million from $999 million. Adjusted EBITDA decreased to $214 million from $222 million. Specialty Additives recorded a $132 million operating loss, including a $174 million goodwill impairment; Performance Adhesives operating income was $56 million.
- Intermediates and Solvents: Sales declined to $129 million from $160 million; adjusted EBITDA fell to $13 million from $41 million.
- The company recorded $530 million of goodwill impairment following its reporting-unit realignment: $356 million in Personal Care and Household and $174 million in Specialty Additives. Management cited weaker growth and margins, including reduced cash-flow projections in construction and energy markets and loss of certain customers in Personal Care and Household.
- FY2019 net income included a $372 million after-tax gain from the Composites and Marl facility sale. FY2020 included a $29 million after-tax gain from the sale of the Maleic business, completed September 30, 2020 for approximately $98 million in proceeds. These businesses are reported as discontinued operations.
Liquidity, debt and capital
At September 30, 2020, cash and cash equivalents were $454 million, total debt was $1.853 billion, and working capital was $734 million. Available liquidity, including cash and unused credit capacity, was $954 million. Liquid assets were 114% of current liabilities. Operating cash flow improved year over year, supported in part by inventory reductions; inventory changes provided a $65 million cash inflow. FY2020 free cash flow of $175 million is a company-defined non-GAAP measure and included restructuring-related payments.
A January 2020 refinancing included a $600 million five-year revolving facility, a $250 million five-year term loan and €500 million of 2.00% notes due 2028. The company tendered existing notes and paid $59 million in premiums. There were no significant maturities on term loans, revolving facilities or bonds until August 2022; scheduled long-term debt maturities include $421 million in FY2022. Ashland reported compliance with debt covenants, a 2.7 net leverage ratio versus a maximum of 4.0, and interest coverage of 7.6 versus a minimum of 3.0. It paid $1.10 per share in FY2020 dividends and had $800 million remaining under its share repurchase authorization; no shares were repurchased in FY2020.
Outlook, risks and contingencies
- Cost program: Ashland targeted incremental annualized savings of $50 million in selling, general and administrative and R&D costs and $50 million in cost of goods sold productivity. It reported approximately $41 million of annualized run-rate savings achieved by September 30, 2020. Targets were to reach run rate by calendar year-end 2020 and FY2021, respectively.
- COVID-19 and demand: Management said consumer specialties proved resilient, while industrial specialties and Intermediates and Solvents faced demand pressure. Ashland reported maintaining supply-chain continuity and stated liquidity was sufficient for current operating, investing and financing needs, while emphasizing that future pandemic effects remained uncertain.
- Environmental exposure: Environmental remediation reserves were $200 million; the upper end of the reasonably possible range of future costs for identified sites was approximately $475 million. FY2020 net environmental remediation expense was $48 million.
- Asbestos exposure: Combined asbestos litigation reserves were $564 million. Management’s models estimated reasonably possible future costs as high as approximately $520 million for Ashland-related claims and $350 million for Hercules-related claims, on an inflated, undiscounted basis. Insurance recovery estimates are subject to insurer coverage and collectability assumptions.
- Other principal risks include substantial indebtedness and variable-rate exposure, raw-material volatility and ability to pass through cost increases, competition, customer concentration, international and currency risks, regulatory compliance, product liability, cyber threats, and potential further goodwill impairment. Management said raw-material supplies were expected to be adequate for FY2021, but cost volatility could continue.
- A November 2020 subsequent event: Ashland closed the sale of a Specialty Additives facility for $23 million, subject to customary adjustments; the gain was to be recorded in FY2021.
Most important facts for investors to verify
- Whether sales and segment profitability recover from COVID-related industrial demand weakness, particularly in Specialty Additives and Intermediates and Solvents.
- Whether the targeted cost savings are fully realized and translate into sustainable cash flow and margins.
- How goodwill valuations respond to future growth, margin and discount-rate assumptions after the $530 million impairment.
- Whether liquidity, covenant headroom and debt maturities remain manageable; review the refinancing terms and leverage calculations.
- Whether environmental and asbestos liabilities, insurance recoveries and related cash payments differ materially from recorded estimates.
- How much of reported free cash flow reflects sustainable operations versus working-capital movements and other temporary factors.
Controls and audit: Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.