Ashland(ASH) - 2022 Q4 - Annual Report

PART I Business Overview Ashland Inc. is a global specialty additives and materials company that underwent a legal restructuring in August 2022, becoming the legal successor to Ashland Global Holdings Inc - Ashland Inc. is the legal successor to Ashland Global Holdings Inc. effective August 1, 2022, following a corporate entity structure simplification[7] - Ashland is a global specialty additives and materials company with approximately 3,900 employees worldwide, serving customers in over 100 countries across various consumer and industrial markets[7] - The company's reportable segments are Life Sciences, Personal Care, Specialty Additives, and Intermediates[7] - On February 28, 2022, Ashland completed the sale of its Performance Adhesives business for $1.7 billion, recognizing an after-tax gain of $726 million, which was classified as discontinued operations[7] General Ashland Inc., a Delaware corporation, completed a legal restructuring in August 2022, becoming the successor to Ashland Global Holdings Inc., and operates as a global specialty additives and materials company - Ashland Inc. is the legal successor to Ashland Global Holdings Inc. effective August 1, 2022, following a corporate entity structure simplification[7] - Ashland is a global specialty additives and materials company serving diverse markets including architectural coatings, construction, energy, food and beverage, nutraceuticals, personal care, and pharmaceutical[7] - The company's reportable segments are Life Sciences, Personal Care (formerly Personal Care and Household), Specialty Additives, and Intermediates (formerly Intermediates and Solvents)[7] - The sale of the Performance Adhesives business was completed on February 28, 2022, for $1.7 billion, resulting in an after-tax gain of $726 million classified under discontinued operations[7] Life Sciences Life Sciences is a leading supplier of excipients and tablet coating systems for pharmaceutical, nutrition, and nutraceutical industries, operating 20 facilities globally - Life Sciences supplies excipients and tablet coating systems to pharmaceutical, nutrition, and nutraceutical industries, offering solutions like controlled release polymers, disintegrants, and nutraceutical ingredients[10] Fiscal 2022 Life Sciences Product Sales Contribution | Product | % of Life Sciences sales | % of Ashland total consolidated sales | |:------------------------|:-------------------------|:--------------------------------------| | Cellulosics | 38% | 38% | | Polyvinylpyrrolidones (PVP) | 38% | 20% | - The segment operates 20 manufacturing and lab facilities in nine countries across the Americas, Europe, and Asia Pacific[10] Personal Care Personal Care offers biofunctionals, microbial protectants, and specialty polymers for various care markets, emphasizing natural and sustainable ingredients, operating 16 facilities globally - Personal Care provides ingredients and solutions for oral care, hair care, skin care, sun care, cosmetics, and household cleaning, focusing on natural and sustainable options[12] Fiscal 2022 Personal Care Product Sales Contribution | Product | % of Personal Care | % of Ashland total consolidated sales | |:------------------------|:-------------------|:--------------------------------------| | Cellulosics | 18% | 38% | | Polyvinylpyrrolidones (PVP) | 19% | 20% | - The segment operates 16 manufacturing and lab facilities in nine countries across the Americas, Europe, and Asia Pacific[12] Specialty Additives Specialty Additives provides rheology- and performance-enhancing additives for architectural coatings, construction, energy, and industrial markets, operating 12 facilities globally - Specialty Additives offers solutions for industrial applications, including coatings additives, construction materials, and oilfield services, focusing on rheology modification and performance enhancement[14] Fiscal 2022 Specialty Additives Product Sales Contribution | Product | % of Specialty Additives sales | % of Ashland total consolidated sales | |:------------------------|:-------------------------------|:--------------------------------------| | Cellulosics | 66% | 38% | | Polyvinylpyrrolidones (PVP) | 7% | 20% | - The segment operates 12 manufacturing and lab facilities in nine countries across the Americas, Europe, and Asia Pacific[14] Intermediates Intermediates is a leading producer of 1,4 butanediol (BDO) and its derivatives, serving as chemical intermediates and specialty solvents for diverse applications, including internal supply to other segments - Intermediates produces 1,4 butanediol (BDO) and derivatives like n-methylpyrrolidone, used as chemical intermediates and specialty process solvents[16][17] - These products are critical for applications in engineering polymers, polyurethanes, electronics, pharmaceuticals, and water filtration membranes[17] - BDO is also supplied internally to Ashland's Life Sciences, Personal Care, and Specialty Additives segments as a raw material[17] Miscellaneous This section covers environmental matters, product control, competition, intellectual property, raw materials, R&D, seasonality, and human capital, highlighting Ashland's environmental policy and competitive landscape - Ashland maintains a companywide environmental policy, with reserves for environmental remediation and related litigation amounting to $211 million at September 30, 2022, with an estimated upper range of $465 million[18] - The company operates in a highly fragmented and global additives and specialty ingredients industry, competing on product performance, quality, price, availability, and technical capability[23] - Ashland's human capital strategy focuses on a Zero Incident Culture (ZIC), achieving a Total Preventable Recordable Rate (TPRR) of 0.58 in fiscal 2022, and promoting inclusion and diversity with 45% diverse board directors and 33% women in the Executive Committee[29][35] Risk Factors Ashland faces significant risks from the COVID-19 pandemic, global operational complexities, substantial indebtedness, intense competition, intellectual property reliance, and environmental and asbestos liabilities - The COVID-19 pandemic continues to pose significant risks to Ashland's business operations, cash flows, liquidity, and financial position due to volatility, uncertainty, and economic disruption[41] - Ashland's substantial global operations (over half of fiscal 2022 net sales outside North America) expose it to risks from differing legal, political, cultural, social, and regulatory requirements, as well as exchange rate fluctuations and trade policies[46] - The company's substantial indebtedness could adversely affect its cash flow, ability to borrow, and flexibility in responding to changing conditions[49] - Ashland is subject to significant costs from environmental, health, safety, and hazardous substances liabilities, with reserves for environmental remediation amounting to $211 million at September 30, 2022, and potential future costs up to $465 million[58] - Ashland and its subsidiaries face liabilities from asbestos-related personal injury claims, with total reserves of $518 million at September 30, 2022, and potential future costs up to $773 million (Ashland: $456 million, Hercules: $317 million)[60][835] Unresolved Staff Comments There are no unresolved staff comments to report Properties Ashland's corporate headquarters is owned in Wilmington, Delaware, with other principal offices primarily leased, and all properties are deemed suitable for operations - Ashland's corporate headquarters is owned and located in Wilmington, Delaware[65] - Principal offices for major operations are located in Wilmington, Delaware; Bridgewater, New Jersey; Dublin, Ohio (U.S.), and Hyderabad, India; Warsaw, Poland; Schaffhausen, Switzerland (international shared service centers)[65] - All physical properties are either owned or leased, and are considered suitable and adequate for the company's business[65] Legal Proceedings Ashland is involved in material legal proceedings, primarily asbestos-related litigation and environmental cleanup under CERCLA, with adequate reserves recorded for potential losses - Ashland is subject to asbestos-related litigation primarily from indemnification obligations related to the 1990 sale of Riley Stoker Corporation and the 2008 acquisition of Hercules LLC[67] - As of September 30, 2022, Ashland and its subsidiaries have been identified as a 'potentially responsible party' (PRP) at 81 sites under CERCLA and similar state laws for environmental investigation and/or cleanup costs[68] - The company is involved in the Lower Passaic River, New Jersey matters, participating in a Cooperating Parties Group (CPG) for remedial investigation and feasibility study[69] - Ashland believes adequate reserves have been recorded for all pending or threatened legal actions, and potential losses exceeding recognized amounts were immaterial as of September 30, 2022[71] Mine Safety Disclosures This item is not applicable to Ashland Inc Information about our Executive Officers This section lists Ashland's current executive officers, including the Chair and CEO, CFO, and SVPs for various segments and functions, each elected for a one-year term - Guillermo Novo serves as Chair and Chief Executive Officer of Ashland Inc. since December 31, 2019[74] - Key executive officers include J. Kevin Willis (SVP and CFO), Yvonne Winkler von Mohrenfels (SVP, General Counsel and Secretary), Xiaolan Wang (SVP and GM, Personal Care), Min Chong (SVP and GM, Specialty Additives and Intermediates), Ashok S. Kalyana (SVP and GM, Life Sciences), Osama M. Musa (SVP and CTO), Eileen M. Drury (SVP and CHRO), and Eric N. Boni (VP, Finance and Principal Accounting Officer)[74] - Each executive officer is elected by the Board of Directors for a one-year term or until a successor is elected[74] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ashland's common stock trades on the NYSE under 'ASH,' with a new $500 million stock repurchase program approved in May 2022, though no shares were repurchased in Q4 fiscal 2022 - Ashland Global Holdings Inc. changed its name to Ashland Inc. on August 1, 2022, and its common stock continues to trade on the NYSE under the symbol "ASH"[78] - As of October 31, 2022, there were approximately 9,058 holders of record of Ashland's Common Stock, with 54,147,528 shares outstanding[2][78] - In May 2022, Ashland's Board of Directors approved a new evergreen $500 million stock repurchase program, replacing the previous program[82] Q4 Fiscal 2022 Share Repurchase Activity | Q4 Fiscal Periods | Total Number of Shares Purchased | Average Price Paid per Share, including commission | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions) | |:-----------------------------------|:---------------------------------|:---------------------------------------------------|:---------------------------------------------------------------------------------|:-------------------------------------------------------------------------------------------| | July 1, 2022 to July 31, 2022 | — | — | — | $500 | | August 1, 2022 to August 31, 2022 | — | — | — | $500 | | September 1, 2022 to September 30, 2022 | — | — | — | $500 | | Total | — | — | — | $500 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operation This section reviews Ashland's financial condition and operations for fiscal years 2022, 2021, and 2020, highlighting increased net income from the Performance Adhesives sale, segment performance, liquidity, and critical accounting estimates - Ashland's net income increased significantly to $927 million in 2022, up from $220 million in 2021, primarily due to a $726 million after-tax gain from the sale of the Performance Adhesives business[185][196] - Adjusted EBITDA for 2022 was $590 million, a $95 million increase from $495 million in 2021, driven by disciplined pricing and improved product mix, partially offset by higher costs and unfavorable currency exchange[185] - The company completed the sale of its Performance Adhesives business on February 28, 2022, for approximately $1.7 billion, classifying its results as discontinued operations[189] - Ashland prepaid $250 million of its Term loan A and repaid $240 million under its Revolving Credit Facility in 2022, utilizing proceeds from the Performance Adhesives sale[192] - A new evergreen $500 million common share repurchase program was authorized in May 2022, replacing the previous program[193] BUSINESS OVERVIEW Ashland is a global specialty additives and materials company with 3,900 employees across 100+ countries, achieving $100 million in cost savings and monitoring global conflicts - Ashland's sales generated outside of North America were 68% in 2022 and 2021, and 67% in 2020[181] Sales by Geography (Percentage of Total Consolidated Sales) | Sales by Geography | 2022 | 2021 | 2020 | |:-------------------|:-----|:-----|:-----| | North America | 32 % | 32 % | 33 % | | Europe | 35 % | 36 % | 36 % | | Asia Pacific | 24 % | 23 % | 23 % | | Latin America & other | 9 % | 9 % | 8 % | | Total | 100 %| 100 %| 100 %| Sales by Reportable Segment (Percentage of Total Consolidated Sales) | Sales by Reportable Segment | 2022 | 2021 | 2020 | |:----------------------------|:------|:------|:------| | Life Sciences | 34 % | 35 % | 35 % | | Personal Care | 28 % | 28 % | 31 % | | Specialty Additives | 30 % | 31 % | 29 % | | Intermediates | 8 % | 6 % | 5 % | | Total | 100 % | 100 % | 100 % | - Ashland achieved all of its target run-rate cost savings of $50 million in incremental SARD cost savings and $50 million in incremental COGS productivity savings as of September 30, 2022[194] RESULTS OF OPERATIONS – CONSOLIDATED REVIEW Ashland's 2022 net income surged to $927 million due to the Performance Adhesives sale, with sales increasing 13% from favorable pricing/mix and gross profit margin expanding 3.0 percentage points Consolidated Net Income and EPS | Metric | 2022 | 2021 | 2020 | |:-------------------------------------|:------------|:------------|:------------| | Net income (loss) | $927 million| $220 million| $(508) million| | Diluted earnings per share | $16.41 | $3.59 | $(8.39) | | Income from continuing operations | $181 million| $173 million| $(555) million| | Income from discontinued operations | $746 million| $47 million | $47 million | Consolidated Sales and Cost of Sales | Metric | 2022 | 2021 | 2020 | |:-------------------------------------|:--------------|:--------------|:--------------| | Sales | $2,391 million| $2,111 million| $2,016 million| | Cost of sales | $1,561 million| $1,441 million| $1,417 million| | Gross profit as a percent of sales | 34.7% | 31.7% | 29.7% | - Sales for 2022 increased by $280 million (13%) compared to 2021, driven by favorable volume ($68 million) and product pricing/mix ($289 million), partially offset by unfavorable foreign currency exchange ($77 million)[203] Income Tax Expense (Benefit) and Effective Tax Rate | Metric | 2022 | 2021 | 2020 | |:---------------------------|:------------|:------------|:------------| | Income tax expense (benefit)| $25 million | $(38) million| $(22) million| | Effective tax rate | 12% | 28% | (4)% | - Net interest and other expense increased by $93 million in 2022 to $149 million, primarily due to $86 million in restricted investments loss (including $102 million mark-to-market losses) compared to a $33 million income in 2021[217] Use of non-GAAP measures Ashland uses non-GAAP measures like Adjusted EBITDA ($590 million in 2022) and Adjusted diluted EPS ($4.37 in 2022) to assess ongoing operating performance and cash generation, excluding certain non-cash items - Ashland uses non-GAAP measures like EBITDA, Adjusted EBITDA, and Adjusted diluted EPS to provide investors with performance metrics that reflect the impact of trends in sales, margin, and operating expenses, excluding certain non-cash or highly variable charges[229] EBITDA and Adjusted EBITDA (in millions) | Metric | 2022 | 2021 | 2020 | |:--------------------------------------------------------------------|:--------|:--------|:--------| | Net income (loss) | $927 | $220 | $(508) | | Income tax expense (benefit) | 25 | (38) | (22) | | Net interest and other financing expense | 149 | 56 | 119 | | Depreciation and amortization | 241 | 244 | 235 | | EBITDA | $1,342 | $482 | $(176) | | Income from discontinued operations (net of taxes) | (746) | (47) | (47) | | Total key items included in EBITDA | (6) | 60 | 672 | | Adjusted EBITDA | $590 | $495 | $449 | Diluted EPS and Adjusted Diluted EPS from Continuing Operations | Metric | 2022 | 2021 | 2020 | |:--------------------------------------------------------------------|:--------|:--------|:--------| | Diluted EPS from continuing operations (as reported) | $3.20 | $2.82 | $(9.16) | | Total key items (after tax) | $1.17 | $(0.24) | $11.01 | | Adjusted diluted EPS from continuing operations (non-GAAP) | $4.37 | $2.58 | $1.85 | | Adjusted diluted EPS from continuing operations (non-GAAP) excluding intangibles amortization expense | $5.70 | $3.75 | $2.93 | RESULTS OF OPERATIONS – REPORTABLE SEGMENT REVIEW All Ashland segments—Life Sciences, Personal Care, Specialty Additives, and Intermediates—reported increased sales, operating income, and Adjusted EBITDA in 2022, driven by strong pricing and strategic adjustments Sales by Reportable Segment (in millions) | Segment | 2022 | 2021 | 2020 | |:--------------------|:------|:------|:------| | Life Sciences | $815 | $737 | $708 | | Personal Care | $678 | $592 | $615 | | Specialty Additives | $719 | $655 | $589 | | Intermediates | $256 | $178 | $129 | | Intersegment sales | $(77) | $(51) | $(25) | | Total | $2,391| $2,111| $2,016| Operating Income (Loss) by Reportable Segment (in millions) | Segment | 2022 | 2021 | 2020 | |:--------------------|:------|:------|:--------| | Life Sciences | $155 | $130 | $123 | | Personal Care | $102 | $73 | $(296) | | Specialty Additives | $103 | $61 | $(132) | | Intermediates | $87 | $35 | $(10) | | Unallocated and Other | $(114)| $(107)| $(146) | | Total | $333 | $192 | $(461) | Adjusted EBITDA by Reportable Segment (in millions) | Segment | 2022 | 2021 | 2020 | |:--------------------|:------|:------|:------| | Life Sciences | $218 | $195 | $195 | | Personal Care | $186 | $161 | $150 | | Specialty Additives | $185 | $158 | $143 | | Intermediates | $100 | $48 | $13 | | Unallocated and Other | $(114)| $(106)| $(143)| | Total | $574 | $436 | $(226)| FINANCIAL POSITION Ashland's financial position as of September 30, 2022, shows strong liquidity with $646 million cash, $680 million borrowing capacity, and total debt reduced to $1,270 million from $1,970 million in 2021 - Ashland had $646 million in cash and cash equivalents as of September 30, 2022, with $230 million held by foreign subsidiaries[269] Cash Flows Summary (in millions) | Cash flows provided (used) by: | 2022 | 2021 | 2020 | |:-------------------------------|:--------|:--------|:--------| | Operating activities from continuing operations | $193 | $466 | $227 | | Investing activities from continuing operations | $(102) | $(367) | $(85) | | Financing activities from continuing operations | $(896) | $(426) | $9 | | Discontinued operations | $1,252 | $80 | $69 | | Net increase (decrease) in cash and cash equivalents | $436 | $(244) | $222 | Total Debt (in millions) | Debt Type | 2022 | 2021 | |:----------------------------------------------|:------------|:------------| | Short-term debt (includes current portion of long-term debt) | $— | $374 | | Long-term debt (less current portion and debt issuance cost discounts) | $1,270 | $1,596 | | Total debt | $1,270 | $1,970 | - Ashland's total borrowing capacity at September 30, 2022, was $680 million, including $581 million from the 2022 Revolving Credit Facility and $99 million from the foreign accounts receivable securitization facility[291] - Ashland's consolidated net leverage ratio was 1.1 and the consolidated interest coverage ratio was 10.8 at September 30, 2022, both in compliance with the 2022 Credit Agreement covenants[306][307] OFF-BALANCE SHEET ARRANGEMENTS Ashland engages in various financial guarantees and commitments not fully reflected on the balance sheet, but their fair value is not considered significant - Ashland is a party to various financial guarantees and other commitments as part of its normal course of business[322] - These arrangements involve elements of performance and credit risk that are not included in the Consolidated Balance Sheets[322] - The fair value of these guarantees is not significant, and the possibility of actual cash expenditures is dependent on unpredictable future events[322] NEW ACCOUNTING PRONOUNCEMENTS This section refers to Note A for a discussion and analysis of recently issued accounting pronouncements and their impact on Ashland CRITICAL ACCOUNTING ESTIMATES Ashland's financial statements rely on critical accounting estimates for environmental remediation ($211 million reserve), asbestos litigation ($518 million reserve), goodwill, and other intangible assets, with annual impairment tests performed - Ashland's reserves for environmental remediation and related litigation amounted to $211 million at September 30, 2022, with an estimated upper end of the reasonably possible range of future costs as high as $465 million[326] - Total reserves for asbestos claims (Ashland and Hercules) were $518 million at September 30, 2022, with a reasonably possible upper range of future litigation defense and claim settlement costs of approximately $773 million (Ashland: $456 million, Hercules: $317 million)[335] - Ashland performs annual goodwill impairment tests, with no impairment identified as of July 1, 2022, and fair values significantly exceeding carrying values for all reporting units[338] - Finite-lived intangible assets are amortized over 3 to 24 years, with amortization expense of $94 million in 2022. Indefinite-lived assets are tested annually for impairment using a 'relief-from-royalty' valuation method[339] EFFECTS OF INFLATION AND CHANGING PRICES Ashland's monetary assets exceed liabilities, making it exposed to inflation, which was mitigated in 2022 through derivative programs, disciplined pricing, and cost actions - Ashland's monetary assets exceeded its monetary liabilities as of September 30, 2022, making it more exposed to the effects of future inflation[342] - The company mitigated the impact of significant inflation in 2022 on its results of operations and financial liquidity through derivative programs, disciplined pricing, and cost actions[342] - Replacement costs for capital-intensive plant and equipment would substantially exceed historical costs, leading to higher depreciation, though new facilities would offer technological improvements[342] OUTLOOK Ashland projects fiscal year 2023 sales between $2.5 billion and $2.7 billion, with Adjusted EBITDA between $600 million and $650 million, but cannot reconcile forward-looking Adjusted EBITDA to net income FY2023 Outlook Key Operating Metrics | Key Operating Metrics | FY2023 Outlook | |:----------------------|:--------------------| | Sales | $2.5 - $2.7 billion | | Adjusted EBITDA | $600 - $650 million | - Ashland is unable to reconcile forward-looking Adjusted EBITDA to forward-looking net income due to the inability to predict with reasonable certainty the ultimate outcome of certain significant items[345] FORWARD-LOOKING STATEMENTS This section highlights that the annual report contains forward-looking statements subject to various risks and uncertainties, which Ashland disclaims any obligation to update unless legally required - The report contains forward-looking statements identified by words such as "anticipates," "believes," "expects," and "intends," based on expectations and assumptions about future operating performance and financial condition[346] - These statements are subject to risks and uncertainties, including impacts from acquisitions/divestitures, substantial indebtedness, competitive nature, severe weather, public health crises (COVID-19), cyber events, legal proceedings, and the Ukraine/Russia conflict[346] - Ashland undertakes no obligation to update any forward-looking statements unless legally required[346] Quantitative and Qualitative Disclosures about Market Risk Ashland manages foreign currency market risk through short-term derivative instruments to mitigate earnings volatility, with no significant credit risk on open contracts or commodity hedging - Ashland uses foreign currency derivative instruments to manage exposure on transactions denominated in foreign currencies, aiming to curtail potential earnings volatility[348] - These derivative contracts generally involve exchanging one foreign currency for another at a fixed future rate, with maturities typically less than twelve months[348] - As of September 30, 2022, Ashland had not identified any significant credit risk on open derivative contracts and had no significant open hedging contracts for commodities or raw material requirements[348] Financial Statements and Supplementary Data This section presents Ashland's consolidated financial statements for fiscal years 2022, 2021, and 2020, along with detailed notes on accounting policies, acquisitions, divestitures, and other financial disclosures - The section includes the Statements of Consolidated Comprehensive Income (Loss), Consolidated Balance Sheets, Statements of Consolidated Equity, and Statements of Consolidated Cash Flows for the fiscal years ended September 30, 2022, 2021, and 2020[352] - Management's report affirms the effectiveness of internal control over financial reporting as of September 30, 2022, based on the COSO framework[354] - Ernst & Young LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[357][363] Management's report on internal control over financial reporting Management affirmed the effectiveness of Ashland's internal control over financial reporting as of September 30, 2022, based on the COSO (2013) framework - Management is responsible for the preparation and integrity of Consolidated Financial Statements and for establishing and maintaining adequate internal control over financial reporting[354] - Management assessed the effectiveness of Ashland's internal control over financial reporting as of September 30, 2022, utilizing the COSO (2013 framework)[354] - Based on this assessment, management believes that Ashland maintained effective internal control over financial reporting as of September 30, 2022[354] Reports of independent registered public accounting firm Ernst & Young LLP issued unqualified opinions on Ashland's internal control over financial reporting and consolidated financial statements, highlighting environmental and asbestos reserves as critical audit matters - Ernst & Young LLP expressed an unqualified opinion on Ashland Inc.'s internal control over financial reporting as of September 30, 2022, based on the COSO criteria[357] - They also issued an unqualified opinion on the consolidated financial statements for the three years ended September 30, 2022[363] - Critical audit matters included the valuation of environmental remediation reserves ($211 million at September 30, 2022) and asbestos litigation reserves ($518 million at September 30, 2022), both requiring challenging, subjective, or complex judgments due to inherent uncertainties[367][370] Statements of Consolidated Comprehensive Income (Loss) Ashland reported $927 million net income in 2022, driven by discontinued operations, with sales reaching $2,391 million and diluted EPS at $16.41, while other comprehensive loss was $(197) million Consolidated Comprehensive Income (Loss) Summary (in millions, except per share data) | Metric | 2022 | 2021 | 2020 | |:-------------------------------------------|:--------|:--------|:--------| | Sales | $2,391 | $2,111 | $2,016 | | Gross profit | $830 | $670 | $599 | | Operating income (loss) | $333 | $192 | $(461) | | Income (loss) from continuing operations | $181 | $173 | $(555) | | Income from discontinued operations (net of income tax) | $746 | $47 | $47 | | Net income (loss) | $927 | $220 | $(508) | | Diluted earnings per share | $16.41 | $3.59 | $(8.39) | | Other comprehensive income (loss), net of tax | $(197) | $11 | $27 | | Comprehensive income (loss) | $730 | $231 | $(481) | Consolidated Balance Sheets Ashland's total assets decreased to $6,213 million in 2022 due to divestitures, while cash increased to $646 million, total debt decreased to $1,270 million, and total equity rose to $3,220 million Consolidated Balance Sheets Summary (in millions) | Asset/Liability/Equity | September 30, 2022 | September 30, 2021 | |:-----------------------------------|:-------------------|:-------------------| | Assets: | | | | Cash and cash equivalents | $646 | $210 | | Accounts receivable | $402 | $369 | | Inventories | $629 | $473 | | Total current assets | $1,768 | $1,717 | | Net property, plant and equipment | $1,338 | $1,427 | | Goodwill | $1,312 | $1,430 | | Intangibles | $963 | $1,099 | | Total noncurrent assets | $4,445 | $4,895 | | Total assets | $6,213 | $6,612 | | Liabilities: | | | | Short-term debt | $— | $365 | | Current portion of long-term debt | $— | $9 | | Total current liabilities | $553 | $934 | | Long-term debt | $1,270 | $1,596 | | Asbestos litigation reserve | $472 | $490 | | Total noncurrent liabilities | $2,440 | $2,926 | | Total liabilities and equity | $6,213 | $6,612 | | Equity: | | | | Total equity | $3,220 | $2,752 | Statements of Consolidated Equity Ashland's total equity increased to $3,220 million in 2022, driven by $927 million net income, partially offset by $200 million in stock repurchases and $70 million in dividends, with accumulated other comprehensive loss widening Consolidated Equity Summary (in millions) | Metric | September 30, 2022 | September 30, 2021 | September 30, 2020 | |:-------------------------------------------|:-------------------|:-------------------|:-------------------| | Common stock | $1 | $1 | $1 | | Paid-in capital | $135 | $327 | $769 | | Retained earnings | $3,653 | $2,796 | $2,649 | | Accumulated other comprehensive loss | $(569) | $(372) | $(383) | | Total equity | $3,220 | $2,752 | $3,036 | | Net income (loss) | $927 | $220 | $(508) | | Dividends per common share | $1.27 | $1.15 | $1.10 | | Repurchase of common stock | $(200) | $(450) | $— | - The accumulated other comprehensive loss of $(569) million at September 30, 2022, was primarily comprised of net unrealized translation losses of $(571) million[378] Statements of Consolidated Cash Flows Ashland's cash and cash equivalents increased by $436 million in 2022 to $646 million, with $1,252 million provided by discontinued operations, largely from the Performance Adhesives sale Consolidated Cash Flows Summary (in millions) | Cash Flow Category | 2022 | 2021 | 2020 | |:---------------------------------------------------------|:--------|:--------|:--------| | Operating activities from continuing operations | $193 | $466 | $227 | | Investing activities from continuing operations | $(102) | $(367) | $(85) | | Financing activities from continuing operations | $(896) | $(426) | $9 | | Cash provided (used) by discontinued operations | $1,252 | $80 | $69 | | Net increase (decrease) in cash and cash equivalents | $436 | $(244) | $222 | | Cash and cash equivalents - end of year | $646 | $210 | $454 | - Cash provided by discontinued operations in 2022 included $1.7 billion in net proceeds from the sale of the Performance Adhesives business segment, partially offset by $339 million in cash tax payments[286] - Cash payments for interest expense were $56 million in 2022, $62 million in 2021, and $77 million in 2020[381] - Income taxes paid (including discontinued operations) were $406 million in 2022, $1 million in 2021, and $91 million in 2020[381] NOTE A – SIGNIFICANT ACCOUNTING POLICIES This note details Ashland's significant accounting policies, including consolidation principles, use of estimates for environmental and asbestos liabilities, revenue recognition, and the adoption of ASU 2016-13 for credit losses - Ashland's Consolidated Financial Statements are prepared in accordance with U.S. GAAP and SEC regulations, including accounts of Ashland Inc. and its majority-owned subsidiaries[382] - Significant estimates and assumptions are made for environmental remediation, asbestos litigation, goodwill and other intangible assets, and income taxes[383] - Effective October 1, 2020, Ashland adopted ASU 2016-13, recording an allowance for credit losses using the expected credit loss model, resulting in a $2 million decrease to retained earnings, net of tax[385][413] Allowance for Credit Losses on Accounts Receivable (in millions) | Metric | 2022 | 2021 | 2020 | |:------------------------------------------|:-----|:-----|:-----| | Allowance for credit losses - beginning of year | $3 | $3 | $3 | | Adjustments to allowances for credit losses | 2 | 1 | 2 | | Reserves utilized | (1) | (1) | (2) | | Allowance for credit losses - end of year | $4 | $3 | $3 | Inventories (in millions) | Category | 2022 | 2021 | |:----------------------------------------|:-----|:-----| | Finished products | $391 | $309 | | Raw materials, supplies and work in process | $238 | $164 | | Total | $629 | $473 | NOTE B – ACQUISITIONS Ashland acquired Schülke & Mayr GmbH's personal care business for $312 million on April 30, 2021, adding $131 million in goodwill and $183 million in definite-lived intangible assets to strengthen its personal care segment - Ashland completed the $312 million acquisition of the personal care business from Schülke & Mayr GmbH on April 30, 2021, to strengthen its personal care segment[415] Schülke Acquisition Purchase Price Allocation (in millions) | Asset/Liability Category | Adjusted at April 30, 2021 | |:-------------------------|:---------------------------| | Cash and cash equivalents| $3 | | Accounts receivable | $6 | | Inventories | $12 | | Net property, plant and equipment | $3 | | Goodwill | $131 | | Intangibles | $183 | | Trade and other payables | $(3) | | Deferred income taxes | $(17) | | Employee benefit obligations | $(6) | | Total purchase price | $312 | Identified Intangible Assets from Schülke Acquisition (in millions) | Intangible asset type | Value | Weighted-average amortization period (years) | |:--------------------------------|:------|:---------------------------------------------| | Trademarks and trade names | $50 | 20 | | Intellectual property | $33 | 8 | | Customer and supplier relationships | $100 | 20 | | Total | $183 | | NOTE C – DIVESTITURES Ashland sold its Performance Adhesives business for $1.7 billion in 2022, recognizing a $726 million after-tax gain, and also divested the Maleic business in 2020 and other properties in 2021-2022 - On February 28, 2022, Ashland completed the sale of its Performance Adhesives business for approximately $1.7 billion, recognizing a $726 million after-tax gain, classified as discontinued operations[420] - The Maleic business was sold on September 30, 2020, for approximately $98 million, resulting in a $29 million after-tax gain, also classified as discontinued operations[421] - Ashland sold a Specialty Additives facility in 2021 for approximately $20 million, recognizing a $14 million pre-tax gain[422] - In 2022, Ashland sold two excess land properties for approximately $50 million, recording a $42 million pre-tax gain[423] Assets and Liabilities Held for Sale (Performance Adhesives) as of September 30, 2021 (in millions) | Category | 2021 | |:----------------------------------------|:-----| | Accounts receivable, net | $26 | | Inventories | $27 | | Net property, plant and equipment | $80 | | Goodwill | $453 | | Operating lease assets, net | $10 | | Other assets | $1 | | Current assets held for sale | $597 | | Trade and other payables | $33 | | Accrued expenses and other liabilities | $7 | | Current operating lease obligations | $1 | | Operating lease obligations | $9 | | Current liabilities held for sale | $50 | NOTE D – DISCONTINUED OPERATIONS Ashland's discontinued operations, including Performance Adhesives and Maleic business, generated $746 million in net income in 2022, primarily from the $726 million gain on the Performance Adhesives sale - Discontinued operations include Performance Adhesives, Maleic business, Composites and Marl facility, Valvoline, Water Technologies, Distribution, and asbestos-related litigation[427][429] Income (Loss) from Discontinued Operations (Net of Taxes) (in millions) | Category | 2022 | 2021 | 2020 | |:----------------------------------------|:--------|:--------|:--------| | Performance Adhesives | $41 | $64 | $64 | | Composites/Marl facility (including Maleic) | $— | $(1) | $4 | | Valvoline | $(7) | $(33) | $(24) | | Water Technologies | $5 | $(4) | $— | | Distribution | $(9) | $(6) | $(10) | | Asbestos-related litigation | $(17) | $(11) | $(18) | | Gain on disposal of discontinued operations | | | | | Performance Adhesives | $726 | $— | $— | | Composites/Marl facility (including Maleic) | $— | $(4) | $37 | | Water Technologies | $— | $1 | $— | | Total income from discontinued operations (net of taxes) | $746 | $47 | $47 | Performance Adhesives Discontinued Operations (in millions) | Metric | 2022 | 2021 | 2020 | |:----------------------------------------|:-----|:-----|:-----| | Sales | $171 | $372 | $310 | | Pretax operating income | $33 | $82 | $75 | | Income from discontinued operations | $41 | $64 | $64 | NOTE E – RESTRUCTURING ACTIVITIES Ashland incurred $2 million in severance income in 2022 from restructuring activities, with $1 million in severance reserves remaining, and recognized $13 million in asset impairment charges in 2021 - Ashland incurred severance income of $2 million in 2022, $1 million in 2021, and an expense of $51 million in 2020, related to company-wide restructuring activities[435] Restructuring Severance Reserves (in millions) | Metric | Severance costs | |:-------------------------------------|:----------------| | Balance as of September 30, 2020 | $39 | | Restructuring reserve | $(1) | | Utilization (cash paid) | $(32) | | Balance as of September 30, 2021 | $6 | | Restructuring reserve | $(2) | | Utilization (cash paid) | $(3) | | Balance as of September 30, 2022 | $1 | - In 2021, Ashland incurred $3 million in asset impairment charges related to a product line shutdown and a $10 million capital project impairment[439] NOTE F – FAIR VALUE MEASUREMENTS Ashland measures financial instruments at fair value, with total assets at fair value of $1,034 million in 2022, primarily Level 1, including $374 million in restricted investments and various derivatives - Ashland categorizes fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[439] Financial Instruments Subject to Recurring Fair Value Measurements (in millions) - September 30, 2022 | Category | Carrying value | Total fair value | Level 1 | Level 2 | Level 3 | |:----------------------------------------|:---------------|:-----------------|:--------|:--------|:--------| | Assets: | | | | | | | Cash and cash equivalents | $646 | $646 | $646 | $— | $— | | Restricted investments | $374 | $374 | $374 | $— | $— | | Investments of captive insurance company| $9 | $9 | $9 | $— | $— | | Foreign currency derivatives | $1 | $1 | $— | $1 | $— | | Commodity derivatives | $4 | $4 | $— | $4 | $— | | Total assets at fair value | $1,034 | $1,034 | $1,029| $5 | $— | | Liabilities: | | | | | | | Foreign currency derivatives | $9 | $9 | $— | $9 | $— | | Commodity derivatives | $1 | $1 | $— | $1 | $— | | Total liabilities at fair value | $10 | $10 | $— | $10 | $— | - Restricted investments include $245 million for the Asbestos trust and $129 million for the Environmental trust as of September 30, 2022[447] - Foreign currency derivatives resulted in a $(40) million loss in 2022, while commodity derivatives generated a $10 million gain[450][454] - Long-term debt had a fair value of $1,102 million at September 30, 2022, based on Level 2 measurements[456] NOTE G – PROPERTY, PLANT AND EQUIPMENT Ashland's net property, plant and equipment totaled $1,338 million in 2022, with depreciation expense of $147 million and $1 million in capitalized interest Property, Plant and Equipment (in millions) | Category | 2022 | 2021 | |:----------------------------------------|:--------|:--------| | Land | $138 | $142 | | Buildings | $458 | $452 | | Machinery and equipment | $2,324 | $2,278 | | Construction in progress | $130 | $194 | | Total property, plant and equipment (gross) | $3,050 | $3,066 | | Accumulated depreciation | $(1,712)| $(1,639)| | Net property, plant and equipment | $1,338 | $1,427 | Property, Plant and Equipment Charges (in millions) | Metric | 2022 | 2021 | 2020 | |:-------------------|:-----|:-----|:-----| | Depreciation | $147 | $154 | $151 | | Capitalized interest | $1 | $2 | $2 | NOTE H – GOODWILL AND OTHER INTANGIBLES Ashland's goodwill was $1,312 million in 2022, with no impairment identified, and other intangible assets totaled $963 million, incurring $94 million in amortization expense Goodwill by Reportable Segment (in millions) | Segment | September 30, 2022 | September 30, 2021 | September 30, 2020 | |:--------------------|:-------------------|:-------------------|:-------------------| | Life Sciences | $787 | $856 | $861 | | Personal Care | $118 | $129 | $— | | Specialty Additives | $407 | $445 | $444 | | Intermediates | $— | $— | $— | | Total | $1,312 | $1,430 | $1,305 | - Ashland performed its annual goodwill impairment test as of July 1, 2022, and concluded there was no impairment, with all reporting units having fair values significantly in excess of their carrying values[460] Other Intangible Assets (in millions) | Category | 2022 Net Carrying Amount | 2021 Net Carrying Amount | |:----------------------------------------|:-------------------------|:-------------------------| | Definite-lived intangible assets: | | | | Trademarks and trade names | $58 | $69 | | Intellectual property | $195 | $255 | | Customer and supplier relationships | $432 | $497 | | Total definite-lived intangible assets | $685 | $821 | | Indefinite-lived intangible assets: | | | | Trademarks and trade names | $278 | $278 | | Total intangible assets | $963 | $1,099 | - Amortization expense recognized on intangible assets was $94 million for 2022, $90 million for 2021, and $84 million for 2020[463] NOTE I – DEBT Ashland's total debt decreased to $1,270 million in 2022 due to $250 million Term loan A prepayment and $23 million European loan repayment, maintaining compliance with debt covenants Ashland's Debt (in millions) | Debt Type | September 30, 2022 | September 30, 2021 | |:----------------------------------------------|:-------------------|:-------------------| | 3.375% Senior Notes, due 2031 | $450 | $450 | | 2.00% Senior Notes, due 2028 (Euro 500 million principal) | $489 | $580 | | 6.875% notes, due 2043 | $282 | $282 | | Term loan A | $— | $250 | | Accounts receivable securitizations | $— | $117 | | 6.50% junior subordinated notes, due 2029 | $60 | $57 | | Revolving credit facility | $— | $225 | | Other | $(11) | $9 | | Total debt | $1,270 | $1,970 | | Short-term debt (includes current portion of long-term debt) | $— | $(374) | | Long-term debt (less current portion and debt issuance costs) | $1,270 | $1,596 | - In 2022, Ashland prepaid its Term loan A principal balance of $250 million and repaid $23 million on its European short-term loan facility[471] - Ashland enacted an amendment to its credit agreement in July 2022, establishing a new $600 million five-year revolving credit facility (2022 Credit Agreement)[470] - Ashland was in compliance with all debt agreement covenant restrictions as of September 30, 2022, with a consolidated net leverage ratio of 1.1 and an interest coverage ratio of 10.8[481][483] Net Interest and Other Expense (Income) (in millions) | Metric | 2022 | 2021 | 2020 | |:------------------------------------------|:-----|:------|:-----| | Interest expense | $62 | $69 | $88 | | Interest income | $(4) | $(1) | $(1) | | Loss on the accounts receivables sale program | $1 | $1 | $— | | Investment securities loss (income) | $86 | $(33) | $(30)| | Other financing costs | $4 | $20 | $62 | | Total | $149 | $56 | $119 | NOTE J – OTHER NONCURRENT ASSETS AND LIABILITIES Ashland's other noncurrent assets totaled $254 million and liabilities $325 million in 2022, including deferred compensation investments, tax liabilities, and environmental remediation reserves Other Noncurrent Assets (in millions) | Category | 2022 | 2021 | |:----------------------------------------|:-----|:-----| | Deferred compensation investments | $85 | $92 | | Tax and tax indemnity receivables | $2 | $9 | | Life insurance policies | $73 | $63 | | Manufacturing catalyst supplies | $25 | $28 | | Defined benefit plan assets | $21 | $28 | | Equity and other unconsolidated investments | $3 | $4 | | Land use rights | $6 | $7 | | Environmental insurance receivables | $17 | $13 | | Debt issuance costs | $2 | $3 | | Other | $20 | $20 | | Total | $254 | $267 | Other Noncurrent Liabilities (in millions) | Category | 2022 | 2021 | |:----------------------------------------|:-----|:-----| | Tax liabilities | $127 | $145 | | Environmental remediation reserves | $157 | $152 | | Deferred compensation | $25 | $31 | | Other | $16 | $21 | | Total | $325 | $349 | - Deferred compensation investments, consisting of insurance policies, had losses of $2 million in 2022, compared to gains of $10 million in both 2021 and 2020[489] NOTE K – LEASING ARRANGEMENTS Ashland's total lease cost was $41 million in 2022, with operating lease assets at $107 million and total lease liabilities at $113 million, primarily for real estate with a 17-year weighted-average term - Ashland leases various assets, with substantially all leases being operating or short-term leases, and real estate leases representing over 85% of total lease liability[491] Lease Cost (in millions) | Category | 2022 | 2021 | 2020 | |:--------------------|:-----|:-----|:-----| | Operating lease cost| $29 | $28 | $29 | | Variable lease cost | $9 | $6 | $8 | | Short-term leases | $3 | $3 | $5 | | Total lease cost | $41 | $37 | $42 | Lease Assets and Liabilities (in millions) - September 30 | Category | 2022 | 2021 | |:----------------------------------|:-----|:-----| | Operating lease assets, net | $107 | $124 | | Current operating lease obligations | $19 | $23 | | Non-current operating lease obligations | $94 | $110 | | Total lease liabilities | $113 | $133 | - The weighted-average remaining lease term for operating leases was approximately 17 years in 2022, with a weighted-average discount rate of 2.6%[495] NOTE L – INCOME TAXES Ashland's income tax expense from continuing operations was $25 million in 2022, with an effective tax rate of 12%, and a net deferred tax liability of $(156) million Provision for Income Taxes Related to Continuing Operations (in millions) | Category | 2022 | 2021 | 2020 | |:---------|:-----|:------|:------| | Current | $60 | $(12) | $20 | | Deferred | $(35)| $(26) | $(42) | | Total | $25 | $(38) | $(22) | Deferred Tax Assets and Liabilities (in millions) - September 30 | Category | 2022 | 2021 | |:----------------------------------------|:--------|:--------| | Total deferred tax assets | $207 | $191 | | Total deferred tax liabilities | $363 | $398 | | Net deferred tax liability | $(156) | $(207) | - Ashland had $84 million of unrecognized tax benefits at September 30, 2022, with $56 million potentially affecting the tax rate if recognized[504] - The company is subject to U.S. federal income tax examinations for periods after September 30, 2018, and foreign income tax audits for years after 2017[506] NOTE M – EMPLOYEE BENEFIT PLANS Ashland maintains pension and postretirement benefit plans, with an unfunded status of $(49) million for pensions and $(36) million for other postretirement plans in 2022, and expects to contribute $4 million to non-U.S. plans in 2023 - Ashland maintains contributory and noncontributory qualified defined benefit pension plans, primarily for international employees and some U.S. union employees[507] - Following the Performance Adhesives sale, Ashland remeasured a plan, resulting in a $1 million actuarial gain in fiscal 2022[511] Net Periodic B