UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑ | ||||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
December 31,OR
☐ | |||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to ___________
Commission file number 333-211719
ASHLAND GLOBAL HOLDINGS INC.
(a Delaware corporation)
I.R.S. No. 81-2587835
50 E. RiverCenter Boulevard
Covington, Kentucky 41011
Telephone Number (859) 815-3333
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ þ No ☐o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☑ þ No ☐o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer | ☑ | Accelerated Filer | ☐ | ||||
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ o No ☑þ
At December 31, 2017,2018, there were 62,228,81262,618,494 shares of Registrant’s Common Stock outstanding.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions except per share data - unaudited) | 2018 |
|
| 2017 |
| ||
Sales | $ | 576 |
|
| $ | 581 |
|
Cost of sales |
| 424 |
|
|
| 402 |
|
Gross profit |
| 152 |
|
|
| 179 |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense |
| 143 |
|
|
| 154 |
|
Research and development expense |
| 17 |
|
|
| 19 |
|
Equity and other income (loss) |
| 1 |
|
|
| (1 | ) |
Operating income (loss) |
| (7 | ) |
|
| 5 |
|
|
|
|
|
|
|
|
|
Net interest and other financing expense |
| 55 |
|
|
| 26 |
|
Other net periodic benefit income |
| 18 |
|
|
| — |
|
Net loss on divestitures |
| 3 |
|
|
| 1 |
|
Loss from continuing operations before income taxes |
| (47 | ) |
|
| (22 | ) |
Income tax expense |
| 24 |
|
|
| 10 |
|
Loss from continuing operations |
| (71 | ) |
|
| (32 | ) |
Income from discontinued operations (net of income taxes) |
| 23 |
|
|
| 28 |
|
Net loss | $ | (48 | ) |
| $ | (4 | ) |
|
|
|
|
|
|
|
|
PER SHARE DATA |
|
|
|
|
|
|
|
Basic earnings per share - Note L |
|
|
|
|
|
|
|
Loss from continuing operations | $ | (1.14 | ) |
| $ | (0.51 | ) |
Income from discontinued operations |
| 0.38 |
|
|
| 0.44 |
|
Net loss | $ | (0.76 | ) |
| $ | (0.07 | ) |
|
|
|
|
|
|
|
|
Diluted earnings per share - Note L |
|
|
|
|
|
|
|
Loss from continuing operations | $ | (1.14 | ) |
| $ | (0.51 | ) |
Income from discontinued operations |
| 0.38 |
|
|
| 0.44 |
|
Net loss | $ | (0.76 | ) |
| $ | (0.07 | ) |
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
Net loss | $ | (48 | ) |
| $ | (4 | ) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
Unrealized translation gain (loss) |
| (31 | ) |
|
| 3 |
|
Net change in investment securities |
| — |
|
|
| 8 |
|
Pension and postretirement obligation adjustment |
| (6 | ) |
|
| — |
|
Other comprehensive income (loss) |
| (37 | ) |
|
| 11 |
|
Comprehensive income (loss) | $ | (85 | ) |
| $ | 7 |
|
Three months ended | |||||||
December 31 | |||||||
(In millions except per share data - unaudited) | 2017 | 2016 | |||||
Sales | $ | 842 | $ | 704 | |||
Cost of sales | 613 | 515 | |||||
Gross profit | 229 | 189 | |||||
Selling, general and administrative expense | 171 | 157 | |||||
Research and development expense | 21 | 20 | |||||
Equity and other income | 2 | 3 | |||||
Operating income | 39 | 15 | |||||
Net interest and other financing expense | 31 | 122 | |||||
Other net periodic benefit income | — | 2 | |||||
Net loss on divestitures | 1 | 1 | |||||
Income (loss) from continuing operations before income taxes | 7 | (106 | ) | ||||
Income tax expense (benefit) - Note I | 14 | (41 | ) | ||||
Loss from continuing operations | (7 | ) | (65 | ) | |||
Income from discontinued operations (net of tax) - Note D | 3 | 75 | |||||
Net income (loss) | (4 | ) | 10 | ||||
Net income attributable to noncontrolling interest (a) | — | 11 | |||||
Net loss attributable to Ashland | $ | (4 | ) | $ | (1 | ) | |
PER SHARE DATA | |||||||
Basic earnings per share - Note L | |||||||
Loss from continuing operations | $ | (0.12 | ) | $ | (1.05 | ) | |
Income from discontinued operations attributable to Ashland | 0.05 | 1.04 | |||||
Net loss attributable to Ashland | $ | (0.07 | ) | $ | (0.01 | ) | |
Diluted earnings per share - Note L | |||||||
Loss from continuing operations | $ | (0.12 | ) | $ | (1.05 | ) | |
Income from discontinued operations attributable to Ashland | 0.05 | 1.04 | |||||
Net loss attributable to Ashland | $ | (0.07 | ) | $ | (0.01 | ) | |
COMPREHENSIVE INCOME (LOSS) | |||||||
Net income (loss) | $ | (4 | ) | $ | 10 | ||
Other comprehensive income (loss), net of tax - Note M | |||||||
Unrealized translation gain (loss) | 3 | (146 | ) | ||||
Net change in available-for-sale securities | 8 | — | |||||
Pension and postretirement obligation adjustment | — | (1 | ) | ||||
Other comprehensive income (loss) | 11 | (147 | ) | ||||
Comprehensive income (loss) | $ | 7 | $ | (137 | ) | ||
Comprehensive income attributable to noncontrolling interest | — | 10 | |||||
Comprehensive income (loss) attributable to Ashland | $ | 7 | $ | (147 | ) | ||
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions - unaudited) |
| December 31 2018 |
|
| September 30 2018 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 149 |
|
| $ | 294 |
|
Accounts receivable (a) |
|
| 448 |
|
|
| 522 |
|
Inventories - Note F |
|
| 619 |
|
|
| 596 |
|
Other assets |
|
| 62 |
|
|
| 60 |
|
Held for sale - Note B |
|
| 713 |
|
|
| 240 |
|
Total current assets |
|
| 1,991 |
|
|
| 1,712 |
|
Noncurrent assets |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Cost |
|
| 3,195 |
|
|
| 3,187 |
|
Accumulated depreciation |
|
| 1,574 |
|
|
| 1,532 |
|
Net property, plant and equipment |
|
| 1,621 |
|
|
| 1,655 |
|
Goodwill - Note G |
|
| 2,289 |
|
|
| 2,304 |
|
Intangibles - Note G |
|
| 1,159 |
|
|
| 1,185 |
|
Restricted investments - Note E |
|
| 279 |
|
|
| 312 |
|
Asbestos insurance receivable - Note K |
|
| 178 |
|
|
| 179 |
|
Deferred income taxes |
|
| 28 |
|
|
| 28 |
|
Other assets |
|
| 398 |
|
|
| 416 |
|
Held for sale - Note B |
|
| — |
|
|
| 468 |
|
Total noncurrent assets |
|
| 5,952 |
|
|
| 6,547 |
|
Total assets |
| $ | 7,943 |
|
| $ | 8,259 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Short-term debt - Note H |
| $ | 229 |
|
| $ | 254 |
|
Trade and other payables |
|
| 277 |
|
|
| 331 |
|
Accrued expenses and other liabilities |
|
| 257 |
|
|
| 328 |
|
Held for sale - Note B |
|
| 143 |
|
|
| 163 |
|
Total current liabilities |
|
| 906 |
|
|
| 1,076 |
|
Noncurrent liabilities |
|
|
|
|
|
|
|
|
Long-term debt - Note H |
|
| 2,275 |
|
|
| 2,275 |
|
Asbestos litigation reserve - Note K |
|
| 594 |
|
|
| 612 |
|
Deferred income taxes |
|
| 285 |
|
|
| 286 |
|
Employee benefit obligations - Note J |
|
| 145 |
|
|
| 156 |
|
Other liabilities |
|
| 433 |
|
|
| 422 |
|
Held for sale - Note B |
|
| — |
|
|
| 26 |
|
Total noncurrent liabilities |
|
| 3,732 |
|
|
| 3,777 |
|
Commitments and contingencies - Note K |
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
| 3,305 |
|
|
| 3,406 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 7,943 |
|
| $ | 8,259 |
|
|
|
|
|
|
|
|
|
|
(a) | ||
December 31 | September 30 | ||||||
(In millions - unaudited) | 2017 | 2017 | |||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 601 | $ | 566 | |||
Accounts receivable (a) | 597 | 612 | |||||
Inventories - Note F | 674 | 634 | |||||
Other assets | 92 | 91 | |||||
Total current assets | 1,964 | 1,903 | |||||
Noncurrent assets | |||||||
Property, plant and equipment | |||||||
Cost | 3,795 | 3,762 | |||||
Accumulated depreciation | 1,850 | 1,792 | |||||
Net property, plant and equipment | 1,945 | 1,970 | |||||
Goodwill - Note G | 2,475 | 2,465 | |||||
Intangibles - Note G | 1,298 | 1,319 | |||||
Restricted investments - Note E | 315 | 302 | |||||
Asbestos insurance receivable - Note K | 205 | 209 | |||||
Deferred and other income taxes | 28 | 28 | |||||
Other assets | 425 | 422 | |||||
Total noncurrent assets | 6,691 | 6,715 | |||||
Total assets | $ | 8,655 | $ | 8,618 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities | |||||||
Short-term debt - Note H | $ | 355 | $ | 235 | |||
Trade and other payables | 382 | 409 | |||||
Accrued expenses and other liabilities | 266 | 324 | |||||
Total current liabilities | 1,003 | 968 | |||||
Noncurrent liabilities | |||||||
Long-term debt - Note H | 2,584 | 2,584 | |||||
Asbestos litigation reserve - Note K | 676 | 694 | |||||
Deferred and other income taxes | 390 | 375 | |||||
Employee benefit obligations - Note J | 194 | 191 | |||||
Other liabilities | 409 | 400 | |||||
Total noncurrent liabilities | 4,253 | 4,244 | |||||
Commitments and contingencies - Note K | |||||||
Stockholders' equity | 3,399 | 3,406 | |||||
Total liabilities and stockholders' equity | $ | 8,655 | $ | 8,618 | |||
Accounts receivable includes an allowance for doubtful accounts of |
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| other |
|
|
|
|
| |
|
| Common |
|
| Paid-in |
|
| Retained |
|
| comprehensive |
|
|
|
|
| ||||
(In millions - unaudited) |
| stock |
|
| capital |
|
| earnings |
|
| income (loss) |
| (a) | Total |
| |||||
BALANCE AT SEPTEMBER 30, 2018 |
| $ | 1 |
|
| $ | 946 |
|
| $ | 2,750 |
|
| $ | (291 | ) |
| $ | 3,406 |
|
Adoption of new accounting pronouncements (b) |
|
|
|
|
|
|
|
|
|
| 33 |
|
|
| (34 | ) |
|
| (1 | ) |
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
| (48 | ) |
|
|
|
|
|
| (48 | ) |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (37 | ) |
|
| (37 | ) |
Regular dividends, $0.25 per common share |
|
|
|
|
|
|
|
|
|
| (16 | ) |
|
|
|
|
|
| (16 | ) |
Common shares issued under stock incentive and other plans (c) |
|
|
|
|
|
| 1 |
|
|
|
|
|
|
|
|
|
|
| 1 |
|
BALANCE AT DECEMBER 31, 2018 |
| $ | 1 |
|
| $ | 947 |
|
| $ | 2,719 |
|
| $ | (362 | ) |
| $ | 3,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | ||
(In millions - unaudited) | Common stock | Paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | (a) | Total | |||||||||||||
BALANCE AT SEPTEMBER 30, 2017 | $ | 1 | $ | 931 | $ | 2,696 | $ | (222 | ) | $ | 3,406 | ||||||||
Total comprehensive income (loss) | |||||||||||||||||||
Net loss | (4 | ) | (4 | ) | |||||||||||||||
Other comprehensive income | 11 | 11 | |||||||||||||||||
Regular dividends, $0.225 per common share | (14 | ) | (14 | ) | |||||||||||||||
Common shares issued under stock incentive and other plans (b) | — | — | |||||||||||||||||
BALANCE AT DECEMBER 31, 2017 | $ | 1 | $ | 931 | $ | 2,678 | $ | (211 | ) | $ | 3,399 | ||||||||
At December 31, |
(b) | Represents the cumulative-effect adjustment related to the adoption of the new guidance related to the accounting for equity securities and the tax effects of intercompany transfers during the three months ended December 31, 2018. See Note A for more information. |
(c) | Common shares issued were |
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions - unaudited) |
| 2018 |
|
| 2017 |
| ||
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM |
|
|
|
|
|
|
|
|
CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Net loss |
| $ | (48 | ) |
| $ | (4 | ) |
Income from discontinued operations (net of income taxes) |
|
| (23 | ) |
|
| (28 | ) |
Adjustments to reconcile income from continuing operations to |
|
|
|
|
|
|
|
|
cash flows from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 81 |
|
|
| 70 |
|
Original issue discount and debt issuance costs amortization |
|
| 2 |
|
|
| 2 |
|
Deferred income taxes |
|
| 3 |
|
|
| 8 |
|
Stock based compensation expense |
|
| 7 |
|
|
| 7 |
|
Loss (income) from restricted investments |
|
| 28 |
|
|
| (3 | ) |
Excess tax benefit on stock based compensation |
|
| 1 |
|
|
| 1 |
|
Net loss on divestitures |
|
| 3 |
|
|
| 1 |
|
Pension contributions |
|
| (1 | ) |
|
| (2 | ) |
Gain on pension and other postretirement plan remeasurements |
|
| (18 | ) |
|
| — |
|
Change in operating assets and liabilities (a) |
|
| (44 | ) |
|
| (83 | ) |
Total cash flows used by operating activities from continuing operations |
|
| (9 | ) |
|
| (31 | ) |
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM |
|
|
|
|
|
|
|
|
CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| (33 | ) |
|
| (21 | ) |
Proceeds from disposal of property, plant and equipment |
|
| 4 |
|
|
| 1 |
|
Proceeds from sales of operations |
|
| — |
|
|
| 1 |
|
Net purchase of funds restricted for specific transactions |
|
| (2 | ) |
|
| (5 | ) |
Reimbursement from restricted investments |
|
| 8 |
|
|
| 5 |
|
Proceeds from sales of securities |
|
| — |
|
|
| 5 |
|
Purchase of securities |
|
| — |
|
|
| (5 | ) |
Proceeds from the settlement of derivative instruments |
|
| 1 |
|
|
| — |
|
Payments for the settlement of derivative instruments |
|
| (2 | ) |
|
| (2 | ) |
Total cash flows used by investing activities from continuing operations |
|
| (24 | ) |
|
| (21 | ) |
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
| (1 | ) |
|
| (2 | ) |
Proceeds from (repayment of) short-term debt |
|
| (26 | ) |
|
| 120 |
|
Cash dividends paid |
|
| (16 | ) |
|
| (14 | ) |
Stock based compensation employee withholding taxes paid in cash |
|
| (7 | ) |
|
| (5 | ) |
Total cash flows provided (used) by financing activities from continuing operations |
|
| (50 | ) |
|
| 99 |
|
CASH PROVIDED (USED) BY CONTINUING OPERATIONS |
|
| (83 | ) |
|
| 47 |
|
Cash used by discontinued operations |
|
|
|
|
|
|
|
|
Operating cash flows |
|
| (58 | ) |
|
| (9 | ) |
Investing cash flows |
|
| (2 | ) |
|
| (3 | ) |
Total cash used by discontinued operations |
|
| (60 | ) |
|
| (12 | ) |
Effect of currency exchange rate changes on cash and cash equivalents |
|
| (2 | ) |
|
| — |
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
| (145 | ) |
|
| 35 |
|
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD |
|
| 294 |
|
|
| 566 |
|
CASH AND CASH EQUIVALENTS - END OF PERIOD |
| $ | 149 |
|
| $ | 601 |
|
|
|
|
|
|
|
|
|
|
(a) | ||
Three months ended | |||||||
December 31 | |||||||
(In millions - unaudited) | 2017 | 2016 | |||||
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM | |||||||
CONTINUING OPERATIONS | |||||||
Net income (loss) | $ | (4 | ) | $ | 10 | ||
Income from discontinued operations (net of tax) | (3 | ) | (75 | ) | |||
Adjustments to reconcile income from continuing operations to | |||||||
cash flows from operating activities | |||||||
Depreciation and amortization | 79 | 68 | |||||
Original issue discount and debt issuance cost amortization | 2 | 94 | |||||
Deferred and other income taxes | 8 | 2 | |||||
Stock based compensation expense | 7 | 5 | |||||
Gain on early retirement of debt | — | (3 | ) | ||||
Realized gain and investment income on available-for-sale securities | (3 | ) | (3 | ) | |||
Net loss on divestitures | 1 | 1 | |||||
Pension contributions | (2 | ) | (1 | ) | |||
Gain on post-employment plan remeasurement | — | (2 | ) | ||||
Change in operating assets and liabilities (a) | (109 | ) | (156 | ) | |||
Total cash flows used by operating activities from continuing operations | (24 | ) | (60 | ) | |||
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM | |||||||
CONTINUING OPERATIONS | |||||||
Additions to property, plant and equipment | (24 | ) | (33 | ) | |||
Proceeds from disposal of property, plant and equipment | 1 | — | |||||
Proceeds from sale of operations | 1 | — | |||||
Net purchase of funds restricted for specific transactions | (5 | ) | (2 | ) | |||
Reimbursements from restricted investments | 5 | — | |||||
Proceeds from sales of available-for-sale securities | 5 | — | |||||
Purchases of available-for-sale securities | (5 | ) | — | ||||
Proceeds from the settlement of derivative instruments | — | 4 | |||||
Payments for the settlement of derivative instruments | (2 | ) | — | ||||
Total cash flows used by investing activities from continuing operations | (24 | ) | (31 | ) | |||
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES FROM | |||||||
CONTINUING OPERATIONS | |||||||
Repayment of long-term debt | (2 | ) | (239 | ) | |||
Premium on long-term debt repayment | — | (5 | ) | ||||
Proceeds (repayment) from short-term debt | 120 | (154 | ) | ||||
Debt issuance costs | — | (4 | ) | ||||
Cash dividends paid | (14 | ) | (24 | ) | |||
Stock based compensation employee withholding taxes paid in cash | (5 | ) | (8 | ) | |||
Total cash flows provided (used) by financing activities from continuing operations | 99 | (434 | ) | ||||
CASH USED BY CONTINUING OPERATIONS | 51 | (525 | ) | ||||
Cash provided (used) by discontinued operations | |||||||
Operating cash flows, net | (16 | ) | 70 | ||||
Investing cash flows, net | — | (10 | ) | ||||
Financing cash flows, net | — | (10 | ) | ||||
Total cash provided (used) by discontinued operations | (16 | ) | 50 | ||||
Effect of currency exchange rate changes on cash and cash equivalents | — | (9 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 35 | (484 | ) | ||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 566 | 1,017 | |||||
Change in cash and cash equivalents held by Valvoline | — | (65 | ) | ||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 601 | $ | 468 | |||
Excludes changes resulting from operations acquired, sold or |
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.STATEMENTS.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
–SIGNIFICANT ACCOUNTING POLICIESBasis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and Securities and Exchange Commission (SEC) regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Additionally, certain prior period data, primarily related to discontinued operations, have been reclassified in the Consolidated Financial Statements and accompanying notes to conform to the current period presentation, as further described in this section. These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended
September 30,On May 12, 2017,November 15, 2018, Ashland completedannounced that it had signed a definitive agreement to sell substantially all of the distributionassets and liabilities of its remaining 170 million shares of common stock of Valvoline Inc. which represented approximately 83% of the total outstanding shares of Valvoline Inc.'s common stock.Composites segment and Intermediates and Solvents facility in Marl, Germany (Marl facility). This separation from Valvoline representedexpected divestiture represents a strategic shift in Ashland's business and, in accordance with U.S. GAAP, qualified as a discontinued operation. Accordingly, Valvoline'sAs a result, the operating results and cash flows forrelated to Composites and the three months ended December 31, 2016Marl facility have been classifiedreflected as discontinued operations in the Statements of Consolidated Comprehensive Income (Loss) and Statements of Condensed Consolidated Cash Flows, while the assets and liabilities that are to be sold have been classified within the Condensed Consolidated Financial Statements.Balance Sheets under a held for sale designation. See NoteNotes B and C for additional information on this expected divestiture.
As a result of classifying the separationComposites reporting segment as a discontinued operation, Ashland is now comprised of Valvoline Inc.
Use of estimates, risks and uncertainties
The preparation of Ashland’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues 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 and liabilities and receivables associated with asbestos litigation and environmental remediation. 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.
Ashland’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions. 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. While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.
New accounting standards
A description of new U.S. GAAP accounting standards issued or adopted during the current year is required in interim financial reporting. A detailed listing of new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2018. The following standards relevant to Ashland were either issued or adopted in the current period or will become effective in a subsequent period.
In May 2014, the FASB issued accounting guidance outlining a single comprehensive five step model for entities to use in accounting for revenue arising from contracts with customers (ASC 606 Revenue from Contracts with Customers). The new guidance supersedesand subsequent amendments to it superseded most current revenue recognition guidance, in an
Ashland formed an implementation team that is currently evaluatingevaluated the impact of the new standard on the Condensed Consolidated Financial Statements and the adoption method options available as well as the overall impact the new guidance will have on the organization. The assessment process consistsconsisted of categorizing Ashland’s revenue streams and reviewing the current internal accounting policies and practices to determine potential differences that wouldcould result from applying the requirements of the new standard to revenue contracts. Additional discussions and meetings with each revenue stream team have occurred to solicit input, identify potential impacts and appropriate changes to Ashland’s business processes, systems and controls to support the revenue recognition and disclosure requirements under the new standard. Based on various preliminary assessments conducted to date,
Ashland has identified agreements with distributors and customers that are subject to rebate and incentive programs that could contain elements of material rights and/or variable consideration. Ashland does not currently believe that these elements would result in a material change to how revenue would be recognized for these agreements. Ashland currently intendselected to adopt this standard using the modified retrospective approach and doesdetermined that the overall impact was not believe the impact will be material to the Condensed Consolidated Financial Statements but does expectStatements. As a result, no cumulative-effect adjustment was made to retained earnings in the Condensed Consolidated Balance Sheets. Further, there has been no significant change to beAshland’s internal controls or the manner and timing of recognizing revenue. However, there are significant additional disclosures within the Notes to Condensed Consolidated Financial Statements. This guidance becomes effective forASC 606 requires disclosure of disaggregated revenue into categories that depict the nature of how the Ashland's revenue and cash flows are affected by economic factors. Additionally, Ashland on October 1, 2018.
Leases
In MarchFebruary 2016, the FASB issued new accounting guidance for certain aspects of share-based payments to employees. This guidance requires all excess tax benefits and tax deficiencies related to share-based paymentslease transactions. The main objective of this guidance is to be recognized as income tax expense inincrease transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the right to use assets and obligations created by leases and to disclose key information about leasing arrangements. The presentation of the Statements of Consolidated Comprehensive Income (Loss) instead of additional paid-in capital, and changes the classification of excess tax benefits from a financing activity to an operating activity within the Statements of Condensed Consolidated Cash Flows. This guidance also allows entities to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, this guidance increases the amount an employer can withhold to cover income taxes on awards and still qualify for equity classification and requires that cash paid by an employer when directly withholding shares for tax-withholding purposes be classified as a financing activity within the Statements of Condensed Consolidated Cash Flows. The guidance became effective for Ashland and was adopted on October 1, 2017. The guidance specifically related to the Statements of Consolidated Comprehensive Income (Loss) was adopted prospectively while the guidance related to the Statements of Condensed Consolidated Cash Flows was adopted retrospectively, as required byis largely unchanged under this guidance. This guidance retains a distinction between finance leases and operating leases, and the guidance.
In July 2018, the FASB amended this guidance to give entities the option to apply the standard at the adoption date and recognize a cumulative-effect adjustment to the overallopening balance of retained earnings in the period of adoption. Ashland currently intends to utilize this transition method upon adopting the guidance.
Ashland has formed an implementation team and is currently evaluating implementation options and quantifying the impact on Ashland'sthat this guidance will have within its Condensed Consolidated Financial Statements was not significant.Statements.
In January 2016, the FASB issued accounting guidance related to the recognition and measurement as well as the presentation and disclosures for certain financial instruments. Most notably, the guidance requires entities to measure equity investments at fair value and to recognize any changes in fair value in net income rather than accumulated other comprehensive income (AOCI). The guidance became effective for Ashland Separationon October 1, 2018 and resulted in Ashland recording a cumulative-effect adjustment to reclassify net after-tax unrealized gains of Valvoline
In October 2016, the sharesFASB issued new accounting guidance which requires entities to recognize the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. This guidance eliminates the exception under previous U.S. GAAP that the income tax effects of all intercompany transfers of assets other than inventory be deferred until the assets are sold to a third party or otherwise recovered through use. This guidance became effective for Ashland common stock outstanding as of May 5, 2017, the record date for the distribution, each share ofon October 1, 2018 and was applied using a modified retrospective approach. Consequently, Ashland common stock received 2.745338 shares of Valvoline common stock in the distribution. The distribution was recorded at the carrying amount of Valvoline Inc.'s neta cumulative-effect adjustment to reclassify $1 million from other current assets which was a deficit of $187 million as of May 12, 2017, as follows:
May 12 | |||
(In millions) | 2017 | ||
ASSETS | |||
Current assets | |||
Cash | 179 | ||
Accounts receivable, net | 385 | ||
Inventories | 153 | ||
Other current assets | 24 | ||
Total current assets | 741 | ||
Noncurrent assets | |||
Net property, plant and equipment | 357 | ||
Goodwill | 329 | ||
Equity and other unconsolidated investments | 31 | ||
Deferred income taxes | 391 | ||
Other noncurrent assets | 93 | ||
Total noncurrent assets | 1,201 | ||
Total assets | $ | 1,942 | |
LIABILITIES AND EQUITY | |||
Current liabilities | |||
Short-term debt | 75 | ||
Current portion of long-term debt | 16 | ||
Trade and other payables | 353 | ||
Other current liabilities | 34 | ||
Total current liabilities | 478 | ||
Noncurrent liabilities | |||
Long-term debt | 662 | ||
Employee benefit obligations | 826 | ||
Other long-term liabilities | 163 | ||
Total noncurrent liabilities | 1,651 | ||
Total liabilities | $ | 2,129 | |
Net deficit | $ | (187 | ) |
Composites and Marl facility
On November 15, 2018, Ashland announced that it had signed a definitive agreement to sell its Composites segment and Valvoline Inc. governsIntermediates and Solvents Marl facility to INEOS Enterprises in a transaction valued at $1.1 billion. Ashland will retain the rightsremaining Intermediates and obligations afterSolvents facility in Lima, Ohio primarily for its own internal business use. Ashland currently expects net proceeds from the separation regardingsale to total approximately $1.0 billion and anticipates that the proceeds will be primarily used to reduce outstanding debt.
The transaction is expected to close prior to the end of the June 2019 quarter, contingent on certain income taxescustomary regulatory approvals, standard closing conditions and other taxes, including certain tax liabilitiescompletion of required employee information and benefits, attributes, returnsconsultation processes. Upon the closing of this transaction, Ashland currently expects to recognize a gain within the Statements of Consolidated Comprehensive Income (Loss).
Since this transaction represents a strategic shift in Ashland’s business and contests.
Certain indirect corporate costs are recordedincluded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss).
Subsequent to the global healthcompletion of the sale, Ashland expects to provide certain transition services to INEOS Enterprises for a fee. While the transition services are expected to vary in duration depending upon the type of service provided, Ashland expects to reduce costs as the transition services are completed.
The assets and wellness industriesliabilities of Composites and high-value differentiated products to fragrancethe Marl facility for current and flavor houses. With annual revenues of approximately $300 millionprior periods have been reflected as assets and 14 manufacturing facilities in the United States and Mexico, New Jersey-based Pharmachem develops, manufactures and supplies custom and branded nutritional and fragrance products. Ashland has included Pharmachem within the Specialty Ingredients reporting segment.
At | |||
May 17, 2017 | |||
Preliminary purchase price allocation (in millions) | As Adjusted | ||
Assets: | |||
Accounts receivable | 52 | ||
Inventory | 74 | ||
Other current assets | 4 | ||
Intangible assets | 330 | ||
Goodwill | 287 | ||
Property, plant and equipment | 97 | ||
Other noncurrent assets | 20 | ||
Liabilities: | |||
Accounts payable | (32 | ) | |
Deferred tax - net | (138 | ) | |
Other noncurrent liabilities | (14 | ) | |
Total purchase price | $ | 680 |
| December 31 |
|
| September 30 |
| ||
(In millions) | 2018 |
|
| 2018 |
| ||
Accounts receivable, net (a) | $ | 148 |
|
| $ | 159 |
|
Inventories |
| 78 |
|
|
| 67 |
|
Net property, plant and equipment |
| 244 |
|
|
| — |
|
Goodwill |
| 144 |
|
|
| — |
|
Intangibles |
| 39 |
|
|
| — |
|
Deferred income taxes |
| 6 |
|
|
| — |
|
Other assets |
| 54 |
|
|
| 14 |
|
Current assets held for sale | $ | 713 |
|
| $ | 240 |
|
|
|
|
|
|
|
|
|
Net property, plant and equipment | $ | — |
|
| $ | 245 |
|
Goodwill |
| — |
|
|
| 144 |
|
Intangibles |
| — |
|
|
| 40 |
|
Deferred income taxes |
| — |
|
|
| 7 |
|
Other assets |
| — |
|
|
| 32 |
|
Noncurrent assets held for sale | $ | — |
|
| $ | 468 |
|
|
|
|
|
|
|
|
|
Trade and other payables | $ | 106 |
|
| $ | 152 |
|
Employee benefit obligations |
| 23 |
|
|
| — |
|
Accrued expenses and other liabilities |
| 11 |
|
|
| 11 |
|
Other liabilities |
| 3 |
|
|
| — |
|
Current liabilities held for sale | $ | 143 |
|
| $ | 163 |
|
|
|
|
|
|
|
|
|
Employee benefit obligations |
| — |
|
|
| 23 |
|
Other liabilities |
| — |
|
|
| 3 |
|
Noncurrent liabilities held for sale | $ | — |
|
| $ | 26 |
|
|
|
|
|
|
|
|
|
(a) | |
Accounts receivable included an allowance for doubtful accounts of $3 million at both December 31, 2018 and September 30, 2018. |
Weighted-average | |||||
amortization period | |||||
Intangible asset type (in millions) | Value | (years) | |||
Trademarks and trade names | $ | 26 | 15 | ||
Intellectual property | 68 | 22 | |||
Customer and supplier relationships | 236 | 20 | |||
Total | $ | 330 |
In previous periods, Ashland has divested certain businesses that have qualified as discontinued operations. The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income (Loss) for all periods presented and are discussed further within this note.
As previously discusseddescribed in Notes ANote B, Ashland announced that it had signed a definitive agreement on November 15, 2018 to sell its Composites segment and B, Intermediates and Solvents Marl facility. Ashland determined that this expected divestiture qualified as a discontinued operation, in accordance with U.S. GAAP, since it represents a strategic shift for Ashland and had a major effect on Ashland's operations and financial results. Accordingly, the operating results and cash flows for Composites and the Marl facility have been classified as discontinued operations within the Condensed Consolidated Financial Statements for all periods presented.
Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. on May 12, 2017. Ashland determined that the Valvoline separation qualified as a discontinued operation, in accordance with U.S. GAAP, since it represents a strategic shift for Ashland and hashad a major effect on Ashland's operations and financial results. Accordingly, Valvoline's operating results and cash flows forAshland has made subsequent tax adjustments to the three months ended December 31, 2016 have been classified as discontinued operations within the Condensed Consolidated Financial Statements.
Components of amounts reflected in the Statements of Consolidated Comprehensive Income (Loss) related to discontinued operations are presented in the following table for the three months ended December 31, 20172018 and 2016.2017.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Income (loss) from discontinued operations (net of tax) |
|
|
|
|
|
|
|
Composites/Marl facility | $ | 25 |
|
| $ | 25 |
|
Valvoline |
| — |
|
|
| 3 |
|
Water Technologies |
| (1 | ) |
|
| — |
|
Distribution |
| (1 | ) |
|
| — |
|
| $ | 23 |
|
| $ | 28 |
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Income from discontinued operations (net of tax) | |||||||
Valvoline | $ | 3 | $ | 75 | |||
Total income from discontinued operations (net of tax) | $ | 3 | $ | 75 |
The following table presents a reconciliation of the historically reported captions within Ashland's Statements of Consolidated Comprehensive Income (Loss) for the income (loss) from discontinued operations attributable to ValvolineComposites and the Marl facility for the three months ended December 31, 2016.2018 and 2017. Interest expense was allocated to discontinued operations based on Ashland’s mandatory debt prepayments upon the disposition of Composites and the Marl facility.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Income (loss) from discontinued operations attributable |
|
|
|
|
|
|
|
to Composites/Marl facility |
|
|
|
|
|
|
|
Sales | $ | 275 |
|
| $ | 261 |
|
Cost of sales |
| (217 | ) |
|
| (211 | ) |
Selling, general and administrative expense |
| (22 | ) |
|
| (17 | ) |
Research and development expense |
| (3 | ) |
|
| (2 | ) |
Equity and other income |
| 3 |
|
|
| 3 |
|
Pretax operating income of discontinued operations |
| 36 |
|
|
| 34 |
|
Net interest and other financing expense |
| (6 | ) |
|
| (4 | ) |
Pretax income of discontinued operations |
| 30 |
|
|
| 30 |
|
Income tax expense |
| (5 | ) |
|
| (5 | ) |
Income from discontinued operations | $ | 25 |
|
| $ | 25 |
|
Three months ended | |||
(In millions) | December 31, 2016 | ||
Income from discontinued operations | |||
attributable to Valvoline | |||
Sales | $ | 489 | |
Cost of sales | (293 | ) | |
Selling, general and administrative expense | (82 | ) | |
Research and development expense | (3 | ) | |
Equity and other income | 9 | ||
Operating income of discontinued operations | 120 | ||
Net interest and other financing expense | (10 | ) | |
Pretax income of discontinued operations | 110 | ||
Income tax expense | (35 | ) | |
Income from discontinued operations | $ | 75 |
NOTE D – RESTRUCTURING ACTIVITIES
Ashland periodically implements company-wide restructuring programs related to acquisitions, divestitures and other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure.
Severance costs
During fiscal 2018, Ashland announced and initiated a company-wide cost reduction program as a result of ongoing strategic asset plans and activities. As part of this restructuring program, Ashland announced a voluntary severance offer (VSO) to certain qualifying employees that was formally approved during 2018. Additionally, during fiscal 2018, an involuntary program for employees was also initiated as part of the restructuring program. The VSO and involuntary programs resulted in a severance charge of $36 million during fiscal 2018. During the three months ended December 31, 2018, these programs resulted in additional severance expense of $4 million, which was primarily recorded within the selling, general and administrative expense caption of the Statement of Consolidated Comprehensive Income (Loss). As of December 31, 2018, the severance reserve for the company-wide restructuring program was $32 million.
Ashland incurred $7 million of lease abandonment charges during the three months ended December 31, 2018 due to the exit from certain office facilities in conjunction with the company-wide cost reduction program. The costs related to this reserve were recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss) and are paid over the remaining lease terms. As of December 31, 2018, the reserve for facility costs was $11 million.
The following table details at December 31, 2018, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves during the three months ended December 31, 2018. The severance and facility cost reserves were primarily recorded within accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet as of December 31, 2018.
(In millions) | Severance costs |
|
| Facility costs |
|
| Total |
| |||
Balance at of September 30, 2018 |
| 36 |
|
|
| 7 |
|
|
| 43 |
|
Restructuring reserve |
| 4 |
|
|
| 7 |
|
|
| 11 |
|
Utilization (cash paid) |
| (8 | ) |
|
| (3 | ) |
|
| (11 | ) |
Balance at December 31, 2018 | $ | 32 |
|
| $ | 11 |
|
|
| 43 |
|
Plant restructuring
During the three months ended December 31, 2018, Specialty Ingredients committed to a cost reduction plan within an existing manufacturing facility. As a result, restructuring charges of $27 million were recorded primarily within the cost of sales caption of the Statements of Consolidated Comprehensive Income (Loss) consisting of $19 million in accelerated depreciation and amortization, $5 million in severance and $3 million of plant closure costs. As of December 31, 2018, there is a restructuring reserve of $8 million related to the $5 million of severance costs and $3 million of plant closure costs. The restructuring plan is expected to be completed during fiscal 2019.
As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows.
Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing
For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived through the use ofusing fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.
The following table summarizes financial instruments subject to recurring fair value measurements as of December 31, 2017.2018.
| Carrying |
|
| Total fair |
|
| Quoted prices in active markets for identical assets |
|
| Significant other observable inputs |
|
| Significant unobservable inputs |
| |||||
(In millions) | value |
|
| value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 149 |
|
| $ | 149 |
|
| $ | 149 |
|
| $ | — |
|
| $ | — |
|
Restricted investments (a) |
| 309 |
|
|
| 309 |
|
|
| 309 |
|
|
| — |
|
|
| — |
|
Deferred compensation investments (b) |
| 161 |
|
|
| 161 |
|
|
| — |
|
|
| 161 |
|
|
| — |
|
Investment of captive insurance company |
| 3 |
|
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
Foreign currency derivatives |
| 2 |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
Total assets at fair value | $ | 624 |
|
| $ | 624 |
|
| $ | 461 |
|
| $ | 163 |
|
| $ | — |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives | $ | 1 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 1 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) | Carrying value | Total fair value | Quoted prices in active markets for identical assets Level 1 | Significant other observable inputs Level 2 | Significant unobservable inputs Level 3 | ||||||||||||||
Assets | |||||||||||||||||||
Cash and cash equivalents | $ | 601 | $ | 601 | $ | 601 | $ | — | $ | — | |||||||||
Restricted investments (a) | 345 | 345 | 345 | — | — | ||||||||||||||
Deferred compensation investments (b) | 160 | 160 | — | 160 | — | ||||||||||||||
Investments of captive insurance company (b) | 3 | 3 | 3 | — | — | ||||||||||||||
Foreign currency derivatives | 4 | 4 | — | 4 | — | ||||||||||||||
Total assets at fair value | $ | 1,113 | $ | 1,113 | $ | 949 | $ | 164 | $ | — | |||||||||
Liabilities | |||||||||||||||||||
Foreign currency derivatives | $ | 13 | $ | 13 | $ | — | $ | 13 | $ | — | |||||||||
(a) | Included in restricted investments is $30 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets. |
(b) | Included in other noncurrent assets in the Condensed Consolidated Balance Sheets. |
The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2017.
| Carrying |
|
| Total fair |
|
| Quoted prices in active markets for identical assets |
|
| Significant other observable inputs |
|
| Significant unobservable inputs |
| |||||
(In millions) | value |
|
| value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 294 |
|
| $ | 294 |
|
| $ | 294 |
|
| $ | — |
|
| $ | — |
|
Restricted investments (a) |
| 342 |
|
|
| 342 |
|
|
| 342 |
|
|
| — |
|
|
| — |
|
Deferred compensation investments (b) |
| 165 |
|
|
| 165 |
|
|
| — |
|
|
| 165 |
|
|
| — |
|
Investment of captive insurance company |
| 3 |
|
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
Foreign currency derivatives |
| 11 |
|
|
| 11 |
|
|
| — |
|
|
| 11 |
|
|
| — |
|
Total assets at fair value | $ | 815 |
|
| $ | 815 |
|
| $ | 639 |
|
| $ | 176 |
|
| $ | — |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives | $ | 3 |
|
| $ | 3 |
|
| $ | — |
|
| $ | 3 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | ||
(In millions) | Carrying value | Total fair value | Quoted prices in active markets for identical assets Level 1 | Significant other observable inputs Level 2 | Significant unobservable inputs Level 3 | ||||||||||||||
Assets | |||||||||||||||||||
Cash and cash equivalents | $ | 566 | $ | 566 | $ | 566 | $ | — | $ | — | |||||||||
Restricted investments (a) | 332 | 332 | 332 | — | — | ||||||||||||||
Deferred compensation investments (b) | 158 | 158 | — | 158 | — | ||||||||||||||
Investments of captive insurance company (b) | 3 | 3 | 3 | — | — | ||||||||||||||
Foreign currency derivatives | 2 | 2 | — | 2 | — | ||||||||||||||
Total assets at fair value | $ | 1,061 | $ | 1,061 | $ | 901 | $ | 160 | $ | — | |||||||||
Liabilities | |||||||||||||||||||
Foreign currency derivatives | $ | 36 | $ | 36 | $ | — | $ | 36 | $ | — | |||||||||
Included in restricted investments is $30 million classified in the other current assets caption on the Condensed Consolidated Balance Sheets. |
(b) | Included in other noncurrent assets in the Condensed Consolidated Balance Sheets. |
Investment income and Hercules entered into a comprehensive settlement agreement related to certain insurance coverage for asbestos bodily injury claims with Underwriters at Lloyd’s, certain London Companiesrealized gains and Chartis (AIG) member companies, along with National Indemnity Company and Resolute Management, Inc., under which Ashland and Hercules received a total of $398 million (the January 2015 asbestos insurance settlement). Ashland placed $335 million of the settlement funds from the January 2015 asbestos insurance settlement into a renewable annual trust restricted for the purpose of paying ongoing and future litigation defense and claim settlement costs incurred in conjunction with asbestos claims. These funds were classified primarily as noncurrent restricted investment assets, with $30 million classified within other current assets, in the Condensed Consolidated Balance Sheets as of December 31, 2017 and September 30, 2017.
(In millions) | December 31 2018 |
|
| September 30 2018 |
| ||
Original cost | $ | 335 |
|
| $ | 335 |
|
Accumulated adjustments, net |
| (47 | ) |
|
| (38 | ) |
Adjusted cost, beginning of year (a) |
| 288 |
|
|
| 297 |
|
Investment income (b) |
| 3 |
|
|
| 8 |
|
Net unrealized gain |
| 24 |
|
|
| 54 |
|
Realized gains |
| — |
|
|
| 6 |
|
Settlement funds |
| 2 |
|
|
| 10 |
|
Disbursements |
| (8 | ) |
|
| (33 | ) |
Fair value | $ | 309 |
|
| $ | 342 |
|
|
|
|
|
|
|
|
|
(a) | ||
December 31 | September 30 | ||||||
(In millions) | 2017 | 2017 | |||||
Original cost | $ | 335 | $ | 335 | |||
Accumulated adjustments, net (a) | (38 | ) | (24 | ) | |||
Adjusted cost, beginning of year | 297 | 311 | |||||
Investment income (b) | 2 | 9 | |||||
Unrealized gain | 45 | 35 | |||||
Realized gain | 1 | 2 | |||||
Settlement funds | 5 | 2 | |||||
Disbursements | (5 | ) | (27 | ) | |||
Fair value | $ | 345 | $ | 332 | |||
The accumulated adjustments include investment income, realized gains, disbursements and settlements recorded in previous periods. |
(b) | Investment income for the demand deposit includes interest income as well as dividend income transferred from the equity and corporate bond mutual funds. |
The following table presents gross unrealized gains and losses for the restricted investment available-for-sale securities as of December 31, 20172018 and September 30, 2017:2018:
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
(In millions) | Adjusted Cost |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value |
| ||||
As of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposit | $ | 17 |
|
| $ | — |
|
| $ | — |
|
| $ | 17 |
|
Equity mutual fund |
| 148 |
|
|
| 30 |
|
|
| — |
|
|
| 178 |
|
Corporate bond mutual fund |
| 120 |
|
|
| — |
|
|
| (6 | ) |
|
| 114 |
|
Fair value | $ | 285 |
|
| $ | 30 |
|
| $ | (6 | ) |
| $ | 309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposit | $ | 20 |
|
| $ | — |
|
| $ | — |
|
| $ | 20 |
|
Equity mutual fund |
| 148 |
|
|
| 59 |
|
|
| — |
|
|
| 207 |
|
Corporate bond mutual fund |
| 120 |
|
|
| — |
|
|
| (5 | ) |
|
| 115 |
|
Fair value | $ | 288 |
|
| $ | 59 |
|
| $ | (5 | ) |
| $ | 342 |
|
Gross | Gross | ||||||||||||||
(In millions) | Adjusted Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||
As of December 31, 2017 | |||||||||||||||
Demand Deposit | $ | 17 | $ | — | $ | — | $ | 17 | |||||||
Equity Mutual Fund | 163 | 45 | — | 208 | |||||||||||
Corporate bond Mutual Fund | 120 | — | — | 120 | |||||||||||
Fair value | $ | 300 | $ | 45 | $ | — | $ | 345 | |||||||
As of September 30, 2017 | |||||||||||||||
Demand Deposit | $ | 9 | $ | — | $ | — | $ | 9 | |||||||
Equity Mutual Fund | 168 | 34 | — | 202 | |||||||||||
Corporate bond Mutual Fund | 120 | 1 | — | 121 | |||||||||||
Fair value | $ | 297 | $ | 35 | $ | — | $ | 332 |
The unrealized gains and losses of $54 million, net of the related deferred income taxes of $20 million, as
ofThe following table presents the investment income, net unrealized gains and losses, realized gains and disbursements related to the investments within the portfolio for the three months ended December 31, 20172018 and 2016.
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Investment income | $ | 2 | $ | 3 | |||
Realized gains | 1 | — | |||||
Disbursements | (5 | ) | — |
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Investment income | $ | 3 |
|
| $ | 2 |
|
Realized gains |
| — |
|
|
| 1 |
|
Net unrealized gains (losses) (a) |
| (30 | ) |
|
| 10 |
|
Disbursements |
| (8 | ) |
|
| (5 | ) |
|
|
|
|
|
|
|
|
(a) | ||
Ashland determined that all unrealized gains and losses were related to equity securities with readily determinable fair values. Due to the new accounting guidance adopted in the current quarter, the net unrealized losses during the three months ended December 31, 2018 were recorded within the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income (Loss). |
Deferred compensation investments
Deferred compensation investments consist of Level 2 measurements within the fair value hierarchy which are comprised primarily of a guaranteed interest fund, a common stock index fund and an intermediate governmentinvestment grade bond fund. Gains and losses related to deferred compensation investments are immediately recognized within the selling, general and administrative expense caption on the Statements of Consolidated Comprehensive Income (Loss).
Foreign currency derivatives
Ashland conducts business in a variety of foreign currencies. Accordingly, Ashland regularly uses foreign currency derivative instruments to manage exposure on certain transactions denominated in foreign currencies to curtail potential earnings volatility effects on certain assets and liabilities, including short-term inter-company loans, denominated in currencies other than Ashland’s functional currency of an entity. These derivative contracts generally require exchange of one foreign currency for another at a fixed rate at a future date and generally have maturities of less than twelve months. All contracts are valued at fair value with net changes in fair value recorded within the selling, general and administrative expense caption. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in non-functional currencies. The following table summarizes the net gains and/orand losses recognized during the three months ended
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Foreign currency derivative gains (losses) | $ | 1 |
|
| $ | (11 | ) |
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Foreign currency derivative loss | $ | (11 | ) | $ | (8 | ) |
The following table summarizes the fair values of the outstanding foreign currency derivatives as of
December 31,
| December 31 |
|
| September 30 |
| ||
(In millions) | 2018 |
|
| 2018 |
| ||
Foreign currency derivative assets | $ | 2 |
|
| $ | 11 |
|
Notional contract values |
| 399 |
|
|
| 1,209 |
|
|
|
|
|
|
|
|
|
Foreign currency derivative liabilities | $ | 1 |
|
| $ | 3 |
|
Notional contract values |
| 304 |
|
|
| 755 |
|
December 31 | September 30 | ||||||
(In millions) | 2017 | 2017 | |||||
Foreign currency derivative assets | $ | 4 | $ | 2 | |||
Notional contract values | 425 | 79 | |||||
Foreign currency derivative liabilities | $ | 13 | $ | 36 | |||
Notional contract values | 810 | 1,601 |
At December 31, 20172018 and September 30, 2017,2018, Ashland's long-term debt (including the current portion and excluding debt issuance cost discounts) had a carrying value of $2,614$2,306 million and 2,615$2,307 million, respectively, compared to a fair value of $2,755$2,331 million and $2,768$2,372 million, respectively. The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates, which are deemed to be Level 2 measurements within the fair value hierarchy.
NOTE F – INVENTORIES
Inventories are carried at the lower of cost or market.net realizable value. Inventories are primarily stated at cost using the weighted-average cost method. In addition, certain inventories are valued at cost using the last-in, first-out (LIFO) method.
The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
(In millions) | December 31, 2018 |
|
| September 30, 2018 |
| ||
Finished products | $ | 398 |
|
| $ | 381 |
|
Raw materials, supplies and work in process |
| 221 |
|
|
| 215 |
|
| $ | 619 |
|
| $ | 596 |
|
December 31 | September 30 | ||||||
(In millions) | 2017 | 2017 | |||||
Finished products | $ | 421 | $ | 390 | |||
Raw materials, supplies and work in process | 256 | 245 | |||||
LIFO reserves | (3 | ) | (1 | ) | |||
$ | 674 | $ | 634 |
NOTE G – GOODWILL AND OTHER INTANGIBLES
Goodwill
Ashland reviews goodwill and indefinite-lived intangible assets for impairment annually or when events and circumstances indicate an impairment may have occurred. This annual assessment is performed as of July 1 and consists of Ashland determining each reporting unit’s current fair value compared to its current carrying value. For its July 1, 20172018 assessment, Ashland determined that its reporting units for the allocation of goodwill arewere its three reportable segments: Specialty Ingredients, Composites and Intermediates and Solvents. At that time, Ashland determined no additional impairment existed.
The following is a progression of goodwill by reportable segment for the three months ended December 31, 2017.2018.
| Specialty |
|
| Intermediates |
|
|
|
|
| ||
(In millions) | Ingredients |
|
| and Solvents |
| (a) | Total |
| |||
Balance at September 30, 2018 | $ | 2,304 |
|
| $ | — |
|
| $ | 2,304 |
|
Acquisitions |
| — |
|
|
| — |
|
|
| — |
|
Currency translation |
| (15 | ) |
|
| — |
|
|
| (15 | ) |
Balance at December 31, 2018 | $ | 2,289 |
|
| $ | — |
|
| $ | 2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty | Intermediates | ||||||||||||||
(In millions) | Ingredients | Composites | and Solvents | (a) | Total | ||||||||||
Balance as of September 30, 2017 | $ | 2,315 | $ | 150 | $ | — | $ | 2,465 | |||||||
Currency translation adjustment | 10 | — | — | 10 | |||||||||||
Balance as of December 31, 2017 | $ | 2,325 | $ | 150 | $ | — | $ | 2,475 | |||||||
(a) | As of December 31, |
Other intangible assets
Intangible assets principally consist of trademarks and trade names, intellectual property and customer and supplier relationships. Intangible assets classified as finite are amortized on a straight-line basis over their estimated useful lives. The cost of trademarks and trade names is amortized principally over 3 to 25 years, intellectual property over 5 to 25 years, and customer and supplier relationships over 3 to 24 years.
Ashland annually reviews indefinite-lived intangible assets for possible impairment or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.
Intangible assets were comprised of the following as of December 31, 20172018 and September 30, 20172018..
| December 31, 2018 |
| |||||||||
| Gross |
|
|
|
|
|
| Net |
| ||
| carrying |
|
| Accumulated |
|
| carrying |
| |||
(In millions) | amount |
|
| amortization |
|
| amount |
| |||
Definite-lived intangibles |
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names | $ | 66 |
|
| $ | (25 | ) |
| $ | 41 |
|
Intellectual property |
| 718 |
|
|
| (360 | ) |
|
| 358 |
|
Customer and supplier relationships |
| 753 |
|
|
| (271 | ) |
|
| 482 |
|
Total definite-lived intangibles |
| 1,537 |
|
|
| (656 | ) |
|
| 881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangibles |
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names |
| 278 |
|
|
| — |
|
|
| 278 |
|
Total intangible assets | $ | 1,815 |
|
| $ | (656 | ) |
| $ | 1,159 |
|
| September 30, 2018 |
| |||||||||
| Gross |
|
|
|
|
|
| Net |
| ||
| carrying |
|
| Accumulated |
|
| carrying |
| |||
(In millions) | amount |
|
| amortization |
|
| amount |
| |||
Definite-lived intangibles |
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names | $ | 66 |
|
| $ | (25 | ) |
| $ | 41 |
|
Intellectual property |
| 721 |
|
|
| (350 | ) |
|
| 371 |
|
Customer and supplier relationships |
| 759 |
|
|
| (264 | ) |
|
| 495 |
|
Total definite-lived intangibles |
| 1,546 |
|
|
| (639 | ) |
|
| 907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangibles |
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names |
| 278 |
|
|
| — |
|
|
| 278 |
|
Total intangible assets | $ | 1,824 |
|
| $ | (639 | ) |
| $ | 1,185 |
|
December 31, 2017 | |||||||||||
Gross | Net | ||||||||||
carrying | Accumulated | carrying | |||||||||
(In millions) | amount | amortization | amount | ||||||||
Definite-lived intangible assets | |||||||||||
Trademarks and trade names | $ | 67 | $ | (22 | ) | $ | 45 | ||||
Intellectual property | 758 | (340 | ) | 418 | |||||||
Customer and supplier relationships | 780 | (246 | ) | 534 | |||||||
Total definite-lived intangible assets | 1,605 | (608 | ) | 997 | |||||||
Indefinite-lived intangible assets | |||||||||||
Trademarks and trade names | 301 | — | 301 | ||||||||
Total intangible assets | $ | 1,906 | $ | (608 | ) | $ | 1,298 |
September 30, 2017 | |||||||||||
Gross | Net | ||||||||||
carrying | Accumulated | carrying | |||||||||
(In millions) | amount | amortization | amount | ||||||||
Definite-lived intangible assets | |||||||||||
Trademarks and trade names | $ | 67 | $ | (22 | ) | $ | 45 | ||||
Intellectual property | 757 | (326 | ) | 431 | |||||||
Customer and supplier relationships | 777 | (235 | ) | 542 | |||||||
Total definite-lived intangible assets | 1,601 | (583 | ) | 1,018 | |||||||
Indefinite-lived intangible assets | |||||||||||
Trademarks and trade names | 301 | — | 301 | ||||||||
Total intangible assets | $ | 1,902 | $ | (583 | ) | $ | 1,319 |
Amortization expense recognized on intangible assets was $24$22 million and $19$23 million for the three months ended December 31, 20172018 and 2016,2017, respectively, and is included in the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss). Estimated amortization expense for future periods is $94$87 million in 20182019 (includes three months actual and nine months estimated), $90 million in 2019, $89$86 million in 2020, $89$85 million in 2021, and $87$84 million in 2022.2022 and $84 million in 2023. The amortization expense for future periods is an estimate. Actual amounts may change from such estimated amounts due to fluctuations in foreign currency exchange rates, additional intangible asset acquisitions and divestitures, potential impairment, accelerated amortization, or other events.
The following table summarizes Ashland’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets.
(In millions) |
| December 31, 2018 |
|
| September 30, 2018 |
| ||
4.750% notes, due 2022 |
| $ | 1,083 |
|
| $ | 1,083 |
|
Term Loan B, due 2024 |
|
| 591 |
|
|
| 593 |
|
6.875% notes, due 2043 |
|
| 376 |
|
|
| 376 |
|
Term Loan A, due 2022 |
|
| 195 |
|
|
| 195 |
|
Accounts receivable securitizations |
|
| 195 |
|
|
| 195 |
|
6.50% junior subordinated notes, due 2029 |
|
| 53 |
|
|
| 52 |
|
Revolving credit facility |
|
| — |
|
|
| 25 |
|
Medium-term notes, due 2019, interest of 9.4% |
|
| 5 |
|
|
| 5 |
|
Other (a) |
|
| 6 |
|
|
| 5 |
|
Total debt |
|
| 2,504 |
|
|
| 2,529 |
|
Short-term debt (includes current portion of long-term debt) |
|
| (229 | ) |
|
| (254 | ) |
Long-term debt (less current portion) |
| $ | 2,275 |
|
| $ | 2,275 |
|
|
|
|
|
|
|
|
|
|
(a) | ||
December 31 | September 30 | ||||||
(In millions) | 2017 | 2017 | |||||
4.750% notes, due 2022 | $ | 1,082 | $ | 1,082 | |||
Term Loan B, due 2024 | 597 | 599 | |||||
6.875% notes, due 2043 | 376 | 376 | |||||
Revolving Credit Facility | 285 | 173 | |||||
Term Loan A, due 2022 | 250 | 250 | |||||
Term Loan A, due 2020 | 250 | 250 | |||||
Accounts receivable securitization | 64 | 56 | |||||
6.50% junior subordinated notes, due 2029 | 51 | 51 | |||||
Medium-term notes, due 2019, interest of 9.4% at December 31, 2017 | 5 | 5 | |||||
Other (a) | (21 | ) | (23 | ) | |||
Total debt | 2,939 | 2,819 | |||||
Short-term debt (includes current portion of long-term debt) | (355 | ) | (235 | ) | |||
Long-term debt (less current portion and debt issuance cost discounts) | $ | 2,584 | $ | 2,584 | |||
Includes $20 million and |
The scheduled aggregate maturities of long-term debt by year (including the current portion and excluding debt issuance costs) are as follows: $5$10 million remaining in 2018, $11 million in 2019, $269$6 million in 2020, $56$13 million in 2021, and $1,279 million in 2022.
Available borrowing capacity
The borrowing capacity remaining under the 2017 $800 million Revolving Credit Facility was $467$752 million due to an outstanding balance of $285 million, as well as a reduction of $48 million for letters of credit outstanding atas of December 31, 2017.2018. Ashland's total borrowing capacity at December 31, 20172018 was $498$793 million, which included $31$41 million of available capacity from the two accounts receivable securitization facility.
Covenants related to current Ashland debt agreements
Ashland's debt 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 of December 31, 2017,2018, Ashland is in compliance with all debt agreement covenant restrictions.
The maximum consolidated net leverage ratio permitted under Ashland's most recent credit agreement (the 2017 Credit Agreement) is 4.5. At December 31, 2017,2018, Ashland’s calculation of the consolidated net leverage ratio was 3.9.
The minimum required consolidated interest coverage ratio under the 2017 Credit Agreement during its entire duration is 3.0. At December 31, 2017,2018, Ashland’s calculation of the interest coverage ratio was 4.6.5.5.
Tax Law Changes
The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017,Through September 30, 2018 we recorded provisional amounts for certain enactment date effects of the Tax Act by applying the guidance in SAB 118 because we had not yet completed our enactment date accounting for these effects. During the current quarter, Ashland has not completed theits internal accounting assessment for the tax effects of enactment of the Tax Act; however, Ashland determined a reasonable estimateAct and recorded adjustments to provisional amounts previously recorded. Ashland’s final assessment resulted in net unfavorable tax adjustments of the effects on our existing deferred tax balances and the one-time transition tax. Ashland recognized a provisional amount for$24 million during the three months ended December 31, 2017, which is included as a component of income tax expense from continuing operations. Ashland recorded net unfavorable tax adjustments of $16 million2018 primarily related to deferred tax rate changes and athe one-time transition tax assessed on foreign cash and unremitted earnings.
Deferred and other income tax assets and liabilities
Ashland remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, Ashland is still analyzing certain aspectsfinalized its assessment of the Tax Act and refining certain calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount previously recorded related tofor the remeasurement of the deferred tax balance was a favorablewhich resulted in an unfavorable tax adjustment of $126 million.
Foreign tax effects
The one-time transition tax is based on Ashland's total post-1986 earnings and profits (E&P) of foreign subsidiaries that were previously deferred from U.S. income taxes. Ashland recorded afinalized its assessment of the provisional amount previously recorded for this one-time transition tax liability which resulted in an unfavorable tax adjustment of $142 million. Ashland has not yet completed its calculation of$22 million during the total post-1986 E&Pthree months ended December 31, 2018. After this final adjustment, the obligation for these foreign subsidiaries. In addition, the one-time transition tax is based in part on the amountwas $51 million as of those earnings held in cash and other specified assets. This amount may change when Ashland finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.December 31, 2018. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Ashland determined that the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable at this time.
Global Intangible Low-Taxed Income
Regarding new Global Intangible Low-Taxed Income (GILTI) tax rules, Ashland made an election to treat taxes due on future GILTI exclusions as a current period expense when incurred.
Current fiscal year
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 200%a negative rate of 51% for the three months ended December 31, 2018. The current quarter tax rate was impacted by income mix, certain nondeductible restructuring costs, as well as $30 million from unfavorable tax discrete items including the final assessment of the Tax Act referenced above and other items.
Prior fiscal year
The overall effective tax rate was negative 45% for the three months ended December 31, 2017 and was primarily impacted by income mix and net unfavorable tax discrete adjustments of $16 million related to the Tax Act.
Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2017.2018.
(In millions) |
|
|
|
Balance at October 1, 2018 | $ | 164 |
|
Decreases related to positions taken on items from prior years |
| (1 | ) |
Increases related to positions taken in the current year |
| 1 |
|
Lapse of statute of limitations |
| (1 | ) |
Balance at December 31, 2018 | $ | 163 |
|
(In millions) | |||
Balance at October 1, 2017 | $ | 194 | |
Increases related to positions taken on items from prior years | 2 | ||
Increases related to positions taken in the current year | 3 | ||
Balance at December 31, 2017 | $ | 199 |
From a combination of statute expirations and audit settlements in the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of between $22$0 million and $32$2 million for continuing operations.operation. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.
Plan contributions
For the three months ended December 31, 2017,2018, Ashland contributed $2$1 million to its non-U.S. pension plans and zero to its U.S. pension plans. Ashland expects to make additional contributions of approximately $5 million to its non-U.S. plans and $1 million to its U.S. plans during the remainder of 2018.
Plan Remeasurements
Ashland discontinued certain post-employment health and life insurance benefits. The effect of thesesettled a non-U.S. pension plan changes resulted in a remeasurement gain of $2 million recorded within the other net period benefit cost (income) caption on the Statement of Consolidated Comprehensive Income (Loss) forduring the three months ended December 31, 2016.
Components of net periodic benefit costs (income)
The following table details the components of pension and other postretirement benefit costs for continuing operations.
|
| Pension benefits |
|
| Other postretirement benefits |
| ||||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Three months ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 2 |
|
| $ | 2 |
|
| $ | — |
|
| $ | 1 |
|
Interest cost |
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
Expected return on plan assets |
|
| (3 | ) |
|
| (3 | ) |
|
| — |
|
|
| — |
|
Curtailment |
|
| (18 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Actuarial (gain) loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total net periodic benefit costs |
| $ | (16 | ) |
| $ | 2 |
|
| $ | — |
|
| $ | 1 |
|
Other postretirement | |||||||||||||||
Pension benefits | benefits | ||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Three months ended December 31 | |||||||||||||||
Service cost (a) | $ | 2 | $ | 2 | $ | 1 | $ | — | |||||||
Interest cost (b) | 3 | 2 | — | 1 | |||||||||||
Expected return on plan assets (b) | (3 | ) | (3 | ) | — | — | |||||||||
Actuarial gain (b) | — | — | — | (2 | ) | ||||||||||
Total net periodic benefit costs (income) | $ | 2 | $ | 1 | $ | 1 | $ | (1 | ) | ||||||
For segment reporting purposes, service cost for continuing operations is proportionately allocated to each segment, excluding the Unallocated and other segment, while alland is recorded within the selling, general and administrative expense and cost of sales captions on the Statements of Consolidated Comprehensive Loss (Income). All other costs for continuing operationscomponents are recorded within the other net periodic benefit income caption on the Statements of Consolidated Comprehensive Income (Loss)Loss (Income).
Asbestos litigation
Ashland and Hercules have liabilities from claims alleging personal injury caused by exposure to asbestos. To assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions, Ashland retained Hamilton, Rabinovitz &Nathan Associates Inc. (HR&A)(Nathan). The methodology used by HR&ANathan to project future asbestos costs is based largely on recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims and litigation defense. The claim experience of Ashland and Hercules are separately compared to the results of previously conducted third party epidemiological studies estimating the number of people likely to develop asbestos-related diseases. Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos. Using that information, HR&ANathan estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims. Changes in asbestos-related liabilities and receivables are recorded on an after-tax basis within the discontinued operations caption in the Statements of Consolidated Comprehensive Income.
Ashland asbestos-related litigation
The claims alleging personal injury caused by exposure to asbestos asserted against Ashland result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation, a former subsidiary.Riley. The amount and timing of settlements and number of open claims can fluctuate from period to period. A summary of Ashland asbestos claims activity, excluding Hercules claims, follows.
| Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| December 31 |
|
| Years ended September 30 |
| ||||||||||||||
(In thousands) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Open claims - beginning of year |
| 53 |
|
|
| 54 |
|
|
| 54 |
|
|
| 57 |
|
|
| 60 |
|
New claims filed |
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
| 2 |
|
|
| 2 |
|
Claims settled |
| (1 | ) |
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
| — |
|
Claims dismissed |
| — |
|
|
| (1 | ) |
|
| (2 | ) |
|
| (4 | ) |
|
| (5 | ) |
Open claims - end of period |
| 53 |
|
|
| 54 |
|
|
| 53 |
|
|
| 54 |
|
|
| 57 |
|
Three months ended | ||||||||||||||
December 31 | Years ended September 30 | |||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | 2015 | |||||||||
Open claims - beginning of period | 54 | 57 | 57 | 60 | 65 | |||||||||
New claims filed | 1 | — | 2 | 2 | 2 | |||||||||
Claims settled | — | — | (1 | ) | — | — | ||||||||
Claims dismissed | (1 | ) | (1 | ) | (4 | ) | (5 | ) | (7 | ) | ||||
Open claims - end of period | 54 | 56 | 54 | 57 | 60 |
Ashland asbestos-related liability
From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A.
During the most recent annual update of this estimate completed during the June 20172018 quarter, it was determined that the liability for Ashland asbestos-related claims should be increaseddecreased by $36$8 million. Total reserves for asbestos claims were $409$369 million at December 31, 20172018 compared to
A progression of activity in the asbestos reserve is presented in the following table.
| Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| December 31 |
|
| Years ended September 30 |
| ||||||||||||||
(In millions) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Asbestos reserve - beginning of year | $ | 380 |
|
| $ | 419 |
|
| $ | 419 |
|
| $ | 415 |
|
| $ | 409 |
|
Reserve adjustment |
| — |
|
|
| — |
|
|
| (8 | ) |
|
| 36 |
|
|
| 37 |
|
Amounts paid |
| (11 | ) |
|
| (10 | ) |
|
| (31 | ) |
|
| (32 | ) |
|
| (31 | ) |
Asbestos reserve - end of period (a) | $ | 369 |
|
| $ | 409 |
|
| $ | 380 |
|
| $ | 419 |
|
| $ | 415 |
|
Three months ended | |||||||||||||||||||
December 31 | Years ended September 30 | ||||||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | 2015 | ||||||||||||||
Asbestos reserve - beginning of period | $ | 419 | $ | 415 | $ | 415 | $ | 409 | $ | 438 | |||||||||
Reserve adjustment | — | — | 36 | 37 | — | ||||||||||||||
Amounts paid | (10 | ) | (9 | ) | (32 | ) | (31 | ) | (29 | ) | |||||||||
Asbestos reserve - end of period (a) | $ | 409 | $ | 406 | $ | 419 | $ | 415 | $ | 409 | |||||||||
(a) | Included |
Ashland has insurance coverage for certain litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide substantially all of the coverage that will be accessed.
For the Ashland asbestos-related obligations, Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. Substantially allA substantial portion of the estimated receivables from insurance companies are expected to be due from domestic insurers, all of which are solvent.
At December 31, 2017,2018, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $151$139 million (excluding the Hercules receivable for asbestos claims) compared to $155$140 million at September 30, 2017.2018. During the June 20172018 quarter, the annual update of the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was completed. This model update resulted in a $15$5 million increasedecrease in the receivable for probable insurance recoveries.
A progression of activity in the Ashland insurance receivable is presented in the following table.
| Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| December 31 |
|
| Years ended September 30 |
| ||||||||||||||
(In millions) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Insurance receivable - beginning of year | $ | 140 |
|
| $ | 155 |
|
| $ | 155 |
|
| $ | 151 |
|
| $ | 150 |
|
Receivable adjustment |
| — |
|
|
| — |
|
|
| (5 | ) |
|
| 15 |
|
|
| 16 |
|
Insurance settlement |
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| (4 | ) |
Amounts collected |
| (1 | ) |
|
| (4 | ) |
|
| (10 | ) |
|
| (6 | ) |
|
| (11 | ) |
Insurance receivable - end of period (a) | $ | 139 |
|
| $ | 151 |
|
| $ | 140 |
|
| $ | 155 |
|
| $ | 151 |
|
Three months ended | |||||||||||||||||||
December 31 | Years ended September 30 | ||||||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | 2015 | ||||||||||||||
Insurance receivable - beginning of period | $ | 155 | $ | 151 | $ | 151 | $ | 150 | $ | 402 | |||||||||
Receivable adjustment | — | — | 15 | 16 | (3 | ) | |||||||||||||
Insurance settlement | — | — | (5 | ) | (4 | ) | (227 | ) | |||||||||||
Amounts collected | (4 | ) | (2 | ) | (6 | ) | (11 | ) | (22 | ) | |||||||||
Insurance receivable - end of period (a) | $ | 151 | $ | 149 | $ | 155 | $ | 151 | $ | 150 | |||||||||
(a) | Included |
Hercules asbestos-related litigation
Hercules has liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of Hercules’ former subsidiaries to a limited industrial market. The amount and timing of settlements and number of open claims can fluctuate from period to period. A summary of Hercules’ asbestos claims activity follows.
| Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| December 31 |
|
| Years ended September 30 |
| ||||||||||||||
(In thousands) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Open claims - beginning of year |
| 13 |
|
|
| 12 |
|
|
| 12 |
|
|
| 15 |
|
|
| 20 |
|
New claims filed |
| — |
|
|
| — |
|
|
| 2 |
|
|
| 1 |
|
|
| 1 |
|
Claims dismissed |
| (1 | ) |
|
| — |
|
|
| (1 | ) |
|
| (4 | ) |
|
| (6 | ) |
Open claims - end of period |
| 12 |
|
|
| 12 |
|
|
| 13 |
|
|
| 12 |
|
|
| 15 |
|
Three months ended | ||||||||||||||
December 31 | Years ended September 30 | |||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | 2015 | |||||||||
Open claims - beginning of period | 12 | 15 | 15 | 20 | 21 | |||||||||
New claims filed | — | — | 1 | 1 | 1 | |||||||||
Claims dismissed | — | — | (4 | ) | (6 | ) | (2 | ) | ||||||
Open claims - end of period | 12 | 15 | 12 | 15 | 20 |
Hercules asbestos-related liability
From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. Ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of HR&A.Nathan. As a result of the most recent annual update of this estimate, completed during the June 20172018 quarter, it was determined that the liability for Hercules asbestos-related claims should be increaseddecreased by $16$19 million. Total reserves for asbestos claims were $315$276 million at
| Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| December 31 |
|
| Years ended September 30 |
| ||||||||||||||
(In millions) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Asbestos reserve - beginning of year | $ | 282 |
|
| $ | 323 |
|
| $ | 323 |
|
| $ | 321 |
|
| $ | 311 |
|
Reserve adjustments |
| — |
|
|
| — |
|
|
| (19 | ) |
|
| 16 |
|
|
| 25 |
|
Amounts paid |
| (6 | ) |
|
| (8 | ) |
|
| (22 | ) |
|
| (14 | ) |
|
| (15 | ) |
Asbestos reserve - end of period (a) | $ | 276 |
|
| $ | 315 |
|
| $ | 282 |
|
| $ | 323 |
|
| $ | 321 |
|
(a) | ||
Three months ended | |||||||||||||||||||
December 31 | Years ended September 30 | ||||||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | 2015 | ||||||||||||||
Asbestos reserve - beginning of period | $ | 323 | $ | 321 | $ | 321 | $ | 311 | $ | 329 | |||||||||
Reserve adjustment | — | — | 16 | 25 | 4 | ||||||||||||||
Amounts paid | (8 | ) | (3 | ) | (14 | ) | (15 | ) | (22 | ) | |||||||||
Asbestos reserve - end of period (a) | $ | 315 | $ | 318 | $ | 323 | $ | 321 | $ | 311 | |||||||||
Included |
Hercules asbestos-related receivables
For the Hercules asbestos-related obligations, certain reimbursement obligations pursuant to coverage-in-place agreements with insurance carriers exist. As a result, any increases in the asbestos reserve have been partially offset by probable insurance recoveries. Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent. The estimated receivable consists exclusively of solvent domestic insurers.
As of
December 31,A progression of activity in the Hercules insurance receivable is presented in the following table.
| Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| December 31 |
|
| Years ended September 30 |
| ||||||||||||||
(In millions) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Insurance receivable - beginning of year | $ | 54 |
|
| $ | 68 |
|
| $ | 68 |
|
| $ | 63 |
|
| $ | 56 |
|
Receivable adjustment |
| — |
|
|
| — |
|
|
| (14 | ) |
|
| 5 |
|
|
| 7 |
|
Insurance receivable - end of period | $ | 54 |
|
| $ | 68 |
|
| $ | 54 |
|
| $ | 68 |
|
| $ | 63 |
|
Three months ended | |||||||||||||||||||
December 31 | Years ended September 30 | ||||||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | 2015 | ||||||||||||||
Insurance receivable - beginning of period | $ | 68 | $ | 63 | $ | 63 | $ | 56 | $ | 77 | |||||||||
Receivable adjustment | — | — | 5 | 7 | 1 | ||||||||||||||
Insurance settlement | — | — | — | — | (22 | ) | |||||||||||||
Insurance receivable - end of period | $ | 68 | $ | 63 | $ | 68 | $ | 63 | $ | 56 |
Asbestos litigation cost projection
Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, mortality rates, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards. Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens. In light ofConsidering these inherent uncertainties, Ashland believes that the asbestos reserves for Ashland and Hercules represent the best estimate within a range of possible outcomes. As a part of the process to develop these estimates of future asbestos costs, a range of long-term cost models was developed. These models are based on national studies that predict the number of people likely to develop asbestos-related diseases and are heavily influenced by assumptions regarding long-term inflation rates for indemnity payments and legal defense costs, as well as other variables mentioned previously. Ashland has currently estimated in various models ranging from approximately 40 to 50 year periods that it is reasonably
Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively, environmental remediation) at multiple locations. At December 31, 2017,2018, such locations included 8281 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 118116 current and former operating facilities (including certain operating facilities conveyed as part of the MAP Transaction) and about 1,225 service station properties, of which 3635 are being actively remediated.
Ashland’s reserves for environmental remediation and related environmental litigation amounted to $168$184 million at December 31, 20172018 compared to $163$187 million at September 30, 2017,2018, of which $125$144 million at December 31, 20172018 and $121$147 million at September 30, 20172018 were classified in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. The remaining reserves were classified in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
The following table provides a reconciliation of the changes in the environmental remediation reserves during the
three months ended December 31,
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Reserve - beginning of period | $ | 187 |
|
| $ | 163 |
|
Disbursements |
| (6 | ) |
|
| (8 | ) |
Revised obligation estimates and accretion |
| 3 |
|
|
| 13 |
|
Reserve - end of period | $ | 184 |
|
| $ | 168 |
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Reserve - beginning of period | $ | 163 | $ | 177 | |||
Disbursements | (8 | ) | (7 | ) | |||
Revised obligation estimates and accretion | 13 | 4 | |||||
Reserve - end of period | $ | 168 | $ | 174 |
The total reserves for environmental remediation reflect Ashland’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable, without regard to any third-party recoveries. Engineering studies, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. Ashland continues to discount certain environmental sites and regularly adjusts its reserves as environmental remediation continues. Ashland has estimated the value of its probable insurance recoveries associated with its environmental reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage. At December 31, 20172018 and September 30, 2017,2018, Ashland’s recorded receivable for these probable insurance recoveries was $14$12 million, and $15 million, respectively, of which $13 million and $14$11 million at December 31, 20172018 and September 30, 2017, respectively,2018 were classified in other noncurrent assets on the Condensed Consolidated Balance Sheets.
Components of environmental remediation expense included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss) are presented in the following table for the
three months ended December 31,
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Environmental expense | $ | 3 |
|
| $ | 12 |
|
Accretion |
| — |
|
|
| 1 |
|
Legal expense |
| 1 |
|
|
| 1 |
|
Total expense |
| 4 |
|
|
| 14 |
|
|
|
|
|
|
|
|
|
Insurance receivable (a) |
| (1 | ) |
|
| — |
|
Total expense, net of receivable activity | $ | 3 |
|
| $ | 14 |
|
|
|
|
|
|
|
|
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Environmental expense | $ | 12 | $ | 4 | |||
Accretion | 1 | — | |||||
Legal expense | 1 | 2 | |||||
Total expense | 14 | 6 | |||||
Insurance receivable (a) | — | — | |||||
Total expense, net of receivable activity | $ | 14 | $ | 6 | |||
(a) | Activity of $0 denotes value less than $1 million. |
Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites. Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range of future costs for identified sites could be as high as approximately $412$424 million. The largest reserve for any site is approximately 15%14% of the remediation reserve.
Other legal proceedings and claims
In addition to the matters described above, there are other various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability, and other environmental matters, which seek remedies or damages, some of which are for substantial amounts. While Ashland cannot predict with certainty the outcome of such actions, it believes that adequate reserves have been recorded and losses already recognized with respect to such actions were immaterial as of
December 31,The following is the computation of basic and diluted earnings per share (EPS) from continuing operations attributable to Ashland. Stock appreciation rights (SARs), stock options and warrants available to purchase shares outstanding for each reporting period whose grant price was greater than the average market price of Ashland Common Stock for each applicable period were not included in the computation of income from continuing operations per diluted share because the effect of these instruments would be antidilutive. The total number of these shares outstanding was approximately 0.71.0 million and 0.90.7 million at December 31, 20172018 and 2016,2017, respectively. Earnings per share is reported under the treasury stock method.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions, except per share data) | 2018 |
|
| 2017 |
| ||
Numerator |
|
|
|
|
|
|
|
Numerator for basic and diluted EPS - |
|
|
|
|
|
|
|
Loss from continuing operations | $ | (71 | ) |
| $ | (32 | ) |
Denominator |
|
|
|
|
|
|
|
Denominator for basic EPS - Weighted- average common shares outstanding |
| 63 |
|
|
| 62 |
|
Share based awards convertible to common shares (a) |
| — |
|
|
| — |
|
Denominator for diluted EPS - Adjusted weighted- average shares and assumed conversions |
| 63 |
|
|
| 62 |
|
EPS from continuing operations |
|
|
|
|
|
|
|
Basic | $ | (1.14 | ) |
| $ | (0.51 | ) |
Diluted |
| (1.14 | ) |
|
| (0.51 | ) |
|
|
|
|
|
|
|
|
(a) | ||
Three months ended | |||||||
December 31 | |||||||
(In millions except per share data) | 2017 | 2016 | |||||
Numerator | |||||||
Numerator for basic and diluted EPS – | |||||||
Loss from continuing operations | $ | (7 | ) | $ | (65 | ) | |
Denominator | |||||||
Denominator for basic EPS – Weighted-average | |||||||
common shares outstanding | 62 | 62 | |||||
Share-based awards convertible to common shares (a) | — | — | |||||
Denominator for diluted EPS – Adjusted weighted- | |||||||
average shares and assumed conversions | 62 | 62 | |||||
EPS from continuing operations attributable to Ashland | |||||||
Basic | $ | (0.12 | ) | $ | (1.05 | ) | |
Diluted | (0.12 | ) | (1.05 | ) | |||
As a result of the loss from continuing operations attributable to Ashland during the three months ended December 31, |
Stock repurchase programs
During March 2018, Ashland’s Board of Directors approved a new $1 billion sharestock repurchase authorization that was set to expire on December 31, 2017 (theprogram, which replaced the 2015 stock repurchase program). This authorization allows forprogram. Under the new program, Ashland’s common shares tomay be repurchased in open market transactions, privately negotiated transactions or pursuant to one or more accelerated stock repurchase programs or Rule 10b5-1 plans.
Stockholder dividends
In May 2017, subsequent to the final distribution of Valvoline Inc.'s common stock,November 2018, the Board of Directors of Ashland announced a quarterly cash dividend of 22.525 cents per share or $16 million, to eligible shareholdersstockholders at record, which was paid for quarterly dividends in the first quarter of fiscal 20182019 and the third and fourth quarters of fiscal 2017.2018. This represented a reductionan increase from the previous quarterly cash dividend of 3922.5 cents per share which was paid for quarterly dividends in the first and second quarters of fiscal 2017.
Accumulated other comprehensive income (loss)
Components of other comprehensive income (loss) recorded in the Statements of Consolidated Comprehensive Income (Loss) are presented below, before tax and net of tax effects.
| 2018 |
|
| 2017 |
| ||||||||||||||||||
(In millions) | Before tax |
|
| Tax (expense) benefit |
|
| Net of tax |
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| Before tax |
|
| Tax (expense) benefit |
|
| Net of tax |
| ||||||
Three months ended December 31 |
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|
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Other comprehensive income (loss) |
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|
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|
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|
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|
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Unrealized translation gain (loss) | $ | (31 | ) |
| $ | — |
|
| $ | (31 | ) |
| $ | 3 |
|
| $ | — |
|
| $ | 3 |
|
Pension and postretirement obligation adjustment: |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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Adjustment of unrecognized prior service costs |
| (7 | ) |
|
| 1 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Net change in investment securities: |
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Unrealized gains during periods (a) |
| — |
|
|
| — |
|
|
| — |
|
|
| 11 |
|
|
| (2 | ) |
|
| 9 |
|
Reclassification adjustment for gains |
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included in net income |
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
Total other comprehensive income (loss) | $ | (38 | ) |
| $ | 1 |
|
| $ | (37 | ) |
| $ | 13 |
|
| $ | (2 | ) |
| $ | 11 |
|
2017 | 2016 | ||||||||||||||||||||||
Tax | Tax | ||||||||||||||||||||||
Before | (expense) | Net of | Before | (expense) | Net of | ||||||||||||||||||
(In millions) | tax | benefit | tax | tax | benefit | tax | |||||||||||||||||
Three months ended December 31 | |||||||||||||||||||||||
Other comprehensive income (loss) | |||||||||||||||||||||||
Unrealized translation gain (loss) | $ | 3 | $ | — | $ | 3 | $ | (150 | ) | $ | 4 | $ | (146 | ) | |||||||||
Pension and postretirement obligation adjustment: | |||||||||||||||||||||||
Amortization of unrecognized prior service | |||||||||||||||||||||||
credits included in net income (a) | — | — | — | (3 | ) | 2 | (1 | ) | |||||||||||||||
Net change in available-for-sale securities: | |||||||||||||||||||||||
Unrealized gains during period | 11 | (2 | ) | 9 | — | — | — | ||||||||||||||||
Reclassification adjustment for realized gains | |||||||||||||||||||||||
included in net income | (1 | ) | — | (1 | ) | — | — | — | |||||||||||||||
Total other comprehensive income (loss) | $ | 13 | $ | (2 | ) | $ | 11 | $ | (153 | ) | $ | 6 | $ | (147 | ) | ||||||||
Ashland has stock incentive plans under which key employees or directors are granted stock appreciation rights (SARs), performance awards or nonvested stock awards. Each program is typically a long-term incentive plan designed to link employee compensation with increased shareholder value or reward superior performance and encourage continued employment with Ashland. Ashland recognizes compensation expense for the grant date fair value of stock-based awards over the applicable vesting period.
The components of Ashland’s pretaxpre-tax stock-based compensation expense included in continuing operations are as follows:
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 (a) |
|
| 2017 (b) |
| ||
SARs | $ | 2 |
|
| $ | 1 |
|
Nonvested stock awards |
| 4 |
|
|
| 6 |
|
Performance share awards |
| — |
|
|
| 4 |
|
| $ | 6 |
|
| $ | 11 |
|
|
|
|
|
|
|
|
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 (a) | 2016 (b) | |||||
SARs | $ | 1 | $ | 1 | |||
Nonvested stock awards | 6 | 4 | |||||
Performance awards | 4 | 2 | |||||
$ | 11 | $ | 7 | ||||
(a) | Included $1 million of expense related to cash-settled nonvested restricted stock awards and $2 million of income related to cash-settled performance units during the three months ended December 31, |
(b) | Included $2 million of expense related to cash-settled nonvested restricted stock awards and $2 million of expense related to cash-settled performance |
SARs
SARs are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and typically become exercisable over periods of one to three years. Unexercised SARs generally lapse ten years and one month after the date of grant. SARs granted for the three months ended December 31, 2018 and 2017 and 2016 were 470300 thousand and 422470 thousand, respectively. As of December 31, 2017,2018, there was $13$12 million
Nonvested stock awards
Nonvested stock awards are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and generally vest over a one-to-five-year period. However, such shares or units are subject to forfeiture upon termination of service before the vesting period ends. Only nonvested stock awards granted in the form of shares entitle employees or directors to vote the shares. Dividends on nonvested stock awards granted are in the form of additional units or shares of nonvested stock awards, which are subject to vesting and forfeiture provisions.
Stock-settled nonvested stock awards
Nonvested stock awards granted in the form of shares were 14281 thousand and 81142 thousand for the three months ended December 31, 20172018 and 2016,2017, respectively. As of December 31, 2017,2018, there was $12$13 million of total unrecognized compensation costs related to these nonvested stock awards. That cost is expected to be recognized over a weighted-average period of 2.01.9 years.
Cash-settled nonvested stock awards
Certain nonvested stock awards are granted to employees and are settled in cash upon vesting. As of December 31, 2017, 2202018, 200 thousand cash-settled nonvested stock awards were outstanding. The value of these cash-settled nonvested stock awards changes in connection with changes in the fair market value of the Ashland Common Stock. These awards generally vest over a period of three years. The expense recognized related to cash-settled nonvested stock awards was $2$1 million and $1$2 million during the three months ended December 31, 2018 and 2017, and 2016, respectively.
Executive performance incentive and retention program
During 2016, certain executives were granted performance-based restricted shares of Ashland in order to provide an incentive to remain employed in the period after the full separation.separation of Ashland and Valvoline. At December 31, 2017,2018, there were 6030 thousand shares outstanding in connection with these awards, which includes forfeitures and the cumulative value of forfeitable dividends. The expense recognition for these awards commenced upon completing the full separation of Valvoline which occurred on May 12, 2017 as discussed further in Note B, and resulted in $1 million and $2 million of expense for the three months ended December 31, 2017.2018 and 2017, respectively. As of December 31, 2017,2018, there was $8$2 million of total unrecognized compensation costs related to these awards.
Ashland sponsors a long-term incentive plan that awards performance shares/units to certain key employees that are primarily tied to Ashland’s overall financial performance relative to internal targets. Additionally, certain outstanding performance awards are tied to Ashland's overall financial performance relative to the financial performance of selected industry peer groups. Awards are granted annually, with each award covering a three-year vesting period.
The performance measure used to determine the actual number of performance shares/units issuable upon vesting is the financial performance of Ashland compared to award targets. The financial performance award metric is considered a performance condition under applicable U.S. GAAP. Additionally, the actual number of performance shares/units issuable upon vesting can be potentially increased or decreased based on a TSR performance modifier relative to peers of Ashland. For awards granted in fiscal 2017, each performance unit will be settled in cash based on the fair value of Ashland common stock. For awards granted in fiscal 2018 and 2019, each performance share/unit is convertible to one share of Ashland Common Stock.
Nonvested performance shares/units do not entitle employees to vote the shares or to receive any dividends thereon. Performance shares/units granted for the three months ended December 31, 2018 and 2017 and 2016 were 10178 thousand and 56101 thousand, respectively. As of December 31, 2017,2018, there was $17$18 million of total unrecognized compensation costs related to performance shares/units. That cost is expected to be recognized over a weighted-average period of 2.2 years.
NOTE O – REVENUE
Effective October 1, 2018, Ashland adopted accounting guidance outlining a single comprehensive five step model for entities to use in accounting for revenue arising from contracts with customers (ASC 606 Revenue from Contracts with Customers). As a result of the adoption, there was no material impact to Ashland’s Condensed Consolidated Financial Statements, but significant additional disclosures that Ashland is required to disclose on an interim and annual basis are contained within this Note O.
Revenue recognition
Ashland’s revenue is measured as the amount of consideration it expects to receive in exchange for transferring goods or providing services and is recognized when performance obligations are satisfied under the terms of contracts with customers. Ashland generally utilizes standardized language for the terms of contracts within each purchase order, unless a separate agreement has been entered into with a customer that supersedes the standard language within the purchase order.
A performance obligation is deemed to be satisfied by Ashland when control of the product or service is transferred to the customer. The transaction price of a contract, or the amount Ashland expects to receive upon satisfaction of all performance obligations, is determined by reference to the contract’s terms and includes adjustments, if applicable, for any variable consideration, such as volume discounts, rebates, refunds and right to return. Where a contract contains more than one distinct performance obligation, the transaction price is allocated to each performance obligation based on the standalone selling price of each performance obligation, although these situations do not occur frequently and are generally not included within Ashland’s contracts. Any unsatisfied performance obligations are not material. Standalone selling prices are based on prices Ashland charges to customers, which in some cases is based on established market prices. Ashland generally collects the cash from its customers within 60 days of the product delivery date. Sales and other similar taxes collected from customers on behalf of third parties are excluded from the contract price.
All of Ashland’s revenue is derived from contracts with customers, and nearly all contracts with customers contain one performance obligation for the transfer of goods where such performance obligation is satisfied at a point in time. Control of a product is deemed to be transferred to the customer generally upon shipment or delivery. Costs for shipping and handling activities, whether performed before or after the customer obtains control of the goods, are accounted for as fulfillment costs when not reimbursed.
Costs incurred to obtain contracts with customers have historically not been significant and are expensed immediately as the amortization period is generally one year or less. Ashland records bad debt expense in specific situations when it is determined that the customer is unable to meet its financial obligation.
Practical expedients
Upon adoption, Ashland utilized the following applicable practical expedients, as permitted by ASC 606, Revenue from Contracts with Customers:
• | Sales and other similar taxes collected from customers on behalf of third parties are excluded from the contract price; |
• | Costs for shipping and handling activities, whether performed before or after the customer obtains control of the goods, are accounted for as fulfillment costs when not reimbursed; and |
• | Costs incurred to obtain contracts with customers are expensed immediately when the amortization period is one year or less. |
Trade receivables
Trade receivables are defined as receivables arising from contracts with customers and are recorded within the accounts receivable caption within the Condensed Consolidated Balance Sheets. Ashland’s trade receivables were $415 million and $482 million as of December 31, 2018 and September 30, 2018, respectively.
Disaggregation of revenue
Ashland disaggregates its revenue from contracts with customers by segment, geographical region and product category, as Ashland believes these categories best depict how management reviews the financial performance of its operations. See the following tables for details:
Sales by geography for the three months ended December 31, 2018 |
| ||||||
(In millions) | Specialty |
|
| Intermediates |
| ||
Geography | Ingredients |
|
| and Solvents |
| ||
North America | $ | 219 |
|
| $ | 11 |
|
Europe |
| 170 |
|
|
| 5 |
|
Asia Pacific |
| 116 |
|
|
| 6 |
|
Latin America & other |
| 48 |
|
|
| 1 |
|
| $ | 553 |
|
| $ | 23 |
|
Sales by product category for the three months ended December 31, 2018 |
| |||||||
(In millions) |
|
|
|
|
|
|
|
|
Specialty Ingredients |
|
| Intermediates and Solvents |
| ||||
Cellulosics | $ | 189 |
|
| Derivatives | $ | 20 |
|
Poly-vinyl pyrrolidones |
| 95 |
|
| Butanediol |
| 3 |
|
Adhesives |
| 82 |
|
|
| $ | 23 |
|
Actives |
| 37 |
|
|
|
|
|
|
Vinyl ethers |
| 24 |
|
|
|
|
|
|
Pharmachem |
| 59 |
|
|
|
|
|
|
Other |
| 67 |
|
|
|
|
|
|
| $ | 553 |
|
|
|
|
|
|
Ashland determines its reportable segments based on how operations are managed internally for the products and services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining resource allocation methodologies used for reportable segments. Operating income is the primary measure on the Statements of Consolidated Comprehensive Income (Loss) that is reviewed by the chief operating decision maker in assessing each reportable segment's financial performance. Ashland does not aggregate operating segments to arrive at these reportable segments.
Change in Reportable Segments
Ashland’s reportable segments changed in the current quarter due to completing the separation from Valvoline Inc. on May 12, 2017,expected divestiture of the Composites reportable segment and Intermediates and Solvents Marl facility and reclassification to discontinued operations. As a result, Ashland's operations are managed by the chief operating decision maker within the following threetwo reportable segments: Specialty Ingredients Composites and Intermediates and Solvents. As a result, theThe financial information for the new reportable segments (Composites and Intermediates and Solvents) has been disclosed for all periods presented. Prior to the separation from Valvoline Inc., Composites and Intermediates and Solvents were reporting units included withinexcludes the previous Ashland Performance Materials reportable segment.
Reportable segment business descriptions
Specialty Ingredients is a global leader in cellulose ethers, vinyl pyrrolidones and biofunctionals. It offers industry-leading products, technologies and resources for solving formulation and product-performance challenges. Specialty Ingredients usesUsing natural, synthetic and semisynthetic polymers derived from cellulose ethers, vinyl pyrrolidones, acrylic polymers, polyester and polyurethane-based adhesives, and plant and seed extract.extract, Specialty Ingredients’ end markets offerIngredients offers comprehensive and innovative solutions for today’s demanding consumer and industrial applications. Key customers include:include pharmaceutical companies; makers of personal care products, food and beverages; makers of nutraceuticals and supplements; manufacturers of paint, coatings and construction materials; packaging and converting; and oilfield service companies. On May 17, 2017, Ashland completed its acquisition of the stock of Pharmachem, a leading provider of quality ingredients to
Intermediates and Solvents is a leading producer of 1,4 butanediol (BDO) 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 to Ashland’s Specialty Ingredients business for use as a raw material.
Unallocated and Other generally includes items such as certain significant company-wide restructuring activities, including internal separation costs, and legacy costs or adjustments that relate to divested businesses that are no longer operated by Ashland.
Reportable segment results
Results of Ashland’s reportable segments are presented based on its management and internal accounting structure. The structure is specific to Ashland; therefore, the financial results of Ashland’s reportable segments are not necessarily comparable with similar information for other comparable 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 that Ashland no longer operates. The service cost 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 to Ashland’s methodologies are adjusted for all segments on a retrospective basis.
The following table presents various financial information for each reportable segment for the three months ended December 31, 20172018 and 2016. 2017.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions - unaudited) | 2018 |
|
| 2017 |
| ||
SALES |
|
|
|
|
|
|
|
Specialty Ingredients | $ | 553 |
|
| $ | 550 |
|
Intermediates and Solvents |
| 23 |
|
|
| 31 |
|
| $ | 576 |
|
| $ | 581 |
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
Specialty Ingredients | $ | 26 |
|
| $ | 42 |
|
Intermediates and Solvents |
| — |
|
|
| 3 |
|
Unallocated and other |
| (33 | ) |
|
| (40 | ) |
| $ | (7 | ) |
| $ | 5 |
|
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
Three months ended | |||||||
December 31 | |||||||
(In millions - unaudited) | 2017 | 2016 | |||||
SALES | |||||||
Specialty Ingredients | $ | 550 | $ | 482 | |||
Composites | 218 | 165 | |||||
Intermediates and Solvents | 74 | 57 | |||||
$ | 842 | $ | 704 | ||||
OPERATING INCOME (LOSS) | |||||||
Specialty Ingredients | $ | 42 | $ | 40 | |||
Composites | 18 | 15 | |||||
Intermediates and Solvents | 8 | (7 | ) | ||||
Unallocated and other | (29 | ) | (33 | ) | |||
$ | 39 | $ | 15 |
This Form 10-Q contains forward-looking statements including, without limitation, statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation” (MD&A), within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Ashland has identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,” “forecasts,” “objectives,” “may,” “will,” “should,” “plans” and “intends” and the negative of these words or other comparable terminology. In addition, Ashland may from time to time make forward-looking statements in its annual reports, quarterlyreports and other filings with the Securities and Exchange Commission (SEC), news releases and other written and oral communications. These forward-looking statements are based on Ashland’s expectations and assumptions, as of the date such statements are made, regarding Ashland’s future operating performance and financial condition, as well as the economy and other future events or circumstances. Ashland’s expectations and assumptions include, without limitation, those mentioned within the MD&A, internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, operating efficiencies and economic conditions (such as prices, supply and demand, cost of raw materials, and the ability to recover raw-material cost increases through price increases), and risks and uncertainties associated with the following: the program to eliminate certain existing corporate and Specialty Ingredients expenses (including the possibility that such cost eliminations may not occur or may take longer to implement than anticipated), the expected divestiture of its Composites segment and the butanediol (BDO) manufacturing facility in Marl, Germany, and related merchant Intermediates and Solvents (I&S) products (including, in each case, the possibility that a transaction may not occur or that, if a transaction does occur, Ashland may not realize the anticipated benefits from such transaction), the impact of acquisitions and/or divestitures Ashland has made or may make including the acquisition of Pharmachem (including the possibility that Ashland may not realize the anticipated benefits from such transactions); Ashland’s substantial indebtedness (including the possibility that such indebtedness and related restrictive covenants may adversely affect Ashland’s future cash flows, results of operations, financial condition and its ability to repay debt); the potential that Ashland does not realize all of the expected benefits of the separation of its Valvoline business; the potential that the Tax Cuts and Jobs Act enacted on December 22, 2017 will have a negative impact on Ashland’s financial results, and severe weather, natural disasters, cyber events and legal proceedings and claims (including product recalls, environmental and asbestos matters). Various risks and uncertainties may cause actual results to differ materially from those stated, projected or implied by any forward-looking statements, including, without limitation, risks and uncertainties affecting Ashland that are contained in “Use of estimates, risks and uncertainties” in Note A of Notes to Consolidated Financial Statements and in Item 1A in its most recent Form 10-K filed with the SEC, which is available on Ashland’s website at http://investor.ashland.com or on the SEC’s website at http://www.sec.gov. Ashland believes its expectations and assumptions are reasonable, but there can be no assurance that the expectations reflected herein will be achieved. Unless legally required, Ashland undertakes no obligation to update any forward-looking statements made in this Form 10-Q whether as a result of new information, future events or otherwise. Information on Ashland’s website is not incorporated into or a part of this Form 10-Q.
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES
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.
Ashland profile
Ashland is a premier global leader in providing specialty chemical solutions 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 6,5006,000 employees worldwide, Ashland serves customers in more than 100 countries.
Ashland’s sales generated outside of North America were 60% and 59% for both the three months ended December 31, 2018 and 2017, and 2016.respectively. Sales by region expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
Sales by Geography |
| 2018 |
|
| 2017 |
| ||
North America (a) |
|
| 40 | % |
|
| 41 | % |
Europe |
|
| 31 | % |
|
| 30 | % |
Asia Pacific |
|
| 21 | % |
|
| 20 | % |
Latin America & other |
|
| 8 | % |
|
| 9 | % |
|
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
|
|
|
(a) | Ashland includes only U.S. and Canada in its North America designation. |
Three months ended | |||||
December 31 | |||||
Sales by Geography | 2017 | 2016 | |||
North America (a) | 40 | % | 40 | % | |
Europe | 34 | % | 31 | % | |
Asia Pacific | 18 | % | 20 | % | |
Latin America & other | 8 | % | 9 | % | |
100 | % | 100 | % | ||
Reportable segments
Ashland’s businesses are managed within the following threetwo reportable segments: Specialty Ingredients Composites and Intermediates and Solvents. For further descriptions of each reportable segment, see “Results of Operations – Reportable Segment Review” beginning on page 45.
The contribution to sales by each reportable segment expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
Sales by Reportable Segment |
| 2018 |
|
| 2017 |
| ||
Specialty Ingredients |
|
| 96 | % |
|
| 95 | % |
Intermediates and Solvents |
|
| 4 | % |
|
| 5 | % |
|
|
| 100 | % |
|
| 100 | % |
Three months ended | |||||
December 31 | |||||
Sales by Reportable Segment | 2017 | 2016 | |||
Specialty Ingredients | 65 | % | 69 | % | |
Composites | 26 | % | 23 | % | |
Intermediates and Solvents | 9 | % | 8 | % | |
100 | % | 100 | % |
Business results
Ashland recorded a net loss was $4of $48 million in the current quarter compared to a net incomeloss of $10$4 million in the prior year quarter. Ashland’s Adjusted EBITDA increased by 25%8% to $136$100 million (see U.S. GAAP reconciliation on page 41)36). The increase in Adjusted EBITDA was primarily due to continued growth inwithin the Specialty Ingredients reportable segment resulting from improved mix and plant fixed cost absorption as well as lower selling, general and administrative expenses.
Composites segment and Marl facility
On November 15, 2018, Ashland announced that it had signed a definitive agreement to sell its Composites segment and Intermediates and Solvents and Specialty Ingredients reportable segments, which reported increasesMarl facility to Adjusted EBITDA of $16 million and $10 million, respectively. The significant improvementINEOS Enterprises in a transaction valued at $1.1 billion. Ashland will retain the performance ofremaining Intermediates and Solvents wasfacility in Lima, Ohio primarily driven by improved product pricingfor its own internal business use. Ashland currently expects net proceeds from the sale to total approximately $1.0 billion and reduced costsanticipates that the proceeds will be primarily used to reduce outstanding debt.
The transaction is expected to close prior to the end of the June 2019 quarter, contingent on certain customary regulatory approvals, standard closing conditions and completion of required employee information and consultation processes. Upon the closing of this transaction, Ashland currently expects to recognize a gain within the Statements of Consolidated Comprehensive Income (Loss).
Since this transaction signifies a strategic shift in Ashland’s business and had a major effect on Ashland’s operations and financial results, the operating results and cash flows related to Composites and the Marl facility have been reflected as discontinued operations in the current quarter comparedStatements of Consolidated Comprehensive Income (Loss) and Statements of Condensed Consolidated Cash Flows. See Note C of the Notes to Condensed Consolidated Financial Statements for the prior year quarter. Excludingresults of operations for Composites and the acquisitionMarl facility for all periods presented
Certain indirect corporate costs included within the selling, general and administrative expense caption of Pharmachem, the increase in profitability for Specialty Ingredients compared to the prior year quarter was primarily driven by improvements in volume and mix and favorable foreign currency exchange.
Subsequent to the completion of the sale, Ashland expects to provide certain transition services to INEOS Enterprises for a componentfee. While the transition services are expected to vary in duration depending upon the type of income tax expense from continuing operations.service provided, Ashland recorded net unfavorable tax adjustments of $16 million primarily relatedexpects to deferred tax rate changesreduce costs as the transition services are completed.
Cost Reduction Program
In early May 2018, Ashland announced a cost reduction program to accelerate EBITDA margin growth by creating a leaner, more cost competitive company with improved operating efficiency, faster decision making and a one-time transition tax assessed on foreign cashstronger customer focus. Under this program, Ashland intends to eliminate a total of $120 million of existing allocated costs, direct expenses within Specialty Ingredients SG&A, and unremitted earnings.facility-related costs as follows:
• | Approximately $70 million of costs allocated to the Composites business 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 $50 million of additional costs are expected to be eliminated to drive improved profitability in Specialty Ingredients and accelerate achievement of its adjusted EBITDA margin target of 25-27 percent. |
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 within U.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 financing expenses, and depreciation and amortization. |
• | Adjusted EBITDA – EBITDA adjusted for noncontrolling interests, discontinued operations, net gain (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
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 provides 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.
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 reference this metric.
Consolidated review
Net income
Ashland’s net income is primarily affected by results within operating income, net interest and other financing expense, income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring.
Key financial results for the three months ended December 31, 20172018 and 20162017 included the following:
• | Ashland’s net loss amounted to $48 million and $4 million for the three months ended December 31, 2018 and 2017, respectively, or a loss of $0.76 and $0.07 diluted earnings per share, respectively. |
• | Discontinued operations, which are reported net of taxes, resulted in income of $23 million and $28 million during the three months ended December 31, 2018 and 2017, respectively. |
• | Loss from continuing operations, which excludes results from discontinued operations, amounted to $71 million and $32 million for the three months ended December 31, 2018 and 2017, respectively. |
• | The effective income tax rates were 51% and 45% for the three months ended December 31, 2018 and 2017, respectively, and were significantly impacted by certain tax discrete items in both the current and prior year quarters. |
• | Ashland incurred pretax net interest and other financing expense of $55 million and $26 million for the three months ended December 31, 2018 and 2017, |
• | Other net periodic benefit income totaled $18 million for the three months ended December 31, 2018. |
• | Net loss on divestitures totaled $3 million and $1 million for the three months ended December 31, 2018 and 2017, respectively. |
• | Operating (loss) income amounted to a loss of $7 million and income of $5 million for the three months ended December 31, 2018 and 2017, 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 (loss) amounted to $39a loss of $7 million and $15income of $5 million for the three months ended December 31, 20172018 and 2016,2017, respectively. The current and prior year quarters'quarters’ operating income included certain key items that were excluded to arrive at Adjusted EBITDA.EBITDA and are quantified in the table on page 36. These operating key items for the applicable periods are summarized as follows:
• | ||
Restructuring, separation and other costs – Ashland periodically 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. Ashland often incurs severance, facility and integration costs associated with these programs. See Note D in the Notes to Condensed Consolidated Financial Statements for further information on the company-wide cost reduction program. Also included within this key item category in the prior year quarter are separation costs incurred as a result of the separation from Valvoline, which primarily related to transaction, consulting and legal fees. |
• | ||
Accelerated depreciation – As a result of various restructuring activities at certain office facilities and manufacturing facilities during both the current and prior year quarters, Ashland recorded accelerated depreciation due to changes in the expected useful life of certain property, plant and equipment. |
• | ||
Environmental reserve adjustments – Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations. As a result of these activities, Ashland recorded non-cash adjustments during the prior year quarter to its environmental liabilities and receivables related to previously divested businesses or non-operational sites. See Note K of the Notes to Condensed Consolidated Financial Statements for more information. |
Operating income for the three months ended December 31, 20172018 and 20162017 included depreciation and amortization of $73$62 million and $68$64 million, respectively (which excluded accelerated depreciation and amortization of $19 million and $6 million for the three months ended December 31, 2017)2018 and 2017, respectively).
Non-operating key items affecting EBITDA
• | Gain on pension and other postretirement plan remeasurements – Ashland recognized a remeasurement gain due to the settlement of a non-U.S. pension plan during the current quarter. See Note J of the Notes to Condensed Consolidated Financial Statements for more information. |
• | Net loss on divestitures – Ashland recorded a loss during the current quarter related to the impairment of an investment. |
EBITDA totaled $114$93 million and $159$96 million for the three months ended December 31, 20172018 and 2016,2017, respectively. EBITDA and Adjusted EBITDA results in the table below have been prepared to illustrate the ongoing effects of Ashland’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 impact of Ashland's previous noncontrolling interest in Valvoline Inc. ongoing operating performance by presenting the financial results between periods on a more comparable basis.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions) |
| 2018 |
|
| 2017 |
| ||
Net loss |
| $ | (48 | ) |
| $ | (4 | ) |
Income tax expense |
|
| 24 |
|
|
| 10 |
|
Net interest and other financing expense |
|
| 55 |
|
|
| 26 |
|
Depreciation and amortization (a) |
|
| 62 |
|
|
| 64 |
|
EBITDA |
|
| 93 |
|
|
| 96 |
|
Loss (income) from discontinued operations (net of tax) |
|
| (23 | ) |
|
| (28 | ) |
Key items included in EBITDA: |
|
|
|
|
|
|
|
|
Restructuring, separation and other costs |
|
| 26 |
|
|
| 8 |
|
Accelerated depreciation |
|
| 19 |
|
|
| 6 |
|
Environmental reserve adjustments |
|
| — |
|
|
| 11 |
|
Gain on pension and other postretirement plan remeasurements |
|
| (18 | ) |
|
| — |
|
Net loss on divestitures |
|
| 3 |
|
|
| — |
|
Total key items included in EBITDA |
|
| 30 |
|
|
| 25 |
|
Adjusted EBITDA |
| $ | 100 |
|
| $ | 93 |
|
|
|
|
|
|
|
|
|
|
Total key items included in EBITDA |
| $ | 30 |
|
| $ | 25 |
|
Unrealized loss on securities (b) |
|
| 30 |
|
|
| — |
|
Total key items, before tax |
| $ | 60 |
|
| $ | 25 |
|
|
|
|
|
|
|
|
|
|
(a) | ||
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Net income (loss) | $ | (4 | ) | $ | 10 | ||
Income tax expense (benefit) | 14 | (41 | ) | ||||
Net interest and other financing expense | 31 | 122 | |||||
Depreciation and amortization (a) | 73 | 68 | |||||
EBITDA | 114 | 159 | |||||
Income from discontinued operations (net of tax) | (3 | ) | (75 | ) | |||
Environmental reserve adjustments | 11 | — | |||||
Separation, restructuring and other costs | 8 | 22 | |||||
Accelerated depreciation | 6 | — | |||||
Legal reserve | — | 5 | |||||
Gain on post-employment plan remeasurement | — | (2 | ) | ||||
Adjusted EBITDA (b) | $ | 136 | $ | 109 | |||
Excludes $19 million and $6 million of accelerated depreciation for the three months ended December 31, |
(b) | Due to the adoption of new accounting guidance in the current quarter, the unrealized losses on certain investment securities directly impact earnings and are recorded within the net interest and other financing expense caption on the Statements of Consolidated Comprehensive Income (Loss). See Notes A and E of the Notes to Condensed Consolidated Financial Statements for more information. |
The following table reflects the U.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 which Ashland believes do not accurately reflect Ashland’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 of Ashland’s operations since managementoperations. Management believes theinvestors and analysts use ofthis financial measure in assessing Ashland's business performance and that presenting this non-GAAP measuresmeasure on a consolidated and reportable segment basis assists investors in better understanding theAshland’s ongoing operatingbusiness performance by presenting theand enhances their ability to compare period-to-period financial results between periods on a more comparable basis. results.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Diluted EPS from continuing operations (as reported) |
| $ | (1.14 | ) |
| $ | (0.51 | ) |
Key items, before tax: |
|
|
|
|
|
|
|
|
Restructuring, separation and other costs |
|
| 0.71 |
|
|
| 0.22 |
|
Gain on pension and other postretirement plan remeasurements |
|
| (0.29 | ) |
|
| — |
|
Environmental reserve adjustments |
|
| — |
|
|
| 0.19 |
|
Unrealized loss on securities |
|
| 0.47 |
|
|
| — |
|
Net loss on divestitures |
|
| 0.05 |
|
|
| — |
|
Key items, before tax |
|
| 0.94 |
|
|
| 0.41 |
|
Tax effect of key items (a) |
|
| (0.11 | ) |
|
| (0.11 | ) |
Key items, after tax |
|
| 0.83 |
|
|
| 0.30 |
|
Tax specific key items: |
|
|
|
|
|
|
|
|
Deferred tax rate changes |
|
| 0.03 |
|
|
| (1.99 | ) |
One-time transition tax |
|
| 0.35 |
|
|
| 2.23 |
|
Restructuring and separation activity |
|
| 0.02 |
|
|
| — |
|
Other tax reform |
|
| 0.05 |
|
|
| — |
|
Tax specific key items (b) |
|
| 0.45 |
|
|
| 0.24 |
|
Total key items |
|
| 1.28 |
|
|
| 0.54 |
|
Adjusted diluted EPS from continuing operations (non-GAAP) |
| $ | 0.14 |
|
| $ | 0.03 |
|
|
|
|
|
|
|
|
|
|
(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 the definition 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. |
Three months ended | |||||||
December 31 | |||||||
2017 | 2016 | ||||||
Diluted EPS from continuing operations (as reported) | $ | (0.12 | ) | $ | (1.05 | ) | |
Key items | 0.54 | 1.19 | |||||
Adjusted diluted EPS from continuing operations (non-GAAP) | $ | 0.42 | $ | 0.14 |
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 ended December 31, 20172018 and 2016.2017.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Sales |
| $ | 576 |
|
| $ | 581 |
|
| $ | (5 | ) |
Three months ended December 31 | ||||||||||||
(In millions) | 2017 | 2016 | Change | |||||||||
Sales | $ | 842 | $ | 704 | $ | 138 |
The following table provides a reconciliation of the change in sales between the three months ended December 31, 20172018 and 2016.2017.
|
| Three months ended |
| |
(In millions) |
| December 31, 2018 |
| |
Currency exchange |
| $ | (9 | ) |
Volume |
|
| (9 | ) |
Pricing |
|
| 10 |
|
Product mix |
|
| 3 |
|
Change in sales |
| $ | (5 | ) |
Three months ended | ||||
(In millions) | December 31, 2017 | |||
Acquisitions and divestitures | $ | 63 | ||
Pricing | 30 | |||
Currency exchange | 20 | |||
Volume | 18 | |||
Product mix | 7 | |||
Change in sales | $ | 138 |
Sales for the current quarter increased $138decreased $5 million compared to the prior year quarter. The acquisition of Pharmachem within the Specialty Ingredients reportable segmentUnfavorable foreign currency exchange and lower volumes each decreased sales by $9 million. These decreases were partially offset by improvements to product pricing and product mix which increased sales by $58 million, or 8%, while the net impact of other acquisitions and divestitures increased sales by $5 million. Improvements in pricing increased sales by $30 million, or 4%, while favorable foreign currency exchange increased sales by $20 million, or 3%. Higher volumes and changes in product mix increased sales by $18$10 million and $7$3 million, respectively.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Cost of sales |
| $ | 424 |
|
| $ | 402 |
|
| $ | 22 |
|
Gross profit as a percent of sales |
|
| 26.4 | % |
|
| 30.8 | % |
|
|
|
|
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Cost of sales | $ | 613 | $ | 515 | $ | 98 | |||||
Gross profit as a percent of sales | 27.2 | % | 26.8 | % |
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 ended December 31, 20172018 and 2016.2017.
|
| Three months ended |
| |
(In millions) |
| December 31, 2018 |
| |
Changes in: |
|
|
|
|
Accelerated depreciation |
| $ | 19 |
|
Severance and other restructuring costs |
|
| 7 |
|
Production and raw material costs |
|
| 7 |
|
Volume |
|
| (6 | ) |
Currency exchange |
|
| (5 | ) |
Change in cost of sales |
| $ | 22 |
|
Three months ended | ||||
(In millions) | December 31, 2017 | |||
Changes in: | ||||
Acquisitions and divestitures | $ | 50 | ||
Production costs | 20 | |||
Currency exchange | 15 | |||
Volume | 8 | |||
Product mix | 4 | |||
Severance and other restructuring costs | 1 | |||
Change in cost of sales | $ | 98 |
Cost of sales for the current quarter increased $98$22 million compared to the prior year quarter. The Pharmachem acquisitionDue to the planned closure of a manufacturing facility during the current quarter, accelerated depreciation increased cost of sales by $44$19 million or 9%, while the net impact ofseverance and other acquisitions and divestituresrestructuring costs increased cost of sales by $6$7 million. Unfavorable production costs and foreign currency exchange increased cost of sales by $20 million, or 4%, and $15 million, or 3%, respectively. Higher$7 million. These increases were partially offset by lower volumes and changes in product mix increasedfavorable foreign currency exchange, which decreased cost of sales by $8$6 million and $4$5 million, respectively, while the current quarter also included $1 million of severance and other restructuring charges related to a plant closure.respectively.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Selling, general and administrative expense |
| $ | 143 |
|
| $ | 154 |
|
| $ | (11 | ) |
As a percent of sales |
|
| 24.8 | % |
|
| 26.5 | % |
|
|
|
|
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Selling, general and administrative expense | $ | 171 | $ | 157 | $ | 14 | |||||
As a percent of sales | 20.3 | % | 22.3 | % |
Selling, general and administrative expense for the current quarter increased $14decreased $11 million compared to the prior year quarter with expenses as a percent of sales decreasing 2.0 percentage points.remaining consistent. Key drivers of the fluctuation in selling, general and administrative expense compared to the prior year quarter were:
• | $3 million and $14 million in net environmental-related expenses during the current and prior year quarters, respectively (see Note K for more information); |
• | $18 million and $11 million of key items for restructuring, separation and other costs during the current and prior year quarters, respectively, comprised of the following: |
o | $18 million of severance, lease abandonment and other restructuring costs related to company-wide cost-savings initiatives during the current quarter; |
o | $6 million of costs related to the separation of Valvoline during the prior year quarter; |
o | $4 million of accelerated depreciation related to the planned closure of an office building during the prior year quarter; and |
o | $1 million of Pharmachem integration costs during the prior year quarter. |
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Research and development expense |
| $ | 17 |
|
| $ | 19 |
|
| $ | (2 | ) |
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Research and development expense | $ | 21 | $ | 20 | $ | 1 |
Research and development expense remained relatively consistent withdeclined compared to the prior year quarter.quarter, primarily due to the overall company-wide cost reduction program.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Equity and other income |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income (a) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
Other income |
|
| 1 |
|
|
| (1 | ) |
|
| 2 |
|
|
| $ | 1 |
|
| $ | (1 | ) |
| $ | 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Equity and other income | |||||||||||
Equity income (a) | $ | — | $ | — | $ | — | |||||
Other income | 2 | 3 | (1 | ) | |||||||
$ | 2 | $ | 3 | $ | (1 | ) | |||||
(a) | Activity of $0 denotes value less than $1 million. |
Equity and other income remained relatively consistent withcompared to the prior year quarter.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Net interest and other financing expense (income) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| $ | 27 |
|
| $ | 29 |
|
| $ | (2 | ) |
Interest income |
|
| (1 | ) |
|
| (1 | ) |
|
| — |
|
Loss (income) from restricted investments |
|
| 28 |
|
|
| (3 | ) |
|
| 31 |
|
Other financing costs |
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| $ | 55 |
|
| $ | 26 |
|
| $ | 29 |
|
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Net interest and other financing expense (income) | |||||||||||
Interest expense | $ | 34 | $ | 126 | $ | (92 | ) | ||||
Interest income | (1 | ) | (1 | ) | — | ||||||
Available-for-sale securities income | (3 | ) | (3 | ) | — | ||||||
Other financing costs | 1 | — | 1 | ||||||||
$ | 31 | $ | 122 | $ | (91 | ) |
Net interest and other financing expense decreased $91increased by $29 million during the current quarter compared to the prior year quarter. TheInterest expense decreased slightly due to lower debt levels during the current quarter decrease in interest expense was primarily duecompared to the prior year quarter including $92 million of accelerated accretion related to the December 2016 tender offer of the 2029 notes. Available-for-sale securities income of $3 million during bothquarter. In the current andquarter, the prior year quarters represents investment income and realized gains related toloss from restricted investments discussed inincluded unrealizes losses on equity securities of $30 million due to new accounting guidance that was effective as of October 1, 2018. See Note E of the Notes to Condensed Consolidated Financial Statements.Statements for more information on the restricted investments.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Other net periodic benefit income |
| $ | 18 |
|
| $ | — |
|
| $ | 18 |
|
Other net periodic benefit income during the current quarter related to the curtailment gain from the settlement of a non-U.S. pension plan.
|
| Three months ended December 31 |
| |||||||||
| 2018 |
|
| 2017 |
|
| Change |
| ||||
Net loss on divestitures |
| $ | 3 |
|
| $ | 1 |
|
| $ | 2 |
|
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Other net periodic benefit income | $ | — | $ | 2 | $ | (2 | ) |
The incomeactivity in the current year quarter related to the impairment of an investment, while activity in the prior year quarter primarily related to a $2 million gain on the remeasurement of certain post-employment health and life insurance benefit plans that were discontinued.
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Net loss on divestitures | $ | 1 | $ | 1 | $ | — |
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Income tax expense |
| $ | 24 |
|
| $ | 10 |
|
| $ | 14 |
|
Effective tax rate |
|
| 51 | % |
|
| 45 | % |
|
|
|
|
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Income tax expense (benefit) | $ | 14 | $ | (41 | ) | $ | 55 | ||||
Effective tax rate | 200 | % | 39 | % |
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 expense rate was 200%51% for the three months ended December 31, 2018 and was primarily impacted by income mix, certain nondeductible restructuring costs as well as $30 million from unfavorable tax discrete items including the final assessment of the Tax Act and other items.
The overall effective tax rate was 45% for the three months ended December 31, 2017 and was primarily impacted by the current quarter income mix and net unfavorable tax discrete adjustments of $16 million related to the enactment of the Tax Act. These
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 unfavorable adjustments primarily included deferredincome and/or operating income which Ashland believes do not accurately reflect Ashland’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, changesexcluding key items, which is a non-GAAP measure, has been prepared to illustrate the ongoing tax effects of Ashland’s operations. Management believes investors and analysts use this financial measure in assessing Ashland's business performance and that presenting this non-GAAP measure on a one-time transition tax assessed on foreign cashconsolidated basis assists investors in better understanding Ashland’s ongoing business performance and unremitted earnings.
The overall effective tax benefit rate was 39% forduring the three months ended December 31, 20162018 and 2017 was primarilysignificantly impacted by income mix.the following tax specific key items:
• | Deferred tax rate changes – Includes the impact from the remeasurement of Ashland’s domestic deferred tax balances resulting from the enactment 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; |
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Income from discontinued operations (net of tax) | |||||||||||
Valvoline | $ | 3 | $ | 75 | $ | (72 | ) |
• | 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. These adjustments 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) |
| 2018 |
|
| 2017 |
| ||
Loss from continuing operations before income taxes |
| $ | (47 | ) |
| $ | (22 | ) |
Key items (pre-tax) (a) |
|
| 60 |
|
|
| 25 |
|
Adjusted income from continuing operations |
|
|
|
|
|
|
|
|
before income taxes |
| $ | 13 |
|
| $ | 3 |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
| $ | 24 |
|
| $ | 10 |
|
Income tax rate adjustments: |
|
|
|
|
|
|
|
|
Tax effect of key items |
|
| 8 |
|
|
| 7 |
|
Tax specific key items: (b) |
|
|
|
|
|
|
|
|
Deferred tax rate changes |
|
| (2 | ) |
|
| 126 |
|
One-time transition tax |
|
| (22 | ) |
|
| (142 | ) |
Restructuring and separation activity |
|
| (1 | ) |
|
| — |
|
Other tax reform |
|
| (3 | ) |
|
| — |
|
Total income tax rate adjustments |
|
| (20 | ) |
|
| (9 | ) |
Adjusted income tax expense |
| $ | 4 |
|
| $ | 1 |
|
|
|
|
|
|
|
|
|
|
Effective tax rate, excluding key items (Non-GAAP) (c) |
|
| 29 | % |
|
| 41 | % |
|
|
|
|
|
|
|
|
|
(a) | See Adjusted EBITDA reconciliation table previously disclosed in this Management, Discussion and Analysis for a summary of the key items, before tax. |
(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 Management Discussion and Analysis. |
(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) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Income (loss) from discontinued operation (net of taxes) |
| |||||||||||
Composites/Marl facility |
| $ | 25 |
|
| $ | 25 |
|
| $ | — |
|
Valvoline |
|
| — |
|
|
| 3 |
|
|
| (3 | ) |
Water Technologies |
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
Distribution |
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
|
| $ | 23 |
|
| $ | 28 |
|
| $ | (5 | ) |
As a result of the full separation of Valvoline Inc. on May 12, 2017, the operating results related to Valvoline Inc., including the operating resultsexpected divestiture of the former Valvoline reportableComposites segment and Marl facility, the related operating results have been reflected as discontinued operations (net of tax) within the StatementStatements of Consolidated Comprehensive Income (Loss). The activity within the current quarter represents subsequent adjustments that were made in conjunction with the Tax Matters Agreement. See Note B for more information on this expected divestiture. In the Tax Matters Agreement. Duringcurrent quarter, the prior year quarter, Valvoline's sales and pre-tax operating income included in discontinued operations were $489$275 million and $120$36 million, respectively.
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Net income attributable to noncontrolling interest | $ | — | $ | 11 | $ | (11 | ) |
The activity within discontinued operations for Valvoline during the prior year quarter was primarily related to adjustments in conjunction with a Tax Matters Agreement established at the time of Valvoline’s separation from Ashland.
The activity related to Water Technologies and Distribution during the current quarter was related to post-closing adjustments.
A comparative analysis of the components of other comprehensive income (loss) is provided below for the three months ended December 31, 20172018 and 2016.2017.
|
| Three months ended December 31 |
| |||||||||
(In millions) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Other comprehensive income (loss) (net of taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation gain (loss) |
| $ | (31 | ) |
| $ | 3 |
|
| $ | (34 | ) |
Pension and postretirement obligation adjustment |
|
| (6 | ) |
|
| — |
|
|
| (6 | ) |
Net change in available-for-sale securities |
|
| — |
|
|
| 8 |
|
|
| (8 | ) |
|
| $ | (37 | ) |
| $ | 11 |
|
| $ | (48 | ) |
Three months ended December 31 | |||||||||||
(In millions) | 2017 | 2016 | Change | ||||||||
Other comprehensive income (loss) (net of taxes) | |||||||||||
Unrealized translation gain (loss) | $ | 3 | $ | (146 | ) | $ | 149 | ||||
Net change in available-for-sale securities | 8 | — | 8 | ||||||||
Pension and postretirement obligation adjustment | — | (1 | ) | 1 | |||||||
$ | 11 | $ | (147 | ) | $ | 158 |
Total other comprehensive income, net of tax, for the current quarter increased $158decreased $48 million compared to the prior year quarter as a result of the following components:
• | For the three months ended December 31, 2018, the change in unrealized gain (loss) from foreign currency translation adjustments resulted in a loss of $31 million compared to a gain of $3 million for the three months ended December 31, 2017. The fluctuations in unrealized translation gains 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 $6 million of prior service costs recognized within other comprehensive income (loss) due to pension plan remeasurements. |
• | The net change in available-for-sale securities related to restricted investments amounted to gains of $8 million |
Ashland’s operations are managed within the following threetwo reportable segments: Specialty Ingredients Composites and Intermediates and Solvents.
Results of Ashland’s reportable segments are presented based on its management and internal accounting structure. The structure is specific to Ashland; therefore, the financial results of Ashland’s reportable segments are not necessarily comparable with similar information for other comparable 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 that Ashland no longer operates. The service cost 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 to Ashland’s methodologies are adjusted for all segments on a retrospective basis.
The EBITDA and Adjusted EBITDA amounts presented within this business section are provided as a means to enhance the understanding of financial measurements that Ashland 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.Income (Loss).
The following table discloses sales, operating income, depreciation and amortization and statistical operating information by reportable segment for the three months ended December 31, 20172018 and 2016. 2017.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Sales |
|
|
|
|
|
|
|
Specialty Ingredients | $ | 553 |
|
| $ | 550 |
|
Intermediates and Solvents |
| 23 |
|
|
| 31 |
|
| $ | 576 |
|
| $ | 581 |
|
Operating income (loss) |
|
|
|
|
|
|
|
Specialty Ingredients | $ | 26 |
|
| $ | 42 |
|
Intermediates and Solvents |
| — |
|
|
| 3 |
|
Unallocated and other |
| (33 | ) |
|
| (40 | ) |
| $ | (7 | ) |
| $ | 5 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
Specialty Ingredients | $ | 77 |
|
| $ | 62 |
|
Intermediates and Solvents |
| 3 |
|
|
| 4 |
|
Unallocated and other |
| 1 |
|
|
| 4 |
|
| $ | 81 |
|
| $ | 70 |
|
Operating information |
|
|
|
|
|
|
|
Specialty Ingredients |
|
|
|
|
|
|
|
Sales per shipping day | $ | 8.9 |
|
| $ | 9.0 |
|
Metric tons sold (thousands) |
| 72.8 |
|
|
| 73.0 |
|
Gross profit as a percent of sales (a) |
| 27.1 | % |
|
| 31.5 | % |
Intermediates and Solvents |
|
|
|
|
|
|
|
Sales per shipping day | $ | 0.4 |
|
| $ | 0.5 |
|
Metric tons sold (thousands) |
| 6.8 |
|
|
| 10.5 |
|
Gross profit as a percent of sales (a) |
| 10.0 | % |
|
| 18.4 | % |
|
|
|
|
|
|
|
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Sales | |||||||
Specialty Ingredients | $ | 550 | $ | 482 | |||
Composites | 218 | 165 | |||||
Intermediates and Solvents | 74 | 57 | |||||
$ | 842 | $ | 704 | ||||
Operating income (loss) | |||||||
Specialty Ingredients | $ | 42 | $ | 40 | |||
Composites | 18 | 15 | |||||
Intermediates and Solvents | 8 | (7 | ) | ||||
Unallocated and other | (29 | ) | (33 | ) | |||
$ | 39 | $ | 15 | ||||
Depreciation and amortization | |||||||
Specialty Ingredients | $ | 62 | $ | 55 | |||
Composites | 5 | 6 | |||||
Intermediates and Solvents | 8 | 7 | |||||
Unallocated and other | 4 | — | |||||
$ | 79 | $ | 68 | ||||
Operating information | |||||||
Specialty Ingredients | |||||||
Sales per shipping day | $ | 9.0 | $ | 7.9 | |||
Metric tons sold (thousands) | 73.0 | 72.6 | |||||
Gross profit as a percent of sales (a) | 31.5 | % | 32.0 | % | |||
Composites | |||||||
Sales per shipping day | $ | 3.6 | $ | 2.7 | |||
Metric tons sold (thousands) | 91.2 | 78.4 | |||||
Gross profit as a percent of sales (a) | 18.4 | % | 21.1 | % | |||
Intermediates and Solvents | |||||||
Sales per shipping day | $ | 1.2 | $ | 0.9 | |||
Metric tons sold (thousands) | 32.7 | 32.2 | |||||
Gross profit as a percent of sales (a) | 21.3 | % | (0.9 | )% | |||
(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 ended December 31, 20172018 and 20162017 were as follows. Ashland includes only U.S. and Canada in its North American designation.
| 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 | % |
| Three months ended December 31, 2017 |
| |||||
| Specialty |
|
| Intermediates |
| ||
Sales by Geography | Ingredients |
|
| and Solvents |
| ||
North America |
| 41 | % |
|
| 43 | % |
Europe |
| 30 | % |
|
| 24 | % |
Asia Pacific |
| 19 | % |
|
| 27 | % |
Latin America & other |
| 10 | % |
|
| 6 | % |
|
| 100 | % |
|
| 100 | % |
Three months ended December 31, 2017 | ||||||||
Sales by Geography | Specialty Ingredients | Composites | Intermediates and Solvents | |||||
North America | 41 | % | 45 | % | 21 | % | ||
Europe | 30 | % | 34 | % | 59 | % | ||
Asia Pacific | 19 | % | 14 | % | 17 | % | ||
Latin America & other | 10 | % | 7 | % | 3 | % | ||
100 | % | 100 | % | 100 | % |
Three months ended December 31, 2016 | ||||||||
Sales by Geography | Specialty Ingredients | Composites | Intermediates and Solvents | |||||
North America | 39 | % | 48 | % | 23 | % | ||
Europe | 29 | % | 28 | % | 57 | % | ||
Asia Pacific | 22 | % | 16 | % | 17 | % | ||
Latin America & other | 10 | % | 8 | % | 3 | % | ||
100 | % | 100 | % | 100 | % |
Specialty Ingredients
Specialty Ingredients is a global leader in cellulose ethers, vinyl pyrrolidones and biofunctionals. It offers industry-leading products, technologies and resources for solving formulation and product-performance challenges. Specialty Ingredients usesUsing natural, synthetic and semisynthetic polymers derived from cellulose ethers, vinyl pyrrolidones, acrylic polymers, polyester and polyurethane-based adhesives, and plant and seed extract.extract, Specialty Ingredients’ end markets offerIngredients offers comprehensive and innovative solutions for today’s demanding consumer and industrial applications. Key customers include:include pharmaceutical companies; makers of personal care products, food and beverages; makers of nutraceuticals and supplements; manufacturers of paint, coatings and construction materials; packaging and converting; and oilfield service companies.
December 20172018 quarter compared to December 20162017 quarter
Specialty Ingredients’ sales increased $68$3 million to $550$553 million in the current quarter. The acquisition of Pharmachem increased sales by $58 million, or 12%. Favorable foreign currency exchange increased sales by $10 million, while volume and mix combined to increase sales by $9 million. In addition, improvedImproved product pricing increased sales by $2$8 million, while mix increased sales by $3 million. These increases were partially offset by a decrease of $11$8 million from divestitures which was primarily relateddue to the transfer of ownership interest in a consolidated joint venture.
Gross profit during the current quarter increased $19decreased $24 million compared to the prior year quarter. The acquisitionnet impact of Pharmachem increasedpricing and costs decreased gross profit by $14$22 million, while improved volumewhich included a $26 million net impact from the following key items during the current and mix combined to increase gross profit by $9 million. Favorableprior year quarters:
• | $27 million of restructuring costs related to the planned closure of a manufacturing facility during the current quarter (which included $19 million of accelerated depreciation and amortization); and |
• | $1 million of severance and other restructuring costs related to the closure of a manufacturing facility during the prior year quarter. |
Additionally, unfavorable foreign currency exchange increaseddecreased gross profit by $4 million. These increasesdecreases were partially offset by an increase of $2 million due to the netcombined impact of pricingvolume and costs which decreased gross profit by $6 million and the joint venture divestiture which decreased gross profit by $2 million.mix. In total, gross profit margin during the current quarter decreased 0.54.4 percentage points as compared to the prior year quarter to 31.5%27.1%.
Selling, general and administrative expenses (which include research and development expenses throughout the reportable segment discussion and analysis) increased $15decreased $7 million in the current quarter as compared to the prior year quarter, largely due to incremental costs of $10 millionprimarily related to Pharmachem’s operations. The remaining increase in selling, general and administrative expenses was primarily due to higher employee-related costs and unfavorablethe company-wide cost reduction program as well as a favorable foreign currency exchange. Equity and other income decreased $2increased $1 million compared to the prior year quarter.
Operating income totaled $42$26 million for the current quarter compared to $40$42 million in the prior year quarter. Current quarter EBITDA increased $7decreased $18 million to $102$84 million, while Adjusted EBITDA increased $10$7 million to $105$112 million. Adjusted EBITDA margin decreased 0.6increased 1.2 percentage points in the current quarter to 19.1%20.3%.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Operating income | $ | 26 |
|
| $ | 42 |
|
Depreciation and amortization (a) |
| 58 |
|
|
| 60 |
|
EBITDA |
| 84 |
|
|
| 102 |
|
Accelerated depreciation |
| 19 |
|
|
| 2 |
|
Severance and other restructuring costs |
| 9 |
|
|
| 1 |
|
Adjusted EBITDA | $ | 112 |
|
| $ | 105 |
|
|
|
|
|
|
|
|
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Operating income | $ | 42 | $ | 40 | |||
Depreciation and amortization (a) | 60 | 55 | |||||
EBITDA | 102 | 95 | |||||
Accelerated depreciation | 2 | — | |||||
Severance and other restructuring costs | 1 | — | |||||
Adjusted EBITDA | $ | 105 | $ | 95 | |||
(a) | Excludes $19 million and $2 million of accelerated depreciation for the three months ended December 31, |
2018 and 2017, respectively. | ||
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Operating income | $ | 18 | $ | 15 | |||
Depreciation and amortization | 5 | 6 | |||||
EBITDA | $ | 23 | $ | 21 |
Intermediates and Solvents
Intermediates and Solvents is a leading producer of 1,4 butanediol (BDO) 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 to Ashland’s Specialty Ingredients business for use as a raw material.
On November 15, 2018, Ashland announced that it had signed a definitive agreement to sell its Composites segment and Marl facility. As a result, the financial information for Intermediates and Solvents excludes the activity from the Marl facility due to the expected divestiture and has been restated in prior periods.
December 20172018 quarter compared to December 20162017 quarter
Intermediates and Solvents’ sales increased $17decreased $8 million to $74$23 million in the current quarter. Higher product pricing increasedVolume decreased sales by $9 million, while higher volumes and favorableunfavorable foreign currency exchange each increaseddecreased sales by $4$1 million.
Gross profit increased $16decreased $3 million during the current quarter compared to the prior year quarter. Lower facility turn around costs in the current quarter resulted in an $8 million increase in gross profit as a result of a significant
Selling, general and administrative expenses increased by $1 million compared toremained consisted with the prior year quarter.
Operating income totaled $8 millionwas zero in the current quarter as compared to a loss of $7$3 million in the prior year quarter. EBITDA and EBITDA margindecreased $4 million to $3 million in the current quarter, increasedwhile EBITDA margin decreased 9.6 percentage points in the current quarter to $16 million and 21.6%, respectively.13.0%.
The following EBITDA presentation for the three months ended December 31, 20172018 and 20162017 is provided as a means to enhance the understanding of financial measurements that Ashland 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.quarters or periods.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Operating income | $ | — |
|
| $ | 3 |
|
Depreciation and amortization |
| 3 |
|
|
| 4 |
|
EBITDA | $ | 3 |
|
| $ | 7 |
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Operating income (loss) | $ | 8 | $ | (7 | ) | ||
Depreciation and amortization | 8 | 7 | |||||
EBITDA | $ | 16 | $ | — |
Unallocated and other
The following table summarizes the key components of the Unallocated and other segment'ssegment’s operating lossincome (loss) for the three months ended December 31, 20172018 and 2016.2017.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Restructuring activities | $ | (29 | ) |
| $ | (25 | ) |
Environmental expenses |
| (2 | ) |
|
| (13 | ) |
Other expense |
| (2 | ) |
|
| (2 | ) |
Total expense | $ | (33 | ) |
| $ | (40 | ) |
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Restructuring activities (includes separation, severance, integration | |||||||
and stranded divestiture costs) | $ | 14 | $ | 24 | |||
Environmental expense for divested businesses | 13 | 4 | |||||
Legal reserve | — | 5 | |||||
Other expense | 2 | — | |||||
Total expense | $ | 29 | $ | 33 |
December 20172018 quarter compared to December 20162017 quarter
Unallocated and other recorded expense of $29$33 million and $33$40 million for the three months ended December 31, 20172018 and 2016,2017, respectively. The unallocated items for the current and prior year quarters included charges for restructuring activities of $14$29 million and $24$25 million, respectively. Restructuring activities included $6 million and $22 millionrespectively, which were comprised of costs related to the separation of Valvoline and stranded divestiture costs of $3 million and $2 million during the current and prior year quarters, respectively. The current quarter also included $4 million of accelerated depreciation related to the planned closure of an office building and $1 million of integration charges related to the acquisition of Pharmachem.
• | ||
$17 million of severance, lease abandonment and other restructuring costs related to company-wide cost reduction programs during the current quarter; |
• | ||
$12 million and $14 million of stranded divestiture costs during the current and prior year quarters, respectively, primarily related to the planned divestiture of the Composites segment and Marl facility; |
• | $6 million of costs related to the separation of Valvoline during the prior year quarter; |
• | ||
$4 million of accelerated depreciation related to the planned closure of an office building during the prior year quarter; and |
• | $1 million of integration costs related to the acquisition of Pharmachem during the prior year quarter. |
Liquidity
Ashland had $601$149 million in cash and cash equivalents as of December 31, 2017,2018, of which $581$138 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. However, due to the recent Tax Act, Ashland will be reassessing this position in future quarters.
Ashland’s cash flows from operating, investing and financing activities, as reflected in the Statements of Condensed Consolidated Cash Flows, are summarized as follows for the three months ended December 31, 20172018 and 2016. 2017.
| Three months ended |
| |||||
| December 31 |
| |||||
(In millions) | 2018 |
|
| 2017 |
| ||
Cash provided (used) by: |
|
|
|
|
|
|
|
Operating activities from continuing operations | $ | (9 | ) |
| $ | (31 | ) |
Investing activities from continuing operations |
| (24 | ) |
|
| (21 | ) |
Financing activities from continuing operations |
| (50 | ) |
|
| 99 |
|
Discontinued operations |
| (60 | ) |
|
| (12 | ) |
Effect of currency exchange rate changes on cash and cash equivalents |
| (2 | ) |
|
| — |
|
Net decrease in cash and cash equivalents | $ | (145 | ) |
| $ | 35 |
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Cash provided (used) by: | |||||||
Operating activities from continuing operations | $ | (24 | ) | $ | (60 | ) | |
Investing activities from continuing operations | (24 | ) | (31 | ) | |||
Financing activities from continuing operations | 99 | (434 | ) | ||||
Discontinued operations | (16 | ) | 50 | ||||
Effect of currency exchange rate changes on cash and cash equivalents | — | (9 | ) | ||||
Net increase (decrease) in cash and cash equivalents | $ | 35 | $ | (484 | ) |
Operating activities
The following discloses the cash flows associated with Ashland’s operating activities for the three months ended December 31, 20172018 and 2016.2017.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions) |
| 2018 |
|
| 2017 |
| ||
Cash flows provided (used) by operating activities from continuing operations |
|
|
|
|
|
|
|
|
Net loss |
| $ | (48 | ) |
| $ | (4 | ) |
Income from discontinued operations (net of income taxes) |
|
| (23 | ) |
|
| (28 | ) |
Adjustments to reconcile income from continuing operations to |
|
|
|
|
|
|
|
|
cash flows from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 81 |
|
|
| 70 |
|
Original issue discount and debt issuance costs amortization |
|
| 2 |
|
|
| 2 |
|
Deferred income taxes |
|
| 3 |
|
|
| 8 |
|
Stock based compensation expense |
|
| 7 |
|
|
| 7 |
|
Loss (income) from restricted investments |
|
| 28 |
|
|
| (3 | ) |
Excess tax benefit on stock based compensation |
|
| 1 |
|
|
| 1 |
|
Net loss on divestitures |
|
| 3 |
|
|
| 1 |
|
Pension contributions |
|
| (1 | ) |
|
| (2 | ) |
Gain on pension and other postretirement plan remeasurements |
|
| (18 | ) |
|
| — |
|
Change in operating assets and liabilities (a) |
|
| (44 | ) |
|
| (83 | ) |
Total cash flows used by operating activities from continuing operations |
| $ | (9 | ) |
| $ | (31 | ) |
|
|
|
|
|
|
|
|
|
(a) | ||
Excludes changes resulting from operations acquired or sold. |
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Cash flows provided (used) by operating activities from continuing operations | |||||||
Net income (loss) | $ | (4 | ) | $ | 10 | ||
Income from discontinued operations (net of tax) | (3 | ) | (75 | ) | |||
Adjustments to reconcile income from continuing operations to | |||||||
cash flows from operating activities | |||||||
Depreciation and amortization | 79 | 68 | |||||
Original issue discount and debt issuance cost amortization | 2 | 94 | |||||
Deferred income taxes | 8 | 2 | |||||
Stock based compensation expense | 7 | 5 | |||||
Gain on early retirement of debt | — | (3 | ) | ||||
Realized gain and investment income on available-for-sale securities | (3 | ) | (3 | ) | |||
Net loss on divestitures | 1 | 1 | |||||
Pension contributions | (2 | ) | (1 | ) | |||
Gain on post-employment plan remeasurement | — | (2 | ) | ||||
Change in operating assets and liabilities (a) | (109 | ) | (156 | ) | |||
Total cash flows used by operating activities from continuing operations | $ | (24 | ) | $ | (60 | ) | |
Cash flows usedprovided from operating activities from continuing operations, a major source of Ashland’s liquidity, amounted to cash inflowsoutflows of $24$(9) million and $60$(31) million in the current and prior year quarters, respectively.
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 $96$47 million and $71$75 million for the three months ended December 31, 20172018 and 2016,2017, respectively, and were driven by the following:
• | ||
Accounts receivable – There were cash inflows of $76 million and $36 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 $21 million and $23 million during the current and prior year quarters, respectively, which were primarily driven by sales volumes and inventory management strategies. |
• | ||
Trade and other payables – There were cash outflows of $102 million and $88 million during the current and prior year quarters, respectively, and primarily related to the timing of certain payments. |
The remaining outflows within changes into operating assets and liabilities resulted in an inflow of $13$3 million and $85an outflow of $8 million in the current and prior year quarters, respectively, relatewere primarily due to income taxes paid or income tax refunds, interest paid, and adjustments to certain accruals and long termother long-term assets and liabilities as well as income taxes received and paid.
Operating Activities -– Summary
Operating cash flows for the current quarter included a loss from continuing operations of $7 million, noncash$71 million. Additionally, the current quarter included non-cash adjustments of $79$81 million for depreciation and amortization, and $2$28 million for debt issuance cost amortization.
Operating cash flows for the prior year quarter included a loss from continuing operations of $65 million and noncash adjustments$31 million. Additionally, the prior year quarter included a non-cash adjustment of $68$70 million for depreciation and amortization and $94 million for original issue discount and debt issuance cost amortization, including $92 million of accelerated accretion related to the tender offer of the 2029 notes.
Investing activities
The following discloses the cash flows associated with Ashland’s investing activities for the three months ended December 31, 20172018 and 2016.2017.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions) |
| 2018 |
|
| 2017 |
| ||
Cash flows provided (used) by investing activities from continuing operations |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
| $ | (33 | ) |
| $ | (21 | ) |
Proceeds from disposal of property, plant and equipment |
|
| 4 |
|
|
| 1 |
|
Proceeds from sales of operations |
|
| — |
|
|
| 1 |
|
Net purchase of funds restricted for specific transactions |
|
| (2 | ) |
|
| (5 | ) |
Reimbursement from restricted investments |
|
| 8 |
|
|
| 5 |
|
Proceeds from sales of securities |
|
| — |
|
|
| 5 |
|
Purchase of securities |
|
| — |
|
|
| (5 | ) |
Proceeds from the settlement of derivative instruments |
|
| 1 |
|
|
| — |
|
Payments for the settlement of derivative instruments |
|
| (2 | ) |
|
| (2 | ) |
Total cash flows used by investing activities from continuing operations |
| $ | (24 | ) |
| $ | (21 | ) |
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Cash flows provided (used) by investing activities from continuing operations | |||||||
Additions to property, plant and equipment | $ | (24 | ) | $ | (33 | ) | |
Proceeds from disposal of property, plant and equipment | 1 | — | |||||
Proceeds from sale of operations | 1 | — | |||||
Net purchase of funds restricted for specific transactions | (5 | ) | (2 | ) | |||
Reimbursements from restricted investments | 5 | — | |||||
Proceeds from sales of available-for-sale securities | 5 | — | |||||
Purchases of available-for-sale securities | (5 | ) | — | ||||
Proceeds from the settlement of derivative instruments | — | 4 | |||||
Payments for the settlement of derivative instruments | (2 | ) | — | ||||
Total cash flows used by investing activities from continuing operations | $ | (24 | ) | $ | (31 | ) |
Cash used by investing activities was $24 million and $31$21 million for the current and prior year quarters, respectively. The significant cash investing activities for the current quarter primarily related to cash outflows of $24$33 million for property additions compared to $33$21 million in the prior year quarter. Additionally, there were reimbursements from the restricted renewable annual asbestos trust of $8 million during the current quarter compared to $5 million in the prior year quarter.
The following discloses the cash flows associated with Ashland’s financing activities for the three months ended December 31, 20172018 and 2016.2017.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions) |
| 2018 |
|
| 2017 |
| ||
Cash flows provided (used) by financing activities from continuing operations |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
| (1 | ) |
|
| (2 | ) |
Proceeds from (repayment of) short-term debt |
|
| (26 | ) |
|
| 120 |
|
Cash dividends paid |
|
| (16 | ) |
|
| (14 | ) |
Stock based compensation employee withholding taxes paid in cash |
|
| (7 | ) |
|
| (5 | ) |
Total cash flows provided (used) by financing activities from continuing operations |
| $ | (50 | ) |
| $ | 99 |
|
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Cash flows provided (used) by financing activities from continuing operations | |||||||
Repayment of long-term debt | $ | (2 | ) | $ | (239 | ) | |
Premium on long-term debt repayment | — | (5 | ) | ||||
Proceeds (repayment) from short-term debt | 120 | (154 | ) | ||||
Debt issuance costs | — | (4 | ) | ||||
Cash dividends paid | (14 | ) | (24 | ) | |||
Stock based compensation employee withholding taxes paid in cash | (5 | ) | (8 | ) | |||
Total cash flows provided (used) by financing activities from continuing operations | $ | 99 | $ | (434 | ) |
Cash flows generated(used) provided by financing activities was $99resulted in an outflow $50 million for the current quarter as compared to a cash usedinflow of $434$99 million for the prior year quarter.
Significant cash financing activities for the current quarter included short-term cash outflows of $26 million, primarily related to repayments of the 2017 Revolving Credit Facility. The current quarter included cash dividends paid of $0.25 per share, for a total of $16 million.
Significant cash financing activities for the prior year quarter included short-term debt net cash inflows of $120 million related to debt outstanding on the 2017 Revolving Credit Facility and the accounts receivable securitization. The currentprior year quarter included cash dividends paid of $0.225 per share, for a total of $14 million.
The following discloses the cash flows associated with Ashland’s discontinued operations for the three months ended December 31, 20172018 and 2016.2017.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions) |
| 2018 |
|
| 2017 |
| ||
Cash provided (used) by discontinued operations |
|
|
|
|
|
|
|
|
Operating cash flows |
| $ | (58 | ) |
| $ | (9 | ) |
Investing cash flows |
|
| (2 | ) |
|
| (3 | ) |
Total cash used by discontinued operations |
| $ | (60 | ) |
| $ | (12 | ) |
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Cash used by discontinued operations | |||||||
Operating cash flows | $ | (16 | ) | $ | 70 | ||
Investing cash flows | — | (10 | ) | ||||
Financing cash flows | — | (10 | ) | ||||
Total cash provided (used) by discontinued operations | $ | (16 | ) | $ | 50 |
Cash flows for discontinued operations in the current quarter primarily related to previously divested businesses, including net paymentsincluded cash outflows of asbestos and environmental liabilities.
Cash flows for discontinued operations in the prior year quarter included cash outflows of $5 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.
The following represents Ashland’s calculation of free cash flow for the disclosed quarters. Free cash flow does not reflect adjustments for certain non-discretionary cash flows such as mandatory debt repayments.
|
| Three months ended |
| |||||
|
| December 31 |
| |||||
(In millions) |
| 2018 |
|
| 2017 |
| ||
Total cash flows used by operating activities from continuing operations |
| $ | (9 | ) |
| $ | (31 | ) |
Adjustments: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| (33 | ) |
|
| (21 | ) |
Free cash flows (a) |
| $ | (42 | ) |
| $ | (52 | ) |
|
|
|
|
|
|
|
|
|
(a) | ||
Three months ended | |||||||
December 31 | |||||||
(In millions) | 2017 | 2016 | |||||
Cash flows provided by operating activities from continuing operations | $ | (24 | ) | $ | (60 | ) | |
Adjustments: | |||||||
Additions to property, plant and equipment | (24 | ) | (33 | ) | |||
Free cash flows (a) | $ | (48 | ) | $ | (93 | ) | |
Includes |
Working capital (current assets minus current liabilities, excluding current assets and current liabilities held for sale and long-term debt due within one year) amounted to $967$526 million compared to $941and $570 million atas of December 31, 2018 and September 30, 2017.2018, respectively. Liquid assets (cash, cash equivalents and accounts receivable) amounted to 119%78% and 122%89% of current liabilities at(excluding current liabilities held for sale) as of December 31, 20172018 and September 30, 2017,2018, respectively.
The following summary reflects Ashland’s cash and unused borrowing capacity as of
December 31,(In millions) | December 31 2018 |
|
| September 30 2018 |
| ||
Cash and investment securities |
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 149 |
|
| $ | 294 |
|
|
|
|
|
|
|
|
|
Unused borrowing capacity |
|
|
|
|
|
|
|
Revolving credit facility | $ | 752 |
|
| $ | 725 |
|
Accounts receivable securitizations |
| 41 |
|
|
| 29 |
|
December 31 | September 30 | ||||||
(In millions) | 2017 | 2017 | |||||
Cash and cash equivalents | $ | 601 | $ | 566 | |||
Unused borrowing capacity | |||||||
2017 Revolving Credit Facility | $ | 467 | $ | 579 | |||
Accounts receivable securitization facility | 31 | 35 |
The borrowing capacity remaining under the 2017 Revolving Credit Facility$800 million revolving credit facility was $467$752 million due to an outstanding balance of $285 million, as well as a reduction of $48 million for letters of credit outstanding at December 31, 2017.2018. In total, Ashland’s available liquidity position, which includes cash, the revolving credit facility and the accounts receivable securitization facility,facilities, was $1,099$942 million at December 31, 2017,2018, compared to $1,180$1,048 million at September 30, 2017.
Capital resources
Debt
The following summary reflects Ashland’s debt as of
December 31,December 31 | September 30 | ||||||
(In millions) | 2017 | 2017 | |||||
Short-term debt (includes current portion of long-term debt) | $ | 355 | $ | 235 | |||
Long-term debt (including current portion and debt issuance cost discounts) (a) | 2,584 | 2,584 | |||||
Total debt | $ | 2,939 | $ | 2,819 | |||
(In millions) | December 31 2018 |
|
| September 30 2018 |
| ||
Short-term debt (includes current portion of long-term debt) | $ | 229 |
|
| $ | 254 |
|
Long-term debt (less current portion and debt issuance cost discounts) (a) |
| 2,275 |
|
|
| 2,275 |
|
Total debt | $ | 2,504 |
|
| $ | 2,529 |
|
|
|
|
|
|
|
|
|
(a) | Includes $20 million and $21 million of debt issuance cost discounts as of December 31, 2018 and September 30, 2018, respectively. |
The current portion of long-term debt was $6$11 million at December 31, 2017.2018. Debt as a percent of capital employed was 46%43% at both December 31, 20172018 and 45% at September 30, 2017.2018. At December 31, 2017,2018, Ashland’s total debt had an outstanding principal balance of $3,015$2,573 million, discounts of $52$49 million, and debt issuance costs of $24$20 million. The scheduled aggregate maturities of long-term debt by year (including the current portion and excluding debt issuance costs) are as follows: $5$10 million remaining in 2018, $11 million in 2019, $269$6 million in 2020, $56$13 million in 2021, and $1,279 million in 2022.
Ashland credit ratings
Ashland’s corporate credit rating with Standard & Poor’s is BB, while Moody’s Investor Services is Ba2. Moody’s Investor Services and Standard & Poor's outlooks both remained at stable. Subsequent changes to these ratings may have an effect on Ashland’s borrowing rate or ability to access capital markets in the future.
Ashland debt covenant restrictions
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 of December 31,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 on page 41.36. 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.
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.
Any change in Covenant Adjusted EBITDA of $100 million would have an approximate 0.7x0.5x effect on the consolidated net leverage ratio and a 0.8x 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 projection
Ashland 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 enable Ashland 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 decreased $7$101 million since September 30, 20172018 to $3,399$3,305 million at December 31, 2017.2018. The decrease of $7$101 million was due to cash dividends of $14 million and a net loss of $4$48 million, partially offset by an $8deferred translation losses of $31 million, net increase in available-for-sale securitiescash dividends of $16 million and $3$6 million related to deferred translation gains.
Stock repurchase program
During March 2018, Ashland’s Board of Directors approved a new $1 billion share repurchase authorization that was set to expire on December 31, 2017 (the 2015 stock repurchase program). This authorization allows forprogram. Under the new program, Ashland’s common shares tomay be repurchased in open market transactions, privately negotiated transactions or pursuant to one or more accelerated stock repurchase programs or Rule 10b5-1 plans.
Stockholder dividends
In May 2017, subsequent to the final distribution of Valvoline Inc.'s common stock,2018, the Board of Directors of Ashland announced a quarterly cash dividend of 22.525 cents per share, or $16 million, to eligible shareholdersstockholders at record, which was paid for quarterly dividends in the first quarter of fiscal 20182019 and the third and fourth quarters of fiscal 2017.2018. This represented a reductionan increase from the previous quarterly cash dividend of 3922.5 cents per share which was paid for quarterly dividends in the first and second quarters of fiscal 2017.
Capital
expendituresCapital expenditures were $24$33 million for the three months ended December 31, 2017 and averaged approximately $2172018 compared to $21 million duringfor the last three fiscal years.
The preparation of Ashland’s Condensed Consolidated Financial Statements in conformity with U.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” in Ashland’s Annual Report on Form 10-K for the fiscal year ended
September 30,Fiscal Year 2018
Ashland updated its financial outlook for fiscal 20182019 as shown in the table below.
FY 2019 Outlook | ||||
Adjusted EBITDA | ||||
Specialty Ingredients | $610 - $635 million | |||
Intermediates & Solvents | $20 - $30 million | |||
Unallocated and other | ($ | |||
Key Operating Metrics | ||||
Adjusted diluted EPS | $3.10 - $3.40 | |||
Free cash flow* | ~ $175 million | |||
Corporate Items | ||||
Depreciation & amortization | ~260 million | |||
Interest expense | $85 - $95 million | |||
Effective tax rate | 14% - | |||
Capital expenditures | ~ $160 million | |||
Diluted share count | ~64 million | |||
* These figures include approximately $40 million of 2018
For the second quarter of fiscal 2018,2019, Ashland expects Adjustedadjusted diluted EPS to beearnings per share in the range of $0.80-$0.90 per diluted share.0.90. This estimate assumes an effective tax rate of 18% based on15% percent for the new U.S. tax legislation.
Ashland’s market risk exposure at
December 31,Disclosure Controls and Procedures
- As of the end of the period covered by this quarterly report, Ashland, under the supervision and with the participation of its management, including Ashland’s Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of Ashland’s disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of December 31,Changes in Internal Control over Financial Reporting
- During the three months ended December 31,The following is a description of Ashland’s material legal proceedings.
Asbestos-Related Litigation
Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary. Although Riley was neither a producer nor a manufacturer of asbestos, its industrial boilers contained some asbestos-containing components provided by other companies.
Hercules LLC (formerly Hercules Incorporated), an indirect wholly-owned subsidiary of Ashland, is also subject to liabilities from asbestos-related personal injury lawsuits involving claims which typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of Hercules’ former subsidiaries to a limited industrial market.
Ashland and Hercules are also defendants in lawsuits alleging exposure to asbestos at facilities formerly or presently owned or operated by Ashland or Hercules.
For additional detailed information regarding liabilities arising from asbestos-related litigation, see Note K of Notes to Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q.
Environmental Proceedings
(a) CERCLA and Similar State Law Sites -
Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws, Ashland and its subsidiaries may be subject to joint and several liability for cleanup costs in connection with alleged releases of hazardous substances at sites where it has been identified as a “potentially responsible party” (PRP). As of December 31,(b) Hattiesburg, Mississippi Resource Conservation and Recovery Act Matter -
In November 2008, the Mississippi Department of Environmental Quality (MDEQ) issued a Notice of Violation to Hercules’ now-closed Hattiesburg, Mississippi manufacturing facility alleging that a process water impoundment basin at the facility had been operated as a hazardous waste storage and treatment facility without a permit in violation of the Resource Conservation and Recovery Act. In May 2011, the USEPA issued an inspection report from a September 2010 inspection with allegations similar to those of the MDEQ and promulgated an information request. Ashland has been working with the MDEQ and USEPA to settle this matter in the context of the shutdown and ongoing remediation of the Hattiesburg facility. The USEPA proposed a settlement penalty in excess of $100,000. While it is reasonable to believe that this matter will involve a penalty from the MDEQ and/or the USEPA exceeding $100,000, the potential penalty with respect to this enforcement matter should not be material to Ashland.(c) Lower Passaic River, New Jersey Matters - Ashland, through two formerly owned facilities, and ISP, through a now-closed facility, have been identified as PRPs, along with approximately 70 other companies (the Cooperating Parties Group or the CPG), in a May 2007 Administrative Order of Consent (AOC) with the USEPA. The parties are required to perform a remedial investigation and feasibility study (RI/FS) of the entire 17 miles of the Passaic River. In June 2007, the USEPA separately commenced a Focused Feasibility Study (FFS) as an interim measure. In accordance with the 2007 AOC, in June 2012 the CPG voluntarily entered into another AOC for an interim removal action focused solely at mile 10.9 of the Passaic River. The allocations for the 2007 AOC and the 2012 removal action are based on interim allocations, are immaterial and have been accrued. In April 2014, the USEPA released the FFS. The CPG
(d) Freetown, MA Resource Conservation and Recovery Act (RCRA) Matter - On September 27, 2018, the USEPA issued a Complaint, Compliance Order and Opportunity for Hearing to ISP Freetown Fine Chemicals, Inc.’s facility in Assonet, Massachusetts alleging various violations of the RCRA relating to certain distillation tanks at the facility and seeking a penalty of $203,792. Ashland disputes USEPA’s stated interpretation of the RCRA regulations and their applicability to these tanks. While this matter could result in a penalty from USEPA in excess of $100,000, the potential penalty is not expected to be material to Ashland.
For additional information regarding environmental matters and reserves, see Note K of Notes to Condensed Consolidated Financial Statements in this quarterly report on Form 10-Q.
Other Pending Legal Proceedings
In addition to the matters described above, there are other various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability and other environmental matters which seek remedies or damages, some of which are for substantial amounts. While Ashland cannot predict with certainty the outcome of such actions, it believes that adequate reserves have been recorded and losses already recognized with respect to such actions were immaterial as of December 31, 2017.2018. There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, Ashland believes that such potential losses were immaterial as of December 31, 2017.
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, 2017.2018.
There was no share repurchase activity during the three months ended December 31, 2017 was as follows:2018.
Issuer Purchases of Equity Securities |
| |||||||||||||||
Q1 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)(a) |
| ||||
October 1, 2018 to October 31, 2018 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 1,000 |
|
November 1, 2018 to November 30, 2018 |
| 10,443 (b) |
|
|
| 80.32 |
|
|
| — |
|
|
| 1,000 |
| |
December 1, 2018 to December 31, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,000 |
|
Total |
|
| 10,443 |
|
|
|
|
|
|
| — |
|
| $ | 1,000 |
|
(a) | During March 2018, Ashland’s Board of Directors approved a new $1 billion stock repurchase program, which replaced the previous stock repurchase program. The Company's stock repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 of the Exchange Act. As of December 31, 2018, $1 billion remains available for repurchase under this authorization. |
Issuer Purchases of Equity Securities | ||||||||||||||
Q1 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)(a) | ||||||||||
October 1, 2017 to October 31, 2017 | — | $ | — | — | $ | 500 | ||||||||
November 1, 2017 to November 30, 2017: | ||||||||||||||
Employee Tax Withholdings | 16,465 | (b) | 66.56 | — | 500 | |||||||||
December 1, 2017 to December 31, 2017 | — | — | — | 500 | ||||||||||
Total.......................................................... | 16,465 | — | $ | 500 |
(b) | Shares withheld from employees to cover their withholding requirements for personal income taxes related to the vesting of restricted stock. |
(a) Exhibits | |
2.1 | |
10.1 | |
31.1* | |
101.INS** | XBRL Instance Document. |
101.SCH** | XBRL Taxonomy Extension Schema Document. |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith. |
** | Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Consolidated Comprehensive Income (Loss) for the three months ended December 31, 2018 and December 31, 2017; (ii) Condensed Consolidated Balance Sheets at December 31, 2018 and September 30, 2018; (iii) Statements of Consolidated Equity at December 31, 2018; (iv) Statements of Condensed Consolidated Cash Flows for the three months ended December 31, 2018 and December 31, 2017; and (v) Notes to Condensed Consolidated Financial Statements. |
SM | Service mark, Ashland or its subsidiaries, registered in various countries. |
™ | Trademark, Ashland or its subsidiaries, registered in various countries. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Ashland Global Holdings Inc. | ||
(Registrant) | ||
February 6, 2019 | /s/ J. Kevin Willis | |
J. Kevin Willis | ||
Senior Vice President and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) |
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