Ashland(ASH) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents Ashland's unaudited condensed consolidated financial statements for the three months ended December 31, 2022, detailing financial performance, position, and cash movements Statements of Consolidated Comprehensive Income (Loss) (Unaudited) | (In millions except per share data) | Three months ended December 31, 2022 | Three months ended December 31, 2021 | | :--- | :--- | :--- | | Sales | $525 | $512 | | Gross profit | $165 | $161 | | Operating income | $37 | $42 | | Income from continuing operations | $42 | $32 | | Net income | $40 | $48 | | Diluted earnings per share | $0.73 | $0.83 | Condensed Consolidated Balance Sheets (Unaudited) | (In millions) | December 31, 2022 | September 30, 2022 | | :--- | :--- | :--- | | Total current assets | $1,724 | $1,768 | | Total assets | $6,259 | $6,213 | | Total current liabilities | $464 | $553 | | Total liabilities | $2,941 | $2,993 | | Total stockholders' equity | $3,318 | $3,220 | Statements of Condensed Consolidated Cash Flows (Unaudited) | (In millions) | Three months ended December 31, 2022 | Three months ended December 31, 2021 | | :--- | :--- | :--- | | Cash flows from operating activities (continuing) | $(29) | $14 | | Cash flows from investing activities (continuing) | $(27) | $(7) | | Cash flows from financing activities (continuing) | $(27) | $(11) | | Decrease in cash and cash equivalents | $(114) | $(16) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations for financial statement line items, covering accounting policies, divestitures, discontinued operations, goodwill, debt, litigation, and segment information Note A – Significant Accounting Policies The financial statements are prepared under U.S. GAAP, with operations organized into four segments, requiring significant management estimates for environmental, asbestos, and goodwill liabilities - Ashland is comprised of four reportable segments: Life Sciences, Personal Care, Specialty Additives, and Intermediates[14] - Significant management estimates are required for environmental remediation, asbestos litigation, goodwill, intangible assets, and income taxes[15] Note B & C – Divestitures and Discontinued Operations Ashland completed the sale of its Performance Adhesives business for approximately $1.7 billion, with discontinued operations reporting a $2 million net loss for the quarter, alongside a $4 million impairment charge for a facility pending sale - On February 28, 2022, Ashland completed the sale of its Performance Adhesives business to Arkema for approximately $1.7 billion, net of transaction costs, with results now reported as discontinued operations[19] Income (Loss) from Discontinued Operations (Net of Tax) | (In millions) | Three months ended Dec 31, 2022 | Three months ended Dec 31, 2021 | | :--- | :--- | :--- | | Performance Adhesives | $(1) | $17 | | Distribution | $(1) | $(1) | | Total | $(2) | $16 | - A $4 million impairment charge was recorded in the quarter for a Specialty Additives manufacturing facility under a definitive sale agreement[21] Note G – Goodwill and Other Intangibles Goodwill increased to $1,369 million due to currency translation, with total net intangible assets at $959 million and quarterly amortization expense of $23 million, with no impairments identified Goodwill Progression by Segment (Q1 FY2023) | (In millions) | Balance at Sep 30, 2022 | Currency Translation | Balance at Dec 31, 2022 | | :--- | :--- | :--- | :--- | | Life Sciences | $787 | $35 | $822 | | Personal Care | $118 | $5 | $123 | | Specialty Additives | $407 | $17 | $424 | | Total | $1,312 | $57 | $1,369 | - Total net intangible assets were $959 million as of December 31, 2022, consisting of $681 million in definite-lived intangibles and $278 million in indefinite-lived intangibles[53] - Amortization expense for intangible assets was $23 million for the quarter. Estimated amortization for the remainder of fiscal 2023 is $92 million[55] Note H – Debt and Other Financing Activities Total debt stood at $1,316 million, with the company in compliance with all debt covenants, reporting a consolidated net leverage ratio of 1.3x and an interest coverage ratio of 10.8x - Total long-term debt was $1,316 million as of December 31, 2022[57] - As of December 31, 2022, Ashland was in compliance with all debt covenants[62] Key Debt Covenants (as of Dec 31, 2022) | Covenant | Requirement | Actual | Status | | :--- | :--- | :--- | :--- | | Consolidated Net Leverage Ratio | ≤ 4.0x | 1.3x | Compliant | | Consolidated Interest Coverage Ratio | ≥ 3.0x | 10.8x | Compliant | Note L – Litigation, Claims and Contingencies Significant liabilities include $501 million in asbestos reserves with $150 million in insurance receivables, and $206 million in environmental remediation reserves with $20 million in related insurance receivables Asbestos Litigation Reserves (as of Dec 31, 2022) | (In millions) | Asbestos Reserve | Insurance Receivable | | :--- | :--- | :--- | | Ashland-related | $292 | $99 | | Hercules-related | $209 | $51 | | Total | $501 | $150 | - The company estimates that total future asbestos litigation costs on an inflated and undiscounted basis could range as high as approximately $456 million for Ashland claims and $317 million for Hercules claims[92] Environmental Remediation Reserves (as of Dec 31, 2022) | (In millions) | Amount | | :--- | :--- | | Total Reserve | $206 | | Insurance Receivable | $20 | Note Q – Reportable Segment Information This note provides a financial breakdown for Ashland's four reportable segments, highlighting strong growth in Life Sciences and declines in Personal Care and Specialty Additives, with Intermediates remaining stable Segment Financial Performance (Three months ended Dec 31) | (In millions) | Sales 2022 | Sales 2021 | Operating Income 2022 | Operating Income 2021 | EBITDA 2022 | EBITDA 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Life Sciences | $207 | $170 | $34 | $21 | $51 | $36 | | Personal Care | $138 | $147 | $11 | $15 | $32 | $36 | | Specialty Additives | $143 | $156 | $1 | $17 | $19 | $38 | | Intermediates | $54 | $53 | $20 | $16 | $23 | $19 | | Unallocated & other | - | - | $(29) | $(27) | $(29) | $(27) | Management's Discussion and Analysis (MD&A) Management provides an overview of business developments, consolidated and segment results, and financial position, highlighting strong Life Sciences performance offset by weaker demand in other segments, while reaffirming the full-year outlook Business Overview & Key Developments Ashland reported $40 million net income and $108 million Adjusted EBITDA, driven by pricing gains offset by costs and lower volumes, with strong Life Sciences demand contrasting with weaker performance in other segments due to macroeconomic factors - For the three months ended December 31, 2022, 70% of Ashland's sales were generated outside of North America[132] - Net income for the quarter was $40 million, compared to $48 million in the prior year quarter[136] - Adjusted EBITDA increased by $2 million to $108 million, driven by improved pricing and mix, substantially offset by increased costs, unfavorable foreign currency exchange, and lower sales volumes[137] Results of Operations – Consolidated Review Consolidated sales increased by $13 million to $525 million due to pricing gains offset by volume and currency, while operating income decreased to $37 million, and Adjusted EBITDA slightly rose to $108 million Reconciliation of Change in Sales (Q1'23 vs Q1'22) | (In millions) | Amount | | :--- | :--- | | Volume | $(25) | | Pricing | $62 | | Foreign currency exchange | $(24) | | Total Change in sales | $13 | - Gross profit margin remained stable at 31.4%, as pricing actions offset higher operating costs related to inflation and plant shutdowns[152][153] Adjusted EBITDA Reconciliation | (In millions) | Three months ended Dec 31, 2022 | Three months ended Dec 31, 2021 | | :--- | :--- | :--- | | Net income | $40 | $48 | | EBITDA | $93 | $118 | | Key items adjustments | $15 | $(12) | | Adjusted EBITDA | $108 | $106 | Adjusted Diluted EPS Reconciliation | | Three months ended Dec 31, 2022 | Three months ended Dec 31, 2021 | | :--- | :--- | :--- | | Diluted EPS from continuing operations (GAAP) | $0.76 | $0.55 | | Key items, after tax | $(0.12) | $0.00 | | Adjusted diluted EPS (non-GAAP) | $0.64 | $0.55 | | Amortization expense adjustment (net of tax) | $0.33 | $0.33 | | Adjusted diluted EPS excluding intangibles (non-GAAP) | $0.97 | $0.88 | Results of Operations – Reportable Segment Review Life Sciences sales grew 22% with 44% Adjusted EBITDA increase, while Personal Care and Specialty Additives saw sales declines of 6% and 8% respectively due to weak demand and destocking, and Intermediates remained stable - Life Sciences: Sales increased $37 million, driven by strong global demand for pharmaceutical ingredients. Adjusted EBITDA rose to $52 million from $36 million[188][191] - Personal Care: Sales decreased $9 million, negatively impacted by the COVID situation in China and significant destocking in Europe. EBITDA fell to $32 million from $36 million[194][195] - Specialty Additives: Sales decreased $13 million due to the China reopening impact and a general economic slowdown in Europe. Adjusted EBITDA fell to $23 million from $38 million, also impacted by unplanned plant shutdowns in China[198][200][202] - Intermediates: Sales increased slightly by $1 million, as favorable pricing offset lower volume. EBITDA increased to $23 million from $19 million[203][204] Financial Position and Liquidity Cash and cash equivalents decreased by $114 million, with ongoing free cash flow at negative $21 million due to increased working capital, while total available liquidity remained strong at $1.2 billion Free Cash Flow Reconciliation | (In millions) | Three months ended Dec 31, 2022 | Three months ended Dec 31, 2021 | | :--- | :--- | :--- | | Cash from operating activities (continuing) | $(29) | $14 | | less: Additions to property, plant and equipment | $(23) | $(15) | | Free cash flow | $(52) | $(1) | | Adjustments for restructuring, environmental, etc. | $31 | $27 | | Ongoing free cash flow | $(21) | $26 | - The $47 million decline in ongoing free cash flow was primarily caused by a $45 million increase in working capital, driven by higher inventories and reduced accrued expenses[217] - Total available liquidity was $1,219 million at December 31, 2022, comprising cash, the revolving credit facility, and the foreign accounts receivable securitization facility[219] Outlook Ashland maintained its FY2023 outlook, expecting sales between $2.5 billion and $2.7 billion and Adjusted EBITDA between $600 million and $650 million, though current forecasts suggest earnings will be below the midpoint of the EBITDA range Fiscal Year 2023 Outlook | Key Operating Metrics | FY2023 Outlook | | :--- | :--- | | Sales | $2.5 - $2.7 billion | | Adjusted EBITDA | $600 - $650 million | - The company's current forecast model indicates earnings will be below the mid-point of the Adjusted EBITDA outlook range[231] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure as of December 31, 2022, remains materially consistent with disclosures in its most recent Annual Report on Form 10-K - Market risk exposure at December 31, 2022 is generally consistent with the exposures presented in the most recent Form 10-K[233] Controls and Procedures Ashland's disclosure controls and procedures were deemed effective as of December 31, 2022, with no significant changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[234] - No significant changes to internal control over financial reporting occurred during the quarter[235] PART II – OTHER INFORMATION Legal Proceedings This section outlines Ashland's material legal proceedings, primarily involving asbestos-related personal injury claims from former subsidiaries and environmental cleanup responsibilities at 59 sites - The company is subject to liabilities from asbestos-related personal injury claims, primarily from indemnification obligations for former subsidiaries Riley Stoker Corporation and Hercules LLC[238] - As of December 31, 2022, Ashland has been identified as a potentially responsible party (PRP) for environmental investigation and/or cleanup at 59 sites under CERCLA and similar state laws[240] Risk Factors No material changes occurred during the quarter to the risk factors previously disclosed in Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2022 - During the period covered by this report, there were no material changes from the risk factors previously disclosed in Ashland's Annual Report on Form 10-K for the fiscal year ended September 30, 2022[246] Issuer Purchases of Equity Securities Ashland did not repurchase any equity securities during the quarter, with the full $500 million authorized under its evergreen stock repurchase program remaining available - There was no share repurchase activity during the three months ended December 31, 2022[247] - As of December 31, 2022, $500 million remains available for repurchase under the company's stock repurchase authorization[248] Exhibits This section lists exhibits filed with the Form 10-Q report, including an amendment to the Tax Matters Agreement, CEO and CFO certifications, and financial statements in Inline XBRL format - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[250]