Ashland(ASH) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides a comprehensive overview of Ashland Global Holdings Inc.'s financial performance and position ITEM 1. FINANCIAL STATEMENTS This section presents Ashland Global Holdings Inc.'s unaudited condensed consolidated financial statements, including the statements of comprehensive income, balance sheets, statements of equity, and cash flows, along with detailed notes explaining significant accounting policies, divestitures, restructuring activities, fair value measurements, debt, and segment information for the periods ended March 31, 2020 and 2019 Condensed Consolidated Statements of Comprehensive Income (Loss) This statement details Ashland's comprehensive income and loss, highlighting a significant net loss for the periods presented Three Months Ended March 31 (in millions) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Sales | $610 | $667 | | Gross profit | $197 | $198 | | Operating income (loss) | $(468) | $44 | | Net income (loss) | $(582) | $76 | | Basic EPS | $(9.61) | $1.21 | | Diluted EPS | $(9.61) | $1.19 | | Comprehensive income (loss) | $(634) | $67 | Six Months Ended March 31 (in millions) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Sales | $1,143 | $1,243 | | Gross profit | $350 | $350 | | Operating income (loss) | $(451) | $37 | | Net income (loss) | $(550) | $28 | | Basic EPS | $(9.08) | $0.45 | | Diluted EPS | $(9.08) | $0.45 | | Comprehensive income (loss) | $(564) | $(18) | - Ashland reported a significant net loss of $582 million for the three months ended March 31, 2020, compared to a net income of $76 million in the prior year, primarily due to a $530 million goodwill impairment charge[3] Condensed Consolidated Balance Sheets This section presents Ashland's financial position, showing assets, liabilities, and equity as of March 31, 2020, and September 30, 2019 As of March 31, 2020 vs. September 30, 2019 (in millions) | Asset/Liability Category | March 31, 2020 | September 30, 2019 | | :----------------------- | :------------- | :----------------- | | Assets: | | | | Total current assets | $1,645 | $1,433 | | Total noncurrent assets | $5,323 | $5,818 | | Total assets | $6,968 | $7,251 | | Liabilities & Equity: | | | | Total current liabilities | $972 | $757 | | Total noncurrent liabilities | $3,013 | $2,923 | | Stockholders' equity | $2,983 | $3,571 | | Total liabilities and stockholders' equity | $6,968 | $7,251 | - Total assets decreased from $7,251 million to $6,968 million, and stockholders' equity decreased from $3,571 million to $2,983 million, primarily driven by the net loss and goodwill impairment[6] Statements of Consolidated Equity This statement tracks changes in stockholders' equity, including net income, other comprehensive income, dividends, and stock transactions Six Months Ended March 31, 2020 (in millions) | Equity Component | Balance at Sep 30, 2019 | Net Income (Loss) | Other Comprehensive Income (Loss) | Dividends | Stock Issued | Balance at Mar 31, 2020 | | :--------------- | :---------------------- | :---------------- | :-------------------------------- | :-------- | :----------- | :---------------------- | | Common stock | $1 | — | — | — | — | $1 | | Paid-in capital | $756 | — | — | — | $9 | $765 | | Retained earnings | $3,224 | $(550) | — | $(33) | — | $2,641 | | Accumulated other comprehensive income (loss) | $(410) | — | $(14) | — | — | $(424) | | Total | $3,571 | $(550) | $(14) | $(33) | $9 | $2,983 | - Total stockholders' equity decreased by $588 million from September 30, 2019, to March 31, 2020, primarily due to a net loss of $550 million and regular dividends of $33 million[8][351] Statements of Condensed Consolidated Cash Flows This statement summarizes cash inflows and outflows from operating, investing, and financing activities for the periods presented Six Months Ended March 31 (in millions) | Cash Flow Activity | 2020 | 2019 | | :----------------- | :--- | :--- | | Operating activities from continuing operations | $13 | $6 | | Investing activities from continuing operations | $(49) | $(49) | | Financing activities from continuing operations | $234 | $(36) | | Discontinued operations | $(78) | $(49) | | Effect of currency exchange rate changes | $1 | $(2) | | Net increase (decrease) in cash and cash equivalents | $121 | $(130) | | Cash and cash equivalents - End of period | $353 | $164 | - Cash and cash equivalents increased by $121 million in the six months ended March 31, 2020, primarily driven by $234 million in financing activities from continuing operations, largely due to debt refinancing[11][326][327] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for significant accounting policies and financial statement line items NOTE A – SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited condensed consolidated financial statements, emphasizing compliance with U.S. GAAP and SEC regulations. It details the reclassification of certain prior period information, the strategic shift to a business-led organization with five new reportable segments, and the significant estimates and assumptions used in financial reporting. Key accounting pronouncements adopted include new lease guidance, which resulted in the recognition of $174 million in right-of-use assets and operating lease liabilities - Ashland realigned its segment reporting structure in Q2 fiscal 2020, moving from a functionally led to a business-led organization, resulting in five new reportable segments: Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents[15][16] - Effective October 1, 2019, Ashland adopted new lease accounting guidance, recognizing $174 million in right-of-use assets and operating lease liabilities, with no material impact on results of operations, cash flows, or debt covenants[21] - The preparation of financial statements involves significant estimates and assumptions, particularly for long-lived assets (including goodwill and other intangibles), income taxes, and liabilities/receivables related to asbestos litigation and environmental remediation[17] NOTE B – DIVESTITURES Ashland completed the sale of its Composites business and Marl facility on August 30, 2019, for $1.015 billion, classifying these operations as discontinued. The Maleic business, though not sold, is held for sale and continues to be reported under discontinued operations. Ashland also provides transition services to the buyer, generating fee income - Ashland completed the sale of its Composites business (excluding Maleic business) and Marl facility on August 30, 2019, for $1.015 billion, classifying them as discontinued operations[27] - The Maleic business, part of the Composites disposal group, is classified as held for sale, with assets and liabilities totaling $64 million and $5 million, respectively, as of March 31, 2020[30] - Transition service fee income of $3 million and $6 million was recognized for the three and six months ended March 31, 2020, respectively, from services provided to the buyer[29] NOTE C – DISCONTINUED OPERATIONS This note details the financial results of divested businesses classified as discontinued operations, including Composites/Marl facility, Valvoline, Asbestos, Water Technologies, and Distribution. For the six months ended March 31, 2020, discontinued operations resulted in a net loss of $9 million, a significant decrease from a $54 million income in the prior year, primarily due to the sale of Composites/Marl facility and asbestos-related losses Income (loss) from discontinued operations (net of tax) (in millions) | Category | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Composites/Marl facility | $4 | $28 | $4 | $53 | | Valvoline | $0 | $1 | $(1) | $1 | | Asbestos | $(7) | $0 | $(7) | $0 | | Water Technologies | $0 | $2 | $(1) | $1 | | Distribution | $(2) | $0 | $(2) | $(1) | | Gain (loss) on disposal of discontinued operations (net of taxes) - Composites/Marl facility | $(2) | $0 | $(2) | $0 | | Total | $(7) | $31 | $(9) | $54 | - The Maleic business, although not sold to INEOS, continues to be reported in discontinued operations as it meets the held for sale criteria, contributing $17 million in sales and $5 million in pretax operating income for the three months ended March 31, 2020[33][34] NOTE D – RESTRUCTURING ACTIVITIES Ashland implemented company-wide restructuring programs, including a fiscal 2018 program for severance and facility costs, and a fiscal 2019 plant restructuring. In fiscal 2020, new severance expenses of $14 million and $17 million were incurred for the three and six months ended March 31, respectively, due to executive and business management changes. Total restructuring reserves stood at $7 million as of March 31, 2020 - Ashland incurred $14 million and $17 million in severance expense for the three and six months ended March 31, 2020, respectively, related to executive and business management changes[42] Restructuring Reserves (in millions) | Category | Balance at Sep 30, 2019 | Utilization (cash paid) | Balance at Mar 31, 2020 | | :--------------- | :---------------------- | :---------------------- | :---------------------- | | Severance costs | $7 | $(6) | $1 | | Facility costs | $7 | $(1) | $6 | | Total | $14 | $(7) | $7 | - The fiscal 2019 plant restructuring within Specialty Additives resulted in charges of $20 million and $47 million for the three and six months ended March 31, 2019, respectively, primarily from accelerated depreciation and amortization[40] NOTE E – FAIR VALUE MEASUREMENTS This note details Ashland's fair value measurements for financial instruments, categorizing them into Level 1, 2, or 3 based on observability of inputs. As of March 31, 2020, total assets at fair value were $667 million, primarily in cash, restricted investments, and foreign currency derivatives. Restricted investments, mainly in equity and fixed income mutual funds, had a fair value of $301 million, experiencing a net unrealized loss of $32 million for the three months ended March 31, 2020 Financial Instruments Subject to Recurring Fair Value Measurements (March 31, 2020, in millions) | Asset/Liability | Carrying Value | Total Fair Value | Level 1 | Level 2 | Level 3 | | :-------------- | :------------- | :--------------- | :------ | :------ | :------ | | Cash and cash equivalents | $353 | $353 | $353 | $0 | $0 | | Restricted investments | $301 | $301 | $301 | $0 | $0 | | Investment of captive insurance company | $7 | $7 | $7 | $0 | $0 | | Foreign currency derivatives (assets) | $6 | $6 | $0 | $6 | $0 | | Total assets at fair value | $667 | $667 | $661 | $6 | $0 | | Foreign currency derivatives (liabilities) | $5 | $5 | $0 | $5 | $0 | Restricted Investment Activity (in millions) | Metric | Three Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2020 | | :-------------------------- | :------------------------------ | :---------------------------- | | Investment income | $3 | $7 | | Net gains (losses) unrealized | $(32) | $(23) | | Disbursements | $(9) | $(19) | - Ashland uses foreign currency derivative instruments to manage exposure, with net gains of $3 million and $4 million for the three and six months ended March 31, 2020, respectively[58][59] NOTE F – INVENTORIES Ashland's inventories are valued at the lower of cost or net realizable value, primarily using the weighted-average cost method, with some inventories using the last-in, first-out (LIFO) method. As of March 31, 2020, total inventories amounted to $611 million, an increase from $597 million at September 30, 2019, mainly driven by finished products Inventories (in millions) | Category | March 31, 2020 | September 30, 2019 | | :-------------------------- | :------------- | :----------------- | | Finished products | $420 | $400 | | Raw materials, supplies and work in process | $191 | $197 | | Total | $611 | $597 | - Inventories are primarily stated at cost using the weighted-average cost method, with certain inventories valued using the LIFO method[62] NOTE G – GOODWILL AND OTHER INTANGIBLES Ashland conducts annual impairment tests for goodwill and indefinite-lived intangible assets. Following a business realignment in Q2 fiscal 2020, a goodwill impairment test resulted in a $530 million non-cash charge, primarily impacting the Personal Care & Household ($356 million) and Specialty Additives ($174 million) segments due to lower growth and margins. Total goodwill decreased to $1,723 million as of March 31, 2020. No impairment was indicated for indefinite-lived intangible assets - A non-cash goodwill impairment charge of $530 million was recorded for the three and six months ended March 31, 2020, following a business realignment and reassessment of reporting units[68] Goodwill Progression by Reportable Segment (Six Months Ended March 31, 2020, in millions) | Segment | Balance at Sep 30, 2019 | Impairment | Currency Translation | Balance at Mar 31, 2020 | | :---------------------- | :---------------------- | :--------- | :------------------- | :---------------------- | | Life Sciences | $836 | $0 | $(1) | $835 | | Personal Care & Household | $355 | $(356) | $1 | $0 | | Specialty Additives | $609 | $(174) | $0 | $435 | | Performance Adhesives | $453 | $0 | $0 | $453 | | Intermediates and Solvents | $0 | $0 | $0 | $0 | | Total | $2,253 | $(530) | $0 | $1,723 | - The impairment was largely due to lower growth and margins in the Personal Care & Household (Oral Care and Avoca businesses) and Specialty Additives (global construction and energy markets) reporting units[68] NOTE H – DEBT Ashland's total debt increased to $2,006 million at March 31, 2020, from $1,667 million at September 30, 2019, driven by refinancing activities. In January 2020, Ashland entered into a new $600 million revolving credit facility and a $250 million term loan, and issued €500 million (approx. $551 million) senior unsecured notes due 2028. Proceeds were used to repurchase existing notes, resulting in $59 million of debt refinancing costs and $8 million in accelerated debt issuance costs. Ashland remains in compliance with all debt covenants, with a consolidated net leverage ratio of 3.1 and an interest coverage ratio of 7.7 Debt Summary (in millions) | Debt Type | March 31, 2020 | September 30, 2019 | | :------------------------------------------ | :------------- | :----------------- | | 4.750% notes, due 2022 | $410 | $1,080 | | 2.00% Senior Notes, due 2028 (Euro 500 million) | $551 | $0 | | 6.875% notes, due 2043 | $282 | $374 | | Term loan A, due 2025 | $250 | $0 | | Accounts receivable securitizations | $209 | $144 | | Revolving credit facility | $240 | $0 | | Other | $10 | $15 | | Total debt | $2,006 | $1,667 | | Short-term debt | $(471) | $(166) | | Long-term debt (less current portion) | $1,535 | $1,501 | - Ashland incurred $59 million in debt refinancing costs and $8 million in accelerated debt issuance costs during the current quarter due to new credit agreements and note issuances[81][83][84][85][87] - As of March 31, 2020, Ashland's consolidated net leverage ratio was 3.1 (max 4.0) and consolidated interest coverage ratio was 7.7 (min 3.0), indicating compliance with debt covenants[90] NOTE I – LEASING ARRANGEMENTS This note provides specific details regarding Leasing Arrangements Lease Assets and Liabilities (March 31, 2020, in millions) | Category | Amount | | :---------------------------- | :----- | | Operating lease assets, net | $144 | | Current operating lease obligations | $23 | | Non-current operating lease obligations | $131 | | Total lease liabilities | $154 | Total Lease Cost (in millions) | Period | Three Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2020 | | :----- | :------------------------------ | :---------------------------- | | Total lease cost | $12 | $23 | | Operating cash flows from operating leases | $5 | $14 | - The weighted average remaining lease term for operating leases is 15 years, and the weighted average discount rate used is 3.2%[93][94] NOTE J – INCOME TAXES This note provides specific details regarding Income Taxes Income Tax Expense (Benefit) and Effective Tax Rate | Period | Income Tax Expense (Benefit) (in millions) | Effective Tax Rate | | :-------------------------- | :--------------------------------------- | :----------------- | | Three months ended Mar 31, 2020 | $(10) | 2% | | Three months ended Mar 31, 2019 | $1 | 2% | | Six months ended Mar 31, 2020 | $(34) | 6% | | Six months ended Mar 31, 2019 | $25 | (2500)% | - The current period's effective tax rate was significantly impacted by a $527 million nondeductible goodwill impairment and a $25 million favorable tax discrete item from the Swiss Tax Reform[100][235] Unrecognized Tax Benefits (in millions) | Activity | Amount | | :------------------------------------------------- | :----- | | Balance at October 1, 2019 | $165 | | Increases related to positions taken from prior years | $2 | | Decreases related to positions taken from prior years | $(1) | | Increases related to positions taken in the current year | $3 | | Lapse of statute of limitations | $(2) | | Balance at March 31, 2020 | $167 | NOTE K - EMPLOYEE BENEFIT PLANS This note provides specific details regarding Employee Benefit Plans - Ashland contributed $3 million to its non-U.S. pension plans for the six months ended March 31, 2020, and anticipates an additional $3 million in contributions for the remainder of 2020[105] Total Net Periodic Benefit Costs (Income) for Continuing Operations (Six Months Ended March 31, in millions) | Component | Pension Benefits (2020) | Pension Benefits (2019) | Other Postretirement Benefits (2020) | Other Postretirement Benefits (2019) | | :-------------------------- | :---------------------- | :---------------------- | :----------------------------------- | :----------------------------------- | | Service cost | $2 | $3 | $0 | $0 | | Interest cost | $3 | $5 | $1 | $1 | | Expected return on plan assets | $(4) | $(5) | $0 | $0 | | Curtailment | $0 | $(18) | $0 | $0 | | Total net periodic benefit costs (income) | $1 | $(15) | $1 | $1 | NOTE L – LITIGATION, CLAIMS AND CONTINGENCIES This note provides specific details regarding Litigation, Claims and Contingencies - Ashland's asbestos-related litigation stems from indemnification obligations related to the 1990 sale of Riley Stoker Corporation and the 2008 acquisition of Hercules[109][111] Asbestos Reserves (in millions) | Entity | March 31, 2020 | September 30, 2019 | | :------- | :------------- | :----------------- | | Ashland | $337 | $352 | | Hercules | $242 | $252 | | Total | $579 | $604 | - It is reasonably possible that total future litigation defense and claim settlement costs could range as high as $600 million for Ashland asbestos-related litigation and $450 million for Hercules asbestos-related litigation[131] Environmental Remediation Reserves (in millions) | Metric | March 31, 2020 | September 30, 2019 | | :-------------------------- | :------------- | :----------------- | | Environmental remediation reserves | $178 | $186 | | Probable insurance recoveries | $14 | $13 | | Net reserve | $164 | $173 | - The upper end of the reasonably possible range of future environmental remediation costs for identified sites could be as high as approximately $425 million[138] NOTE M – EARNINGS PER SHARE This note provides specific details regarding Earnings Per Share Basic and Diluted EPS from Continuing Operations | Period | Basic EPS (2020) | Basic EPS (2019) | Diluted EPS (2020) | Diluted EPS (2019) | | :-------------------------- | :--------------- | :--------------- | :----------------- | :----------------- | | Three months ended Mar 31 | $(9.48) | $0.72 | $(9.48) | $0.71 | | Six months ended Mar 31 | $(8.93) | $(0.41) | $(8.93) | $(0.41) | - The loss from continuing operations for the three and six months ended March 31, 2020, resulted in share-based awards being antidilutive and thus excluded from diluted EPS calculations[141][142] NOTE N – EQUITY ITEMS This note provides specific details regarding Equity Items - Total stockholders' equity decreased by $588 million from September 30, 2019, to March 31, 2020, primarily due to a net loss of $550 million, $33 million in regular dividends, and a $14 million unrealized translation loss[351][148] Cash Dividends Declared Per Common Share | Period | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Three months ended Mar 31 | $0.275 | $0.250 | | Six months ended Mar 31 | $0.550 | $0.500 | Other Comprehensive Income (Loss), Net of Tax (in millions) | Component | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Unrealized translation gain (loss) | $(52) | $(9) | $(14) | $(40) | | Pension and postretirement obligation adjustment | $0 | $0 | $0 | $(6) | | Total | $(52) | $(9) | $(14) | $(46) | NOTE O – STOCK INCENTIVE PLANS This note provides specific details regarding Stock Incentive Plans Pre-Tax Stock-Based Compensation Expense (in millions) | Component | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | SARs | $1 | $2 | $3 | $4 | | Nonvested stock awards | $3 | $6 | $5 | $10 | | Performance share awards | $0 | $2 | $1 | $2 | | Total | $4 | $10 | $9 | $16 | NOTE P – REVENUE This note provides specific details regarding Revenue - Revenue is recognized when control of the product or service is transferred to the customer, generally upon shipment or delivery[151][152] - Trade receivables from contracts with customers were $458 million as of March 31, 2020, an increase from $435 million at September 30, 2019[154] Sales by Geography (in millions) | Segment | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Life Sciences - North America | $59 | $67 | $108 | $126 | | Life Sciences - Europe | $63 | $61 | $112 | $110 | | Life Sciences - Asia Pacific | $43 | $48 | $85 | $95 | | Personal Care & Household - North America | $50 | $48 | $91 | $91 | | Personal Care & Household - Europe | $69 | $86 | $124 | $149 | | Specialty Additives - North America | $53 | $57 | $98 | $105 | | Performance Adhesives - North America | $73 | $75 | $137 | $144 | | Intermediates and Solvents - North America | $23 | $29 | $37 | $50 | NOTE Q – REPORTABLE SEGMENT INFORMATION This note provides specific details regarding Reportable Segment Information - Ashland's five reportable segments are Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents, with Corporate covering governance and legacy matters[162] Sales by Reportable Segment (in millions) | Segment | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Life Sciences | $184 | $196 | $340 | $366 | | Personal Care & Household | $159 | $183 | $296 | $337 | | Specialty Additives | $155 | $169 | $294 | $316 | | Performance Adhesives | $85 | $89 | $159 | $171 | | Intermediates and Solvents | $37 | $44 | $64 | $77 | | Total Sales | $610 | $667 | $1,143 | $1,243 | Operating Income (Loss) by Reportable Segment (in millions) | Segment | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Life Sciences | $36 | $33 | $58 | $56 | | Personal Care & Household | $(336) | $25 | $(326) | $42 | | Specialty Additives | $(161) | $(2) | $(152) | $(24) | | Performance Adhesives | $16 | $17 | $27 | $26 | | Intermediates and Solvents | $(2) | $9 | $(14) | $11 | | Unallocated and other | $(21) | $(38) | $(44) | $(74) | | Total Operating Income (Loss) | $(468) | $44 | $(451) | $37 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on Ashland's financial performance, condition, and operational results BUSINESS OVERVIEW Ashland is a global leader in specialty materials for consumer and industrial markets, serving over 100 countries with 60% of sales generated outside North America. The company recently reorganized into a business-led structure with five reportable segments: Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents - Ashland is a global leader in specialty materials, with approximately 4,700 employees serving customers in over 100 countries[180] Sales by Geography (Percentage of Total Consolidated Sales) | Geography | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | North America | 40% | 39% | 40% | 39% | | Europe | 35% | 34% | 33% | 33% | | Asia Pacific | 17% | 18% | 19% | 19% | | Latin America & other | 8% | 9% | 8% | 9% | - The company's five reportable segments are Life Sciences, Personal Care & Household, Specialty Additives, Performance Adhesives, and Intermediates and Solvents, reflecting a shift to a business-led organization[182] Ashland profile This profile outlines Ashland's global presence and strategic focus as a specialty materials leader Reportable segments This section details Ashland's five business-led reportable segments, reflecting its recent organizational realignment KEY DEVELOPMENTS Ashland reported a net loss of $582 million for the current quarter, primarily due to a $530 million non-cash goodwill impairment charge and debt restructuring costs. Despite global uncertainties, the COVID-19 pandemic has not significantly impacted Ashland's operations or cash flows to date, and liquidity remains sufficient, though the long-term impact remains unpredictable - Ashland recorded a net loss of $582 million for the current quarter, driven by a $530 million non-cash goodwill impairment charge and $67 million in debt restructuring costs[184] - Adjusted EBITDA remained flat at $142 million for the current quarter, with lower sales volumes offset by reduced selling, general, and administrative expenses[184] - The COVID-19 pandemic has not significantly impacted Ashland's operations or cash flows for the three and six months ended March 31, 2020, and the company's liquidity remains sufficient[185][186] Business results This section summarizes Ashland's key financial outcomes, including the significant net loss and adjusted EBITDA for the period Uncertainty relating to the COVID-19 pandemic This section addresses the potential and unpredictable impacts of the COVID-19 pandemic on Ashland's operations and financial stability RESULTS OF OPERATIONS – CONSOLIDATED REVIEW Ashland experienced a significant net loss of $582 million for the three months and $550 million for the six months ended March 31, 2020, primarily due to a $530 million goodwill impairment charge and increased net interest and other expenses from debt refinancing. Sales decreased by $57 million and $100 million for the three and six months, respectively, driven by unfavorable volume, plant realignment, currency exchange, and pricing. Despite these challenges, Adjusted EBITDA remained flat at $142 million for the quarter, reflecting cost reduction efforts Net income This section analyzes the drivers behind Ashland's net income (loss), including the goodwill impairment and debt refinancing costs - Ashland reported a net loss of $582 million (diluted EPS of $(9.61)) for the three months ended March 31, 2020, compared to a net income of $76 million (diluted EPS of $1.19) in the prior year[188] - The loss from continuing operations for the three months ended March 31, 2020, was $575 million, primarily due to a $530 million goodwill impairment charge[190][191] - Net interest and other expense increased to $117 million for the three months ended March 31, 2020, from an income of $3 million in the prior year, including $59 million for debt refinancing and $8 million for accelerated debt issuance costs[192] Operating income This section examines the factors influencing Ashland's operating income, particularly the impact of the goodwill impairment charge - Operating income for the three months ended March 31, 2020, was a loss of $468 million, compared to an income of $44 million in the prior year, primarily due to the $530 million goodwill impairment charge[200] - Key items affecting operating income included the goodwill impairment, restructuring, separation and other costs, accelerated depreciation, proxy costs, and inventory adjustments[200][201][202][203] - Depreciation and amortization for continuing operations were $61 million and $122 million for the three and six months ended March 31, 2020, respectively[204][210] Non-operating key items affecting EBITDA This section identifies specific non-operating items that influenced Ashland's EBITDA, such as pension remeasurements and divestiture losses - Non-operating key items affecting EBITDA included a gain on pension and other postretirement plan remeasurements in the prior year and net loss on divestitures[210][211] Statements of Consolidated Comprehensive Income (Loss) – caption review This review provides a detailed breakdown of changes in sales, costs, expenses, and other comprehensive income components Sales Change (in millions) | Driver | Three Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2020 | | :-------------------------- | :------------------------------ | :---------------------------- | | Volume | $(35) | $(64) | | Plant realignment | $(8) | $(14) | | Currency exchange | $(7) | $(11) | | Pricing | $(7) | $(11) | | Total Change in Sales | $(57) | $(100) | Cost of Sales Change (in millions) | Driver | Three Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2020 | | :-------------------------- | :------------------------------ | :---------------------------- | | Plant realignment/closure costs | $(27) | $(61) | | Volume | $(23) | $(41) | | Currency exchange | $(3) | $(6) | | Operating costs | $(4) | $4 | | Price/mix | $1 | $4 | | Total Change in Cost of Sales | $(56) | $(100) | - Selling, general and administrative expense decreased by $12 million for the three months and $34 million for the six months ended March 31, 2020, due to cost savings initiatives and favorable currency exchange[219][220] - Net interest and other expense increased by $120 million for the three months and $75 million for the six months ended March 31, 2020, primarily due to debt refinancing costs ($59 million) and losses on restricted investments ($29 million for three months, $16 million for six months)[229][230] - Income tax expense was a benefit of $10 million for the three months and $34 million for the six months ended March 31, 2020, significantly impacted by the nondeductible goodwill impairment and a favorable tax benefit from Swiss Tax Reform[233][235] - Discontinued operations resulted in a net loss of $7 million for the three months and $9 million for the six months ended March 31, 2020, compared to income of $31 million and $54 million in the prior year periods, mainly due to the Composites/Marl facility divestiture and asbestos-related losses[242][244] - Other comprehensive income (loss) for the three months ended March 31, 2020, was a loss of $52 million, primarily due to unrealized foreign currency translation losses[246] Use of non-GAAP measures This section discusses Ashland's use of non-GAAP financial measures to provide a clearer understanding of its ongoing operating performance and comparability between periods - Ashland uses non-GAAP measures like EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted diluted EPS, and Free cash flow to provide a clearer understanding of ongoing operating performance and comparability between periods[250][251][252][253][254] - These non-GAAP measures exclude items causing short-term fluctuations, such as depreciation, amortization, non-cash charges, interest, taxes, and certain other variable charges, to reflect fundamental business attributes[254] - Free cash flow is used to indicate cash available for debt and equity holders and investments, but it does not reflect mandatory debt repayments[257] EBITDA and Adjusted EBITDA This section reconciles net income to EBITDA and Adjusted EBITDA, highlighting the impact of key non-recurring items EBITDA and Adjusted EBITDA (in millions) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net income (loss) | $(582) | $76 | $(550) | $28 | | Income tax expense (benefit) | $(10) | $1 | $(34) | $25 | | Net interest and other expense | $117 | $(3) | $127 | $52 | | Depreciation and amortization | $61 | $62 | $122 | $124 | | EBITDA | $(414) | $136 | $(335) | $229 | | Loss (income) from discontinued operations | $7 | $(31) | $9 | $(54) | | Key items included in EBITDA | $549 | $37 | $556 | $67 | | Adjusted EBITDA | $142 | $142 | $230 | $242 | - Adjusted EBITDA remained flat at $142 million for the three months ended March 31, 2020, compared to the prior year, despite a significant decrease in reported EBITDA due to key items like goodwill impairment[261] - Key items totaling $549 million for the three months ended March 31, 2020, included $530 million goodwill impairment, $15 million restructuring costs, and $4 million inventory adjustment[261] Diluted EPS and Adjusted Diluted EPS This section presents diluted and adjusted diluted EPS, illustrating the effect of significant non-GAAP adjustments on per-share earnings Diluted EPS and Adjusted Diluted EPS from Continuing Operations | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :------------------------------------------------------------------------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Diluted EPS from continuing operations (as reported) | $(9.48) | $0.71 | $(8.93) | $(0.41) | | Key items, before tax | $10.67 | $0.16 | $10.64 | $1.10 | | Tax effect of key items | $(0.35) | $0.04 | $(0.33) | $(0.08) | | Tax specific key items | $0 | $(0.08) | $(0.41) | $0.36 | | Adjusted diluted EPS from continuing operations (non-GAAP) | $0.84 | $0.83 | $0.97 | $0.97 | | Amortization expense adjustment (net of tax) | $0.28 | $0.25 | $0.56 | $0.51 | | Adjusted diluted EPS from continuing operations (non-GAAP) excluding intangibles amortization expense | $1.12 | $1.08 | $1.53 | $1.48 | - Adjusted diluted EPS from continuing operations (non-GAAP) was $0.84 for the three months and $0.97 for the six months ended March 31, 2020, showing stability after excluding significant key items[264] - The key items, before tax, for the three months ended March 31, 2020, totaled $10.67 per share, primarily driven by goodwill impairment ($8.75) and debt refinancing costs ($0.97)[264] RESULTS OF OPERATIONS – REPORTABLE SEGMENT REVIEW Ashland's reportable segments were realigned in Q2 fiscal 2020. Consumer Specialties saw sales decrease by $36 million for the quarter, with Personal Care & Household experiencing a $336 million operating loss due to goodwill impairment. Industrial Specialties' sales decreased by $18 million, with Specialty Additives recording a $161 million operating loss from goodwill impairment. Intermediates and Solvents' sales decreased by $7 million, resulting in an $11 million decrease in operating income. Unallocated and other expenses decreased due to lower restructuring and stranded divestiture costs Consumer Specialties This segment review details the sales and operating income performance of Life Sciences and Personal Care & Household, including the impact of goodwill impairment - Consumer Specialties' sales decreased by $36 million to $343 million for the three months ended March 31, 2020, with Personal Care & Household and Life Sciences contributing $24 million and $12 million to the decrease, respectively[275] - Operating income for Consumer Specialties decreased by $358 million to a loss of $300 million for the current quarter, primarily due to a $336 million loss in Personal Care & Household from goodwill impairment[276] - Adjusted EBITDA for Consumer Specialties decreased $1 million to $91 million for the three months ended March 31, 2020, with Life Sciences contributing $52 million and Personal Care & Household contributing $39 million[276][283] Life Sciences This section provides a detailed review of the Life Sciences segment's financial performance Personal Care & Household This section provides a detailed review of the Personal Care & Household segment's financial performance, including goodwill impairment March 2020 quarter compared to March 2019 quarter (Consumer Specialties) This section compares Consumer Specialties' performance for the three months ended March 31, 2020, against the prior year Fiscal 2020 year-to-date compared to fiscal 2019 year-to-date (Consumer Specialties) This section compares Consumer Specialties' year-to-date performance for fiscal 2020 against fiscal 2019 EBITDA and Adjusted EBITDA reconciliation (Consumer Specialties) This reconciliation details the EBITDA and Adjusted EBITDA for the Consumer Specialties segment Industrial Specialties This segment review covers the sales and operating income performance of Specialty Additives and Performance Adhesives, including goodwill impairment - Industrial Specialties' sales decreased by $18 million to $240 million for the three months ended March 31, 2020, with Specialty Additives and Performance Adhesives contributing $14 million and $4 million to the decrease, respectively[288] - Operating income for Industrial Specialties decreased by $160 million to a loss of $145 million for the current quarter, primarily due to a $161 million loss in Specialty Additives from goodwill impairment[289] - Adjusted EBITDA for Industrial Specialties decreased $6 million to $53 million for the three months ended March 31, 2020, with Specialty Additives contributing $33 million and Performance Adhesives contributing $20 million[289][294] Specialty Additives This section provides a detailed review of the Specialty Additives segment's financial performance, including goodwill impairment Performance Adhesives This section provides a detailed review of the Performance Adhesives segment's financial performance March 2020 quarter compared to March 2019 quarter (Industrial Specialties) This section compares Industrial Specialties' performance for the three months ended March 31, 2020, against the prior year Fiscal 2020 year-to-date compared to fiscal 2019 year-to-date (Industrial Specialties) This section compares Industrial Specialties' year-to-date performance for fiscal 2020 against fiscal 2019 EBITDA and Adjusted EBITDA reconciliation (Industrial Specialties) This reconciliation details the EBITDA and Adjusted EBITDA for the Industrial Specialties segment Intermediates and Solvents This segment review analyzes the sales and operating income performance of the Intermediates and Solvents segment - Intermediates and Solvents' sales decreased by $7 million to $37 million for the three months ended March 31, 2020, due to lower volume and pricing[296] - Operating income for Intermediates and Solvents decreased by $11 million to a loss of $2 million for the current quarter, impacted by unfavorable price/mix, costs, and inventory adjustments[298] - Adjusted EBITDA for Intermediates and Solvents decreased $7 million to $5 million for the three months ended March 31, 2020[298][301] March 2020 quarter compared to March 2019 quarter (Intermediates and Solvents) This section compares Intermediates and Solvents' performance for the three months ended March 31, 2020, against the prior year Fiscal 2020 year-to-date compared to fiscal 2019 year-to-date (Intermediates and Solvents) This section compares Intermediates and Solvents' year-to-date performance for fiscal 2020 against fiscal 2019 EBITDA and Adjusted EBITDA reconciliation (Intermediates and Solvents) This reconciliation details the EBITDA and Adjusted EBITDA for the Intermediates and Solvents segment Unallocated and other This section details unallocated corporate expenses and other items not attributable to specific operating segments Unallocated and Other Segment's Operating Income (Loss) (in millions) | Expense Category | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Restructuring activities | $(14) | $(24) | $(22) | $(53) | | Environmental expenses | $(5) | $(4) | $(8) | $(6) | | Proxy costs | $0 | $(5) | $0 | $(5) | | Other expenses (governance and legacy) | $(2) | $(5) | $(14) | $(10) | | Total expense | $(21) | $(38) | $(44) | $(74) | - Unallocated and other expenses decreased to $21 million for the three months and $44 million for the six months ended March 31, 2020, primarily due to lower restructuring activities and reduced stranded divestiture costs[304][306] March 2020 quarter compared to March 2019 quarter (Unallocated and other) This section compares unallocated and other expenses for the three months ended March 31, 2020, against the prior year Fiscal 2020 year-to-date compared to fiscal 2019 year-to-date (Unallocated and other) This section compares unallocated and other expenses year-to-date for fiscal 2020 against fiscal 2019 FINANCIAL POSITION Ashland's liquidity remains strong with $353 million in cash and cash equivalents and $339 million in unused borrowing capacity as of March 31, 2020. Operating cash flows from continuing operations were $13 million for the six months ended March 31, 2020, while financing activities provided $234 million, largely from debt refinancing. Total debt increased to $2,006 million, but the company remains in compliance with all debt covenants. Total equity decreased by $588 million due to net loss and dividends Liquidity This section assesses Ashland's cash position, borrowing capacity, and overall ability to meet short-term obligations - Ashland held $353 million in cash and cash equivalents as of March 31, 2020, with $160 million held by foreign subsidiaries[308] - The company renewed its revolving credit agreement and issued new senior notes in January 2020, accessing $240 million from the revolving credit facility[309] - Total remaining borrowing capacity was $339 million as of March 31, 2020, with no major loan maturities until 2022[309] Operating activities This section details cash flows generated or used by Ashland's core business operations, including changes in working capital - Cash flows provided by operating activities from continuing operations amounted to $13 million for the six months ended March 31, 2020, compared to $6 million in the prior year[314] - Changes in operating assets and liabilities resulted in outflows of $163 million for the six months ended March 31, 2020, primarily driven by accounts receivable ($19 million outflow), inventory ($15 million outflow), and trade and other payables ($83 million outflow)[317][318] - Operating cash flows for the current year period included a $541 million loss from continuing operations, offset by non-cash adjustments such as $530 million goodwill impairment and $122 million depreciation and amortization[320] Investing activities This section outlines cash flows related to Ashland's investments in property, plant, equipment, and other strategic assets - Cash used by investing activities from continuing operations was $49 million for both the six months ended March 31, 2020, and 2019[325] - Significant investing activities included $66 million for property additions and $19 million in reimbursements from the restricted asbestos trust for the current period[325] Financing activities This section describes cash flows from debt, equity, and dividend transactions, including the impact of recent debt refinancing - Cash flows provided by financing activities from continuing operations resulted in an inflow of $234 million for the six months ended March 31, 2020, compared to an outflow of $36 million in the prior year[326] - This inflow was driven by $804 million from long-term debt issuance, partially offset by $767 million in long-term debt repayment, $59 million in premiums on debt repayment, and $11 million in debt issuance costs, all related to debt refinancing[327] - Cash dividends paid totaled $33 million ($0.550 per share) for the current period[327] - Cash flows for discontinued operations resulted in a $78 million outflow for the current period, primarily due to payments of asbestos, environmental liabilities, and tax payments associated with the Composites divestiture[330] Free cash flow and other liquidity resources This section analyzes Ashland's free cash flow and other available liquidity resources, including working capital and borrowing capacity Free Cash Flow (in millions) | Metric | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :-------------------------------------------------------------------------------- | :------------------------------ | :------------------------------ | | Total cash flows provided by operating activities from continuing operations | $13 | $6 | | Additions to property, plant and equipment | $(66) | $(70) | | Free cash flows | $(53) | $(64) | - Working capital amounted to $673 million as of March 31, 2020, and liquid assets represented 88% of current liabilities (excluding current liabilities held for sale)[334] - Ashland's total available liquidity position, including cash and unused borrowing capacity, was $692 million at March 31, 2020, down from $1,032 million at September 30, 2019[338] Capital resources This section details Ashland's debt structure and its impact on capital employed, providing an overview of its financial leverage Debt Summary (in millions) | Debt Type | March 31, 2020 | September 30, 2019 | | :------------------------------------------------------------------- | :------------- | :----------------- | | Short-term debt (includes current portion of long-term debt) | $471 | $166 | | Long-term debt (less current portion and debt issuance cost discounts) | $1,535 | $1,501 | | Total debt | $2,006 | $1,667 | - Debt as a percent of capital employed was 40% at March 31, 2020, up from 32% at September 30, 2019[342] Ashland credit ratings This section provides an overview of Ashland's corporate credit ratings from major agencies and their outlooks - Ashland's corporate credit rating is BB+ with Standard & Poor's and Ba1 with Moody's Investor Services, both with stable outlooks[343] Ashland debt covenant restrictions This section confirms Ashland's compliance with its debt covenants, including leverage and interest coverage ratios - Ashland is in compliance with all debt agreement covenant restrictions under the 2020 Credit Agreement as of March 31, 2020[344] - The consolidated net leverage ratio was 3.1 (maximum permitted 4.0), and the consolidated interest coverage ratio was 7.7 (minimum required 3.0)[347][348] Additional capital resources This section discusses other potential sources of capital available to Ashland beyond its primary debt and equity structures Total equity This section summarizes the changes in Ashland's total stockholders' equity, driven by net income, dividends, and other comprehensive income Stockholder dividends This section details the cash dividends declared and paid to Ashland's common stockholders during the reporting period Capital expenditures This section outlines Ashland's investments in property, plant, and equipment, reflecting its capital allocation strategy - Capital expenditures were $66 million for the six months ended March 31, 2020, a slight decrease from $70 million in the prior year period[352] CRITICAL ACCOUNTING POLICIES Ashland's critical accounting policies involve significant estimates for long-lived assets, income taxes, and asbestos/environmental liabilities. A key event was the $530 million goodwill impairment charge in Q2 fiscal 2020, affecting Personal Care & Household and Specialty Additives segments, following a business realignment. This impairment was driven by lower growth and margins in these units. Sensitivity analysis indicates potential further impairment with changes in discount or growth rates Goodwill and other indefinite-lived intangible assets This section details Ashland's accounting for goodwill and indefinite-lived intangible assets, including impairment testing and the recent $530 million charge - Ashland tests goodwill and other indefinite-lived intangible assets for impairment annually and when circumstances indicate, comparing fair value to carrying value[355] - A $530 million non-cash goodwill impairment charge was recorded in Q2 fiscal 2020, impacting Personal Care & Household (remaining goodwill zero) and Specialty Additives (remaining goodwill $435 million)[358] - The impairment was attributed to lower growth and margins in the affected reporting units, with fair values determined using discounted cash flow models and earnings multiples[358][362] Sensitivity Analysis for Specialty Additives Goodwill | Scenario | Approximate Percent Change in Estimated Fair Value | | :-------------------------- | :--------------------------------------- | | +25 bps Discount Rate | -2.9% | | -25 bps Growth Rate | -2.1% | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Ashland's market risk exposure as of March 31, 2020, remains consistent with the types of market risks previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2019 - Ashland's market risk exposure at March 31, 2020, is consistent with disclosures in the prior fiscal year's Form 10-K[364] ITEM 4. CONTROLS AND PROCEDURES Ashland's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020. There were no significant changes in internal control over financial reporting during the quarter that materially affected or are reasonably likely to materially affect these controls - Ashland's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2020[365] - No significant changes in internal control over financial reporting occurred during the three months ended March 31, 2020[366] PART II – OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, equity security sales, and exhibits, providing additional context ITEM 1. LEGAL PROCEEDINGS Ashland is involved in material legal proceedings, primarily asbestos-related litigation from its former subsidiary Riley Stoker and acquired subsidiary Hercules, and environmental proceedings under CERCLA and similar state laws at multiple sites. While the ultimate costs are uncertain, Ashland believes adequate reserves have been recorded, and potential losses exceeding recognized amounts are immaterial as of March 31, 2020 - Ashland is subject to asbestos-related litigation from indemnification obligations related to Riley Stoker Corporation and claims against Hercules LLC[369][370] - The company is identified as a 'potentially responsible party' (PRP) at 79 waste treatment or disposal sites under CERCLA and similar state laws for environmental remediation[372] - Ashland believes adequate reserves have been recorded for all legal proceedings, and potential losses exceeding recognized amounts were immaterial as of March 31, 2020[379] Asbestos-Related Litigation This section details Ashland's ongoing liabilities and legal challenges stemming from asbestos-related claims against its former and acquired entities Environmental Proceedings This section outlines Ashland's involvement in environmental remediation efforts and associated liabilities under various regulations Other Pending Legal Proceedings This section addresses other miscellaneous legal actions and claims that Ashland is currently facing ITEM 1A. RISK FACTORS There were no material changes to Ashland's previously disclosed risk factors, but the COVID-19 pandemic presents new and significant uncertainties. Its impact on business operations, cash flows, liquidity, and financial position is unpredictable, depending on factors like virus severity, outbreak duration, governmental actions, supply chain dis