ASHLAND INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements herein.
BUSINESS OVERVIEW Ashland profileAshland is a premier global leader in providing specialty materials to customers in a wide range of consumer and industrial markets, including adhesives, architectural coatings, construction, energy, food and beverage, personal care and pharmaceutical. With approximately 4,700 employees worldwide,Ashland serves customers in more than 100 countries.Ashland's sales generated outside ofNorth America were 60% each for the three months endedDecember 31, 2019 and 2018. Sales by region expressed as a percentage of total consolidated sales for the three months endedDecember 31 were as follows: Three months ended December 31 Sales by Geography 2019 2018 North America (a) 40 % 40 % Europe 31 % 31 % Asia Pacific 21 % 21 % Latin America & other 8 % 8 % 100 % 100 %
(a)
Reportable segmentsAshland's businesses are managed within the following two reportable segments: Specialty Ingredients and Intermediates and Solvents. For further descriptions of each reportable segment, see "Results of Operations - Reportable Segment Review" beginning on page 43. The contribution to sales by each reportable segment expressed as a percentage of total consolidated sales for the three months endedDecember 31 were as follows: Three months ended December 31 Sales by Reportable Segment 2019 2018 Specialty Ingredients 95 % 96 % Intermediates and Solvents 5 % 4 % 100 % 100 % 32
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KEY DEVELOPMENTS Business resultsAshland recorded net income of$32 million in the current quarter compared to a net loss of$48 million in the prior year quarter.Ashland's Adjusted EBITDA decreased by 12% to$88 million (seeU.S. GAAP reconciliation below under consolidated review). The decrease in Adjusted EBITDA was primarily due to lower sales volumes within the Specialty Ingredients reportable segment and a catalyst changeover at the Intermediates and Solvents Lima facility resulting in additional turnaround spend and lost absorption during the current quarter. These items were partially offset by lower selling, general and administrative expenses as a result of the current company-wide cost reduction program and improved pricing versus changes in raw material costs.
Composites segment and Marl facility
OnNovember 15, 2018 ,Ashland announced that it had signed a definitive agreement to sell its Composites segment and Intermediates and Solvents Marl facility toINEOS Enterprises in a transaction valued at$1.1 billion .Ashland retained the remaining Intermediates and Solvents facility inLima, Ohio primarily for its own internal business use.
In late July of 2019,
On
Since this disposal group signifies a strategic shift inAshland's business and had a major effect onAshland's operations and financial results, the operating results and cash flows related to Composites and the Marl facility, including the Maleic business, have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income (Loss) and Statements of Consolidated Cash Flows. See Note C of the Notes to Condensed Consolidated Financial Statements for the results of operations for Composites and the Marl facility, including the Maleic business, for all periods presented. Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss) that were previously allocated to the Composites segment and Marl facility do not qualify for classification within discontinued operations and are now reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were zero and$12 million during the three months endedDecember 31, 2019 and 2018, respectively.
Subsequent to the completion of the sale,
Restructuring Plans
In earlyMay 2018 ,Ashland announced a company-wide restructuring program to accelerate EBITDA margin growth by creating a leaner, more cost competitive company with improved operating efficiency, faster decision making and a stronger customer focus. Under this program,Ashland intended to eliminate a total of$120 million of existing allocated costs, direct expenses within Specialty Ingredients SG&A, and facility-related costs as follows:
• Approximately
and to the butanediol manufacturing facility in Marl, Germany , are
expected to be offset or eliminated through transfers and reductions. This
reduction is intended to eliminate stranded costs.
• Approximately
improved profitability in Specialty Ingredients and adjusted EBITDA
margin.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS - CONSOLIDATED REVIEW
Use of non-GAAP measures
Ashland has included within this document the following non-GAAP measures, on both a consolidated and reportable segment basis, which are not defined withinU.S. GAAP and do not purport to be alternatives to net income or cash flows from operating activities as a measure of operating performance or cash flows: • EBITDA - net income (loss), plus income tax expense (benefit), net interest and other expenses, and depreciation and amortization. • Adjusted EBITDA - EBITDA adjusted for noncontrolling interests, discontinued operations, net income (loss) on acquisitions and divestitures, other income and (expense) and key items (including the
remeasurement gains and losses related to pension and other postretirement
plans).
• Adjusted EBITDA margin - Adjusted EBITDA divided by sales.
• Adjusted diluted earnings per share (EPS) - income (loss) from continuing
operations, adjusted for key items, net of tax, divided by the average
outstanding diluted shares for the applicable period.
• Free cash flow - operating cash flows less capital expenditures and
certain other adjustments as applicable.
Management believes the use of EBITDA and Adjusted EBITDA measures on a
consolidated and reportable segment basis assists investors in understanding the
ongoing operating performance by presenting comparable financial results between
periods. Ashland believes that by removing the impact of depreciation and
amortization and excluding certain non-cash charges, amounts spent on interest
and taxes and certain other charges that are highly variable from year to year,
EBITDA and Adjusted EBITDA provide Ashland's investors with performance measures
that reflect the impact to operations from trends in changes in sales, margin
and operating expenses, providing a perspective not immediately apparent from
net income and operating income. The adjustments Ashland makes to derive the
non-GAAP measures of EBITDA and Adjusted EBITDA exclude items which may cause
short-term fluctuations in net income and operating income and which Ashland
does not consider to be the fundamental attributes or primary drivers of its
business. EBITDA and Adjusted EBITDA provide disclosure on the same basis as
that used by Ashland's management to evaluate financial performance on a
consolidated and reportable segment basis and provide consistency in our
financial reporting, facilitate internal and external comparisons of Ashland's
historical operating performance and its business units and provide continuity
to investors for comparability purposes.
The Adjusted diluted EPS metric enables Ashland to demonstrate what effect key
items have on an earnings per diluted share basis by taking income (loss) from
continuing operations, adjusted for key items after tax that have been
identified in the Adjusted EBITDA table, and dividing by the average outstanding
diluted shares for the applicable period. Ashland's management believes this
presentation is helpful to illustrate how the key items have impacted this
metric during the applicable period.
The free cash flow metric enables Ashland to provide a better indication of the
ongoing cash being generated that is ultimately available for both debt and
equity holders as well as other investment opportunities. Unlike cash flow
provided by operating activities, free cash flow includes the impact of capital
expenditures from continuing operations, providing a more complete picture of
cash generation. Free cash flow has certain limitations, including that it does
not reflect adjustment for certain non-discretionary cash flows such as
mandatory debt repayments. The amount of mandatory versus discretionary
expenditures can vary significantly between periods.
Although Ashland may provide forward-looking guidance for Adjusted EBITDA,
Adjusted diluted EPS and free cash flow, Ashland is not reaffirming or providing
forward-looking guidance for U.S. GAAP-reported financial measures or a
reconciliation of forward-looking non-GAAP financial measures to the most
directly comparable U.S. GAAP measure because it is unable to predict with
reasonable certainty the ultimate outcome of certain significant items that
affect these metrics such as domestic and international economic, political,
legislative, regulatory and legal actions. In addition, certain economic
conditions, such as recessionary trends, inflation, interest and monetary
exchange rates, government fiscal policies and changes in the prices of certain
key raw materials, can have a significant effect on operations and are difficult
to predict with certainty.
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These non-GAAP measures should be considered supplemental in nature and should
not be construed as more significant than comparable measures defined by U.S.
GAAP. Limitations associated with the use of these non-GAAP measures include
that these measures do not present all of the amounts associated with our
results as determined in accordance with U.S. GAAP. The non-GAAP measures
provided are used by Ashland management and may not be determined in a manner
consistent with the methodologies used by other companies. EBITDA and Adjusted
EBITDA provide a supplemental presentation of Ashland's operating performance on
a consolidated and reportable segment basis. Adjusted EBITDA generally includes
adjustments for items that impact comparability between periods. In addition,
certain financial covenants related to Ashland's 2017 Credit Agreement are based
on similar non-GAAP measures and are defined further in the sections that refer
to this metric.
Consolidated review
Net income
Ashland's net income is primarily affected by results within operating income,
net interest and other expense, income taxes, discontinued operations and other
significant events or transactions that are unusual or nonrecurring.
Key financial results for the three months ended
•Ashland's net income amounted to$32 million compared to a loss of$48 million for the three months endedDecember 31, 2019 and 2018, respectively, or income of$0.53 and a loss of$0.76 diluted earnings per share, respectively.
• Discontinued operations, which are reported net of taxes, resulted in a
loss of
December 31, 2019 and 2018, respectively. • Results from continuing operations, which excludes results from
discontinued operations, amounted to income of $34 million and a loss of
$71 million for the three months ended December 31, 2019 and 2018,
respectively.
• The effective income tax rates were a benefit of 240% and expense of 51%
for the three months ended December 31, 2019 and 2018, respectively, and
were significantly impacted by certain tax discrete items in both the
current and prior year quarters.
•
respectively. This includes gains of
for gains/losses on restricted investments.
• Other net periodic benefit income of
ended
• Net income/loss on divestitures totaled income of
$3 million for the three months endedDecember 31, 2019 and 2018, respectively.
• Operating (loss) income amounted to an income of
respectively.
For further information on the items reported above, see the discussion in the comparative Statements of Consolidated Comprehensive Income (Loss) caption review analysis.
Operating income
Operating income (loss) amounted to an income of$17 million and a loss of$7 million for the three months endedDecember 31, 2019 and 2018, respectively. The current and prior year quarters' operating income included certain key items that were excluded to arrive at Adjusted EBITDA and are quantified in the table below. These operating key items for the applicable periods are summarized as follows:
• Restructuring, separation and other costs -
implements company-wide cost reduction programs related to acquisitions,
divestitures and other cost reduction programs in order to enhance
profitability through streamlined operations and an improved overall cost
structure.
associated with these programs.
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• Accelerated depreciation - As a result of various restructuring activities
at certain office facilities and manufacturing facilities during the prior
year quarter,
the expected useful life of certain property, plant and equipment.
Operating income for the three months endedDecember 31, 2019 and 2018 included depreciation and amortization of$61 million and$62 million , respectively (which excluded accelerated depreciation and amortization of$19 million for the three months ended 2018).
Non-operating key items affecting EBITDA
• Gain on pension and other postretirement plan remeasurements -
recognized a remeasurement gain due to the settlement of a non-U.S.
pension plan during the prior year quarter. See Note K of the Notes to
Condensed Consolidated Financial Statements for more information.
• Net income (loss) on divestitures -
impairment of an investment in the prior year quarter.
EBITDA and Adjusted EBITDA
EBITDA totaled$79 million and$93 million for the three months endedDecember 31, 2019 and 2018, respectively. EBITDA and Adjusted EBITDA results in the table below have been prepared to illustrate the ongoing effects ofAshland's operations, which exclude certain key items previously described. Management believes the use of such non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis. Three months ended December 31 (In millions) 2019 2018 Net income (loss) $ 32 $ (48 ) Income tax expense (benefit) (24 ) 24 Net interest and other expense 10 55 Depreciation and amortization (a) 61 62 EBITDA 79 93 Loss (income) from discontinued operations (net of tax) 2 (23 ) Key items included in EBITDA: Restructuring, separation and other costs 7 26 Accelerated depreciation - 19 Gain on pension and other postretirement plan remeasurements - (18 ) Net loss on divestitures - 3 Total key items included in EBITDA 7 30 Adjusted EBITDA $ 88 $
100
Total key items included in EBITDA $ 7 $ 30 Unrealized (gain) loss on securities (b) (9 ) 30 Total key items, before tax $ (2 ) $ 60
(a) Excludes
ended
(b) Due to the adoption of new accounting guidance in the prior year quarter,
the unrealized losses on certain investment securities directly impact
earnings and are recorded within the net interest and other expense
caption on the Statements of Consolidated Comprehensive Income
(Loss). See Note E of the Notes to Condensed Consolidated Financial
Statements for more information.
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Diluted EPS and Adjusted Diluted EPS
The following table reflects theU.S. GAAP calculation for the income (loss) from continuing operations adjusted for the cumulative diluted EPS effect for key items after tax that have been identified in the Adjusted EBITDA table in the previous section. Key items are defined as the financial effects from significant transactions that may have caused short-term fluctuations in net income and/or operating income whichAshland believes do not accurately reflectAshland's underlying business performance and trends. The Adjusted diluted EPS for the income (loss) from continuing operations in the following table has been prepared to illustrate the ongoing effects ofAshland's operations. Management believes investors and analysts use this financial measure in assessingAshland's business performance and that presenting this non-GAAP measure on a consolidated basis assists investors in better understandingAshland's ongoing business performance and enhances their ability to compare period-to-period financial results. Three months ended December 31 2019 2018 Diluted EPS from continuing operations (as reported) $ 0.56 $ (1.14 ) Key items, before tax: Restructuring, separation and other costs 0.12
0.71
Gain on pension and other postretirement plan remeasurements - (0.29 ) Unrealized (gain) loss on securities (0.15 ) 0.47 Net loss on divestitures - 0.05 Key items, before tax (0.03 ) 0.94 Tax effect of key items (a) 0.02 (0.11 ) Key items, after tax (0.01 ) 0.83 Tax specific key items: Deferred tax rate changes - 0.03 One-time transition tax - 0.35 Restructuring and separation activity - 0.02 Other tax reform (0.42 ) 0.05 Tax specific key items (b) (0.42 ) 0.45 Total key items (0.43 ) 1.28 Adjusted diluted EPS from continuing operations (non-GAAP) $ 0.13 $ 0.14
(a) Represents the diluted EPS impact from the tax effect of the key items
that are previously identified above.
(b) Represents the diluted EPS impact from tax specific financial
transactions, tax law changes or other matters that fall within thedefinition of key items. For additional explanation of these tax specific
key items, see the income tax expense (benefit) discussion within the
following caption review section.
Statements of Consolidated Comprehensive Income (Loss) - caption review
A comparative analysis of the Statements of Consolidated Comprehensive Income (Loss) by caption is provided as follows for the three months endedDecember 31, 2019 and 2018. Three months ended December 31 (In millions) 2019 2018 Change Sales$ 533 $ 576 $ (43 )
The following table provides a reconciliation of the change in sales between the
three months ended
Three months ended
(In millions) December 31, 2019
Volume/product mix $ (28 )
Plant realignment (7 )
Currency exchange (4 )
Pricing (4 )
Change in sales $ (43 )
37
-------------------------------------------------------------------------------- Sales for the current quarter decreased$43 million compared to the prior year quarter. Lower volume, the impact of plant realignments, unfavorable foreign currency exchange and lower pricing each decreased sales by$28 million ,$7 million $4 million and$4 million , respectively. Three months ended December 31 (In millions) 2019 2018 Change Cost of sales$ 380 $ 424 $ (44 ) Gross profit as a percent of sales 28.7 % 26.4 % Fluctuations in cost of sales are driven primarily by raw material prices, volume and changes in product mix, currency exchange, acquisitions and divestitures and other certain charges incurred as a result of changes or events within the businesses or restructuring activities. The following table provides a quantified reconciliation of the changes in cost of sales between the three months endedDecember 31, 2019 and 2018. Three months ended (In millions) December 31, 2019 Changes in: Plant closure costs $ (34 ) Volume/product mix (11 ) Currency exchange (2 ) Production and raw material costs 3 Change in cost of sales $ (44 ) Cost of sales for the current quarter decreased$44 million compared to the prior year quarter. The closure of a manufacturing facility during the prior year quarter, unfavorable volume and favorable currency exchange decreased cost of sales by$34 million ,$11 million and$2 million , respectively. These decreases were partially offset by higher production and raw material costs which increased cost of sales by$3 . Three months ended December 31 (In millions) 2019 2018 Change
Selling, general and administrative expense
$ (23 ) As a percent of sales 22.5 % 24.8 % Selling, general and administrative expense for the current quarter decreased$23 million compared to the prior year quarter driving expenses as a percent of sales favorable compared to the prior year quarter. Key drivers of the fluctuation in selling, general and administrative expense compared to the prior year quarter were:
•
primarily due to the overall company-wide cost reduction program.
•
other costs during the current and prior year quarters, respectively.
•$2 million of favorable foreign currency exchange compared to the prior year quarter. Three months ended December 31 (In millions) 2019 2018 Change
Research and development expense
38
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Research and development expense declined compared to the prior year quarter, primarily due to the overall company-wide cost reduction program.
Three months ended December 31
(In millions) 2019 2018 Change
Equity and other income
Equity income (a) $ - $ - $ -
Other income - 1 (1 )
$ - $ 1 $ (1 )
(a) Activity of $0 denotes value less than $1 million .
Equity and other income remained relatively consistent compared to the prior
year quarter.
Three months ended December 31
(In millions) 2019 2018 Change
Net interest and other expense (income)
Interest expense $ 23 $ 27 $ (4 )
Interest income (1 ) (1 ) -
Loss (income) from restricted investments (13 ) 28
(41 )
Other financing costs 1 1 -
$ 10 $ 55 $ (45 )
Net interest and other financing expense decreased by $45 million during the
current quarter compared to the prior year quarter. The decrease is primarily
due to the impact of restricted investments, which generated income of $13
million in the current quarter compared to losses of $28 million in the prior
year quarter. Interest expense decreased $4 million due to lower debt levels
during the current quarter compared to the prior year quarter.
Three months ended December 31
(In millions) 2019 2018 Change
Other net periodic benefit income $ -
Other net periodic benefit income during the prior year quarter related to the
curtailment gain from the settlement of a non-
Three months ended December 31
(In millions) 2019 2018 Change
Net income (loss) on divestitures
6
The activity in the current quarter was related to post-closing adjustments for
certain divestitures, while activity in the prior year quarter related to the
impairment of an investment.
Three months ended December 31
(In millions) 2019 2018 Change
Income tax expense (benefit) $ (24 ) $ 24 $ (48 )
Effective tax rate (240 )% 51 %
Ashland's effective tax rate in any interim period is subject to adjustments
related to discrete items and the mix of domestic and foreign operating
results. The overall effective tax rate was negative 240% for the three months
ended December 31, 2019 and was primarily impacted by income mix, certain
nondeductible restructuring costs as well as $27 million from favorable tax
discrete items primarily from the tax benefit related to the Swiss Tax Reform
enacted in the current quarter.
39
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The overall effective tax rate was 51% for the three months ended December 31,
2018 and was primarily impacted by the prior year quarter income mix and net
unfavorable tax discrete adjustments of $30 million related to the enactment of
the US Tax Cuts and Jobs Act of 2017 (Tax Act).
Adjusted income tax expense (benefit)
Key items are defined as the financial effects from significant transactions that may have caused short-term fluctuations in net income and/or operating income whichAshland believes do not accurately reflectAshland's underlying business performance and trends. Tax specific key items are defined as the financial effects from tax specific financial transactions, tax law changes or other matters that fall within the definition of key items as previously described. The effective tax rate, excluding key items, which is a non-GAAP measure, has been prepared to illustrate the ongoing tax effects ofAshland's operations. Management believes investors and analysts use this financial measure in assessingAshland's business performance and that presenting this non-GAAP measure on a consolidated basis assists investors in better understandingAshland's ongoing business performance and enhancing their ability to compare period-to-period financial results.
The effective tax rate during the three months ended
• Deferred tax rate changes - Includes the impact from the remeasurement of
the Tax Act as well as the impact from deferred rate changes for other
jurisdictions;
• One-time transition tax - Includes the impact from the one-time transition
tax resulting from the enactment of the Tax Act;
• Restructuring and separation activity - Includes the impact from
company-wide cost reduction programs; and
• Other tax reform - Includes the impact from other items related to the Tax
Act and other tax law changes including Swiss Tax Reform. The Swiss Tax
Reform benefit is an estimate based on ten year income projections and is
subject to approval by the Swiss tax authorities.
this amount and make adjustments as appropriate in future periods. These
adjustments also include the impact from the deductibility of compensation
items and miscellaneous state tax items.
The following table is a calculation of the effective tax rate, excluding these
key items.
Three months ended
December 31
(In millions) 2019 2018
Loss from continuing operations before income taxes
(47 )
Key items (pre-tax) (a) (2 ) 60
Adjusted income from continuing operations before income taxes$ 8 $ 13 Income tax expense (benefit)$ (24 ) $ 24 Income tax rate adjustments: Tax effect of key items (1 ) 8 Tax specific key items: (b) Deferred tax rate changes - (2 ) One-time transition tax - (22 ) Restructuring and separation activity - (1 ) Other tax reform 25 (3 ) Total income tax rate adjustments 24 (20 ) Adjusted income tax expense $ - $
4
Effective tax rate, excluding key items (Non-GAAP) (c) 3 % 29 %
(a) See Adjusted EBITDA reconciliation table previously disclosed in this
MD&A for a summary of the key items, before tax.
40
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(b) For additional information on the effect that these tax specific key
items had on EPS, see the Adjusted Diluted EPS table previously disclosed
in this MD&A.
(c) Due to rounding conventions, the effective tax rate presented may not
recalculate precisely based on the numbers disclosed within this table.
Three months ended December 31
(In millions) 2019 2018 Change
Income (loss) from discontinued operation (net of taxes)
Composites/Marl facility $ - $ 25 $ (25 )
Valvoline (1 ) - (1 )
Water Technologies (1 ) (1 ) -
Distribution - (1 ) 1
$ (2 ) $ 23 $ (25 )
As a result of the divestiture of the Composites segment and Marl facility, the
related operating results have been reflected as discontinued operations (net of
tax) within the Statements of Consolidated Comprehensive Income (Loss). See Note
B for more information on this divestiture. In the current quarter, for the
Maleic business component of the Composites business not sold to INEOS , the
sales and pre-tax operating income included in discontinued operations were $12
million and $2 million , respectively. In the prior year quarter, the sales and
pre-tax operating income included in discontinued operations were $275 million
and $36 million , respectively. The prior year quarter was primarily attributable
to the operations of the Composites segment and the Marl facility sold to INEOS
during August 2019 .
The activity related to Water Technologies, Valvoline and Distribution was related to post-closing adjustments.
Other comprehensive income (loss)
A comparative analysis of the components of other comprehensive income (loss) is
provided below for the three months ended
Three months ended December 31
(In millions) 2019 2018 Change
Other comprehensive income (loss) (net of taxes)
Unrealized translation gain (loss) $ 38 $ (31 ) $ 69
Pension and postretirement obligation adjustment - (6 ) 6
$ 38 $ (37 ) $ 75 Total other comprehensive income, net of tax, for the current quarter increased
• For the three months ended
gain (loss) from foreign currency translation adjustments resulted in a
gain of
ended
and losses are primarily due to translating foreign subsidiary financial
statements from local currencies to U.S. Dollars.
• For the three months ended December 31, 2018 , the pension and
postretirement obligation adjustment included
costs recognized within other comprehensive income (loss) due to pension
plan remeasurements.
RESULTS OF OPERATIONS - REPORTABLE SEGMENT REVIEW
Results ofAshland's reportable segments are presented based on its management and internal accounting structure. The structure is specific toAshland ; therefore, the financial results ofAshland's reportable segments are not necessarily comparable with similar information for other companies.Ashland allocates all significant costs to its reportable segments except for certain significant company-wide restructuring activities and other costs or adjustments that relate to former businesses thatAshland no longer operates. The service cost 41
-------------------------------------------------------------------------------- component of pension and other postretirement benefits costs is allocated to each reportable segment on a ratable basis; while the remaining components of pension and other postretirement benefits costs are recorded within the other net periodic benefit income caption on the Statements of Consolidated Comprehensive Income (Loss).Ashland refines its expense allocation methodologies to the reportable segments from time to time as internal accounting practices are improved, more refined information becomes available and the industry or market changes. Significant revisions toAshland's methodologies are adjusted for all segments on a retrospective basis. Beginning in the second quarter of fiscal 2020,Ashland will change the manner in which it manages the business, moving from a functionally led to a business led organization. This change recognizes thatAshland has a diverse portfolio of businesses with different value propositions for the marketsAshland serves. The organizational change will allowAshland to align its business models, resources and cost structure to the specific needs of each business and enable greater ownership and accountability for both short- and long-term performance.Ashland will realign its segment reporting structure commensurate with this organizational change. The EBITDA and Adjusted EBITDA amounts presented within this business section are provided as a means to enhance the understanding of financial measurements thatAshland has internally determined to be relevant measures of comparison for each segment. Each of these non-GAAP measures is defined as follows: EBITDA (operating income (loss) plus depreciation and amortization), Adjusted EBITDA (EBITDA adjusted for key items, which may include pro forma effects for significant acquisitions or divestitures, as applicable), and Adjusted EBITDA margin (Adjusted EBITDA, which may include pro forma adjustments, divided by sales or sales adjusted for pro forma results).Ashland does not allocate items to each reportable segment below operating income, such as interest expense and income taxes. As a result, reportable segment EBITDA and Adjusted EBITDA are reconciled directly to operating income since it is the most directly comparable caption to the Statements of Consolidated Comprehensive Income (Loss).
The following table discloses sales, operating income, depreciation and
amortization and statistical operating information by reportable segment for the
three months ended
Three months ended
December 31
(In millions) 2019 2018
Sales
Specialty Ingredients $ 505 $ 553
Intermediates and Solvents 28 23
$ 533 $ 576
Operating income (loss)
Specialty Ingredients $ 44 $ 26
Intermediates and Solvents (12 ) -
Unallocated and other (15 ) (33 )
$ 17 $ (7 )
Depreciation and amortization
Specialty Ingredients $ 58 $ 77
Intermediates and Solvents 3 3
Unallocated and other - 1
$ 61 $ 81
Operating information
Specialty Ingredients
Sales per shipping day $ 7.7 $ 8.9
Metric tons sold (thousands) 67.2 72.8Gross profit as a percent of sales (a) 32.2 % 27.1 % Intermediates and Solvents Sales per shipping day
$ 0.4 $ 0.4 Metric tons sold (thousands) 9.9 6.8
Gross profit as a percent of sales (a) (35.6 )% 10.0 %
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(a) Gross profit is defined as sales, less cost of sales divided by sales.
Sales by region expressed as a percentage of reportable segment sales for the three months endedDecember 31, 2019 and 2018 were as follows.Ashland includes onlyU.S. andCanada in its North American designation. Three months ended December 31, 2019 Specialty Intermediates Sales by Geography Ingredients and Solvents North America 39 % 53 % Europe 32 % 19 % Asia Pacific 20 % 24 % Latin America & other 9 % 4 % 100 % 100 % Three months ended December 31, 2018 Specialty Intermediates Sales by Geography Ingredients and Solvents North America 40 % 50 % Europe 31 % 21 % Asia Pacific 21 % 26 % Latin America & other 8 % 3 % 100 % 100 % Specialty Ingredients Specialty Ingredients offers industry-leading products, technologies and resources for solving formulation and product-performance challenges. Using natural, synthetic and semisynthetic polymers derived from cellulose ethers, vinyl pyrrolidones, acrylic polymers, polyester and polyurethane-based adhesives, and plant and seed extract, Specialty Ingredients offers comprehensive and innovative solutions for consumer and industrial applications. Key customers include pharmaceutical companies; makers of personal care products, food and beverages manufacturers; makers of nutraceuticals and supplements; manufacturers of paint, coatings and construction materials; packaging and converting; and oilfield service companies.
Specialty Ingredients' sales decreased
Gross profit during the current quarter increased$12 million compared to the prior year quarter. The net impact of pricing and costs increased gross profit by$32 million , which included$26 million for the impact of the planned closure of a manufacturing facility during the prior year quarter (which included$19 million of accelerated depreciation and amortization). Additionally, unfavorable foreign currency exchange and lower volume decreased gross profit by$2 million and$16 million , respectively. In total, gross profit margin during the current quarter increased 5.1 percentage points as compared to the prior year quarter to 32.2%. Selling, general and administrative expenses (which include research and development expenses throughout the reportable segment discussion and analysis) decreased$5 million compared to the prior year quarter due to lower operating costs and favorable foreign currency exchange, which represented$4 million and$1 million of the total decrease, respectively. Equity and other income increased$1 million compared to the prior year quarter. Operating income totaled$44 million for the current quarter compared to$26 million in the prior year quarter. Current quarter EBITDA increased$18 million to$102 million , while Adjusted EBITDA decreased$10 million to$102 million . Adjusted EBITDA margin decreased 0.1 percentage points in the current quarter to 20.2%. 43
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EBITDA and adjusted EBITDA reconciliation
The following EBITDA and Adjusted EBITDA presentation for the three months endedDecember 31, 2019 and 2018 below is provided as a means to enhance the understanding of financial measurements thatAshland has internally determined to be relevant measures of comparison for the results of Specialty Ingredients. Adjusted EBITDA results have been prepared to illustrate the ongoing effects ofAshland's operations, which exclude certain key items. The key items within the prior year quarter related to$28 million of restructuring costs associated with the planned closure of a manufacturing facility (which included$19 million of accelerated depreciation). Three months ended December 31 (In millions) 2019 2018 Operating income$ 44 $ 26 Depreciation and amortization (a) 58 58 EBITDA 102 84 Accelerated depreciation - 19 Severance and other restructuring costs - 9 Adjusted EBITDA$ 102 $ 112
(a) Excludes
ended
Intermediates and Solvents
Intermediates and Solvents is a leading producer of 1,4 butanediol and related derivatives, including tetrahydrofuran and n-methylpyrrolidone. These products are used as chemical intermediates in the production of engineering polymers and polyurethanes, and as specialty process solvents in a wide array of applications including electronics, pharmaceuticals, water filtration membranes and more. Butanediol is also supplied toAshland's Specialty Ingredients business for use as a raw material.
Intermediates and Solvents' sales increased
Gross profit decreased$12 million during the current quarter compared to the prior year quarter primarily due to a$10 million decrease for increased production costs, primarily driven by theLima facility changeover resulting in additional turnaround spend and absorption lost during the current quarter, and a$2 million reduction for lower pricing. Gross profit margin decreased 45.6 percentage points as compared to the prior year quarter to (35.6)%.
Selling, general and administrative expenses remained consisted with the prior year quarter.
Operating income was a loss of$12 million in the current quarter compared to zero in the prior year quarter. EBITDA decreased$12 million to a loss of$9 million in the current quarter, while EBITDA margin decreased 45.1 percentage points in the current quarter to (32.1)%.
EBITDA reconciliation
The following EBITDA presentation for the three months endedDecember 31, 2019 and 2018 is provided as a means to enhance the understanding of financial measurements thatAshland has internally determined to be relevant measures of comparison for the results of Intermediates and Solvents. There were no unusual or key items that affected comparability for EBITDA during the current and prior year quarters or periods. Three months ended December 31 (In millions) 2019 2018 Operating income$ (12 ) $ - Depreciation and amortization 3 3 EBITDA$ (9 ) $ 3 44
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Unallocated and other The following table summarizes the key components of the Unallocated and other segment's operating income (loss) for the three months endedDecember 31, 2019 and 2018. Three months ended December 31 (In millions) 2019 2018 Restructuring activities$ (7 ) $ (29 ) Environmental expenses (3 ) (2 ) Other expenses (primarily legacy expenses) (5 ) (2 ) Total expense$ (15 ) $ (33 )
Unallocated and other recorded expense of$15 million and$33 million for the three months endedDecember 31, 2019 and 2018, respectively. The current and prior year quarters included charges for restructuring activities of$7 million and$29 million , respectively, which were comprised of the following items:
•
•
restructuring costs related to company-wide cost reduction programs during
the current and prior year quarters; and
•
primarily related to the planned divestiture of the Composites segment and
Marl facility.
FINANCIAL POSITION
Liquidity
Ashland had $157 million in cash and cash equivalents as of December 31, 2019 ,
of which $145 million was held by foreign subsidiaries and had no significant
limitations that would prohibit remitting the funds to satisfy corporate
obligations. In certain circumstances, if such amounts were repatriated to the
United States , additional taxes might need to be accrued and paid depending on
the source of the earnings remitted. Ashland currently has no plans to
repatriate any amounts for which additional taxes would need to be accrued.
Three months ended
December 31
(In millions) 2019 2018
Cash provided (used) by:
Operating activities from continuing
operations $ (34 ) $ (9 )
Investing activities from continuing
operations (20 ) (24 )
Financing activities from continuing
operations (7 ) (50 )
Discontinued operations (15 ) (60 )
Effect of currency exchange rate changes on
cash and cash equivalents 1 (2 )
Net decrease in cash and cash equivalents $ (75 ) $ (145 )
45
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Operating activities
The following discloses the cash flows associated with
Three months ended
December 31
(In millions) 2019 2018
Cash flows provided (used) by operating
activities from continuing operations
Net income (loss) $ 32 $ (48 )
Income (loss) from discontinued operations 2 (23 )
(net of income taxes)
Adjustments to reconcile income from
continuing operations to
cash flows from operating activities:
Depreciation and amortization 61 81
Original issue discount and debt issuance 2 2
costs amortization
Deferred income taxes (12 ) 3
Stock based compensation expense 4 7
(Income) loss from restricted investments (13 ) 28
Excess tax benefit on stock based - 1
compensation
Net loss on divestitures - 3
Pension contributions (1 ) (1 )
Gain on pension and other postretirement plan - (18 )
remeasurements
Change in operating assets and liabilities (109 ) (44 )
(a)
Total cash flows used by operating activities $ (34 ) $ (9 )
from continuing operations
(a) Excludes changes resulting from operations acquired or sold.
Cash flows used from operating activities from continuing operations amounted to
cash outflows of
Operating Activities - Operating Assets and Liabilities
The cash results during each quarter are primarily driven by net income (loss), excluding discontinued operation results, adjusted for certain non-cash items including depreciation and amortization (including original issue discount and debt issuance cost amortization), as well as changes in working capital, which are fluctuations within accounts receivable, inventory, trade payables and accrued expenses.Ashland continues to emphasize working capital management as a high priority and focus. Changes in net working capital accounted for outflows of$94 million and$47 million for the three months endedDecember 31, 2019 and 2018, respectively, and were driven by the following:
• Accounts receivable - There were cash inflows of
million during the current and prior year quarters, respectively, which
were primarily due to collections in excess of sales during the first
quarter of each fiscal year.
• Inventory - There were cash outflows of
the current and prior year quarters, respectively, which were primarily
driven by sales volumes.
• Trade and other payables - There were cash outflows of
primarily related to the timing of certain payments.
The remaining changes to operating assets and liabilities resulted in an outflow of$15 million and an inflow of$3 million in the current and prior year quarters, respectively, and were primarily due to income taxes paid or income tax refunds, interest paid, and adjustments to certain accruals and other long-term assets and liabilities. 46 --------------------------------------------------------------------------------
Operating Activities - Summary
Operating cash flows for the current quarter included income from continuing operations of$34 million . Additionally, the current quarter included non-cash adjustments of$61 million for depreciation and amortization,$4 million for stock-based compensation expense and$13 million for income on restricted investments. Operating cash flows for the prior year quarter included a loss from continuing operations of$71 million . Additionally, the prior year quarter included a non-cash adjustment of$81 million for depreciation and amortization,$7 million for stock-based compensation expense,$28 million for the loss on restricted investments and$18 million for the gain on pension and other postretirement plan remeasurements. Investing activities
The following discloses the cash flows associated with
Three months ended
December 31
(In millions) 2019 2018
Cash flows provided (used) by investing
activities from continuing operations
Additions to property, plant and equipment $ (29 ) $ (33 )
Proceeds from disposal of property, plant and
equipment - 4
Net purchase of funds restricted for specific
transactions (1 ) (2 )
Reimbursement from restricted investments 10 8
Proceeds from sales of securities 4 -
Purchase of securities (4 ) -
Proceeds from the settlement of derivative
instruments - 1
Payments for the settlement of derivative
instruments - (2 )
Total cash flows used by investing activities
from continuing operations $ (20 ) $ (24 )
Cash used by investing activities was $20 million and $24 million for the
current and prior year quarters, respectively. The significant cash investing
activities for the current quarter primarily related to cash outflows of $29
million for property additions compared to $33 million in the prior year
quarter. Additionally, there were reimbursements from the restricted renewable
annual asbestos trust of $10 million during the current quarter compared to $8
million in the prior year quarter.
Financing activities
The following discloses the cash flows associated with
Three months ended
December 31
(In millions) 2019 2018
Cash flows provided (used) by financing
activities from continuing operations
Repayment of long-term debt - (1 )
Proceeds from (repayment of) short-term debt 14 (26 )
Cash dividends paid (16 ) (16 )
Stock based compensation employee withholding
taxes paid in cash (5 ) (7 )
Total cash flows used by financing activities $ (7 ) $ (50 )
from continuing operations
Cash flows (used) provided by financing activities resulted in outflows of $7
million for the current quarter as compared to $50 million for the prior year
quarter.
47
-------------------------------------------------------------------------------- Significant cash financing activities for the current quarter included short-term cash inflows of$14 million , primarily related to draws on the 2017 Revolving Credit Facility. The current quarter included cash dividends paid of$0.275 per share, for a total of$16 million .
Significant cash financing activities for the prior year quarter included
short-term debt net cash outflows of
The following discloses the cash flows associated with
Three months ended
December 31
(In millions) 2019 2018
Cash provided (used) by discontinued operations
Operating cash flows $ (17 ) $ (58 )
Investing cash flows 2 (2 )
Total cash used by discontinued operations
Cash flows for discontinued operations in the current quarter related to previously divested businesses, including net payments of asbestos and environmental liabilities.
Cash flows for discontinued operations in the prior year quarter included cash outflows of$44 million related to the activity of Composites and the Marl facility. The remaining cash flows for discontinued operations related to other previously divested businesses, including net payments of asbestos and environmental liabilities.
Free cash flow and other liquidity resources
The following represents
Three months ended
December 31
(In millions) 2019 2018
Total cash flows used by operating activities $ (34 ) $ (9 )
from continuing operations
Adjustments:
Additions to property, plant and equipment (29 ) (33 )
Free cash flows (a) $ (63 ) $ (42 )
(a) Includes
three months ended
Working capital (current assets minus current liabilities, excluding long-term debt due within one year) amounted to$656 million and$676 million as ofDecember 31, 2019 andSeptember 30, 2019 , respectively. Liquid assets (cash, cash equivalents and accounts receivable) amounted to 88% and 94% of current liabilities (excluding current liabilities held for sale) as ofDecember 31, 2019 andSeptember 30, 2019 , respectively.
The following summary reflects
December 31 September 30
(In millions) 2019 2019
Cash and investment securities
Cash and cash equivalents $ 157 $ 232
Unused borrowing capacity
Revolving credit facility $ 766 $ 752
Accounts receivable securitizations 27 48
48
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The borrowing capacity remaining under the $800 million revolving credit
facility was $766 million due to a reduction of $34 million for letters of
credit outstanding at December 31, 2019 . In total, Ashland's available liquidity
position, which includes cash, the revolving credit facility and the accounts
receivable securitization facilities, was $950 million at December 31, 2019 ,
compared to $1,032 million at September 30, 2019 .
Capital resources
Debt
The following summary reflects Ashland's debt as of December 31, 2019 and
September 30, 2019 .
December 31 September 30
(In millions) 2019 2019
Short-term debt (includes current portion of
long-term debt) $ 179 $ 166
Long-term debt (less current portion and debt issuance cost discounts) (a) 1,502 1,501 Total debt $ 1,681 $ 1,667
(a) Includes
of December 31, 2019 and September 30, 2019 , respectively.
Debt as a percent of capital employed was 32% at
See Note R of the Notes to Condensed Consolidated Financial Statements for
subsequent events related to
Ashland's corporate credit rating withStandard & Poor's is BB+, whileMoody's Investor Services is Ba1.Moody's Investor Services andStandard & Poor's outlooks both remained at stable. Subsequent changes to these ratings may have an effect onAshland's borrowing rate or ability to access capital markets in the future.
Ashland's most recent credit agreement (the 2017 Credit Agreement) contains usual and customary representations, warranties and affirmative and negative covenants, including financial covenants for leverage and interest coverage ratios, limitations on liens, additional subsidiary indebtedness, restrictions on subsidiary distributions, investments, mergers, sale of assets and restricted payments and other customary limitations. As ofDecember 31, 2019 ,Ashland is in compliance with all debt agreement covenant restrictions under the 2017 Credit Agreement. The maximum consolidated net leverage ratio permitted under the 2017 Credit Agreement is 4.5. The 2017 Credit Agreement defines the consolidated net leverage ratio as the ratio of consolidated indebtedness minus unrestricted cash and cash equivalents to consolidated EBITDA (Covenant Adjusted EBITDA) for any measurement period. In general, the 2017 Credit Agreement defines Covenant Adjusted EBITDA as net income plus consolidated interest charges, taxes, depreciation and amortization expense, fees and expenses related to capital market transactions and proposed or actual acquisitions and divestitures, restructuring and integration charges, noncash stock and equity compensation expense, and any other nonrecurring expenses or losses that do not represent a cash item in such period or any future period; less any noncash gains or other items increasing net income. The computation of Covenant Adjusted EBITDA differs from the calculation of EBITDA and Adjusted EBITDA, which have been reconciled above in the "consolidated review" section. In general, consolidated indebtedness includes debt plus all purchase money indebtedness, banker's acceptances and bank guaranties, deferred purchase price of property or services, attributable indebtedness and guarantees. AtDecember 31, 2019 ,Ashland's calculation of the consolidated net leverage ratio was 2.9. 49 -------------------------------------------------------------------------------- The minimum required consolidated interest coverage ratio under the 2017 Credit Agreement is 3.0. The 2017 Credit Agreement defines the consolidated interest coverage ratio as the ratio of Covenant Adjusted EBITDA to consolidated interest charges for any measurement period. AtDecember 31, 2019 ,Ashland's calculation of the consolidated interest coverage ratio was 5.9. Any change in Covenant Adjusted EBITDA of$100 million would have an approximate 0.5x effect on the consolidated net leverage ratio and a 1.1x effect on the consolidated interest coverage ratio. The average change in consolidated indebtedness of$100 million would affect the consolidated leverage ratio by approximately 0.2x. Additional capital resources Cash projectionAshland projects that cash flow from operations and other available financial resources such as cash on hand and revolving credit should be sufficient to meet investing and financing requirements to enableAshland to comply with the covenants and other terms of its financing obligations. These projections are based on various assumptions that include, but are not limited to: operational results, capital expenditures, working capital needs and tax payments and receipts.
Total equity
Total equity increased$54 million sinceSeptember 30, 2019 to$3,625 million atDecember 31, 2019 . The increase of$54 million was due to net income of$32 million , deferred translation gains of$38 million , and$1 million of common shares issued under stock incentive and other plans offset by dividends of$17 million . Stockholder dividends InMay 2019 , the Board of Directors ofAshland announced a quarterly cash dividend of27.5 cents per share to eligible stockholders at record, which represented an increase from previous quarterly cash dividend of25.0 cents per share. This dividend was paid in the third and fourth quarter of fiscal 2019 and the first quarter of fiscal 2020.
Capital expenditures
Capital expenditures were
CRITICAL ACCOUNTING POLICIES
The preparation ofAshland's Condensed Consolidated Financial Statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosures of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and other intangible assets), income taxes, other liabilities and receivables associated with asbestos litigation and environmental remediation. These accounting policies are discussed in detail in "Management's Discussion and Analysis - Critical Accounting Policies" inAshland's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions. Management has reviewed the estimates affecting these items with the Audit Committee ofAshland's Board of Directors. No material changes have been made to the valuation techniques during the three months endedDecember 31, 2019 .
Ashland reviews goodwill and other indefinite-lived intangible assets for impairment annually as ofJuly 1 or when events and circumstances indicate an impairment may have occurred. There were no events giving rise to an interim impairment assessment atDecember 31, 2019 , althoughAshland continues to closely monitor its Specialty Ingredients (ASI) reporting unit's performance and the impact of recent declines in sales and continued competitive pricing pressures among other items. 50 --------------------------------------------------------------------------------Ashland's assessment of an impairment on any of these assets classified currently as having indefinite lives, including goodwill, could change in future periods if significant events happen and/or circumstances change that effect the previously mentioned assumptions included inAshland's Form 10-K, which could result in impairment charges in future periods. Significant assumptions inherent in the valuation methodologies include, but are not limited to, such estimates as future projected business results, growth rates, the weighted average cost of capital for market participant, royalty and discount rates, and internal segmentation realignments.
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