ASHLAND INC. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements herein.
BUSINESS OVERVIEW
Ashland profile
Ashland is a global specialty additives and materials company with a conscious and proactive mindset for sustainability. The Company serves customers in a wide range of consumer and industrial markets, architectural coatings, construction, energy, food and beverage, nutraceuticals, personal care and pharmaceutical. With approximately 3,800 employees worldwide, Ashland serves customers in more than 100 countries. Ashland's sales generated outside ofNorth America were 67% for the three and nine months endedJune 30, 2022 , respectively, and 67% and 68% for the three and nine months endedJune 30, 2021 , respectively. Sales by region expressed as a percentage of total consolidated sales for the three and nine months endedJune 30 were as follows: Three months ended Nine months ended June 30 June 30 Sales by Geography 2022 2021 2022 2021 North America (a) 33 % 33 % 33 % 32 % Europe 35 % 36 % 35 % 35 % Asia Pacific 23 % 23 % 24 % 24 % Latin America & other 9 % 8 % 8 % 9 % 100 % 100 % 100 % 100 % (a)
Ashland includes only
Reportable segments
OnAugust 31, 2021 , Ashland announced its agreement with Arkema, a French société anonyme, to sell the Performance Adhesive business for$1.65 billion . The transaction closedFebruary 28, 2022 . Ashland received proceeds from the sale of approximately$1.7 billion , net of transaction costs. A portion of these proceeds were used during the nine months endedJune 30, 2022 to reduce outstanding debt and execute an open-market stock repurchase agreement. Ashland intends to use the remaining proceeds to invest in the growth of its other reportable core businesses and explore further actions to optimize its balance sheet through debt reductions or utilization of unused authorized share repurchase program amounts. The divestiture represented a strategic shift in Ashland's business and qualified as a discontinued operation. As a result, the assets, liabilities, operating results and cash flows related to Performance Adhesives have been classified as discontinued operations for all periods presented within the Consolidated Financial Statements. See Notes B and C of the Notes to the Condensed Consolidated Financial Statements for additional information. 34 -------------------------------------------------------------------------------- As a result, Ashland's reportable segments include Life Sciences, Personal Care (formerly Personal Care & Household), Specialty Additives and Intermediates (formerly Intermediates and Solvents). Unallocated and Other includes corporate governance activities and certain legacy matters. The contribution to sales by each reportable segment expressed as a percentage of total consolidated sales for the three and nine months endedJune 30 was as follows: Three months ended Nine months ended June 30 June 30 Sales by Reportable Segment 2022 2021 2022 2021 Life Sciences 35 % 36 % 35 % 36 % Personal Care 27 % 27 % 28 % 27 % Specialty Additives 30 % 31 % 30 % 31 % Intermediates 8 % 6 % 7 % 6 % 100 % 100 % 100 % 100 % KEY DEVELOPMENTS
Business results current quarter
Ashland recorded net income of$36 million (income of$51 million in continuing operations and expense of$15 million in discontinued operations) and net income of$80 million (income of$72 million in continuing operations and$8 million in discontinued operations) in the current and prior year quarters, respectively. Ashland's EBITDA of$157 million increased by$39 million for the current quarter, while Ashland's Adjusted EBITDA of$174 million increased by$45 million for the current quarter, each compared to the prior year quarter (seeU.S. GAAP reconciliation below under consolidated review). These increases were primarily driven by disciplined pricing leading to cost recovery in a high-inflation environment and improved product mix partially offset by unfavorable currency exchange and higher selling, general and administration costs.
Uncertainty relating to the
Business disruptions, including those related to the ongoing conflict betweenUkraine andRussia continue to impact businesses around the globe. While it is impossible to predict the effects of the conflict such as possible escalating geopolitical tensions (including the imposition of existing and additional sanctions by theU.S and theEuropean Union on Russia ), worsening macroeconomic and general business conditions, supply chain interruptions and unfavorable energy markets, the impact could be material. Ashland is closely monitoring the situation and maintains business continuity plans that are intended to continue operations or mitigate the effects of events that could disrupt its business. Ashland does not have manufacturing operations inRussia ,Ukraine , orBelarus . Ashland sells (or previously sold) additives and specialty ingredients to manufacturers in these countries for their use in pharmaceuticals, personal care, and coatings applications. Sales toRussia andBelarus were previously limited and our products were primarily used in products and applications that are essential to the population's wellbeing and currently support our customers' humanitarian efforts. We have sales controls in place to ensure that future potential sales into the region are only to support critical pharmaceutical or personal hygiene products which are essential for the general population and in accordance with any applicable sanctions. Sales toUkraine ,Russia , andBelarus represent less than 1% of total sales and less than 1% of total assets (related to accounts receivable). 35 --------------------------------------------------------------------------------
Uncertainty relating to the COVID-19 pandemic
Ashland continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact customers, employees, suppliers, vendors, business partners and distribution channels. Ashland is unable to predict the impact that the COVID-19 pandemic will have on its future financial position and operating results due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental, business or other actions, impacts on Ashland's supply chain, the effect on customer demand, or changes to Ashland's operations. The health of Ashland's workforce and its ability to meet staffing needs throughout the critical functions cannot be predicted and is vital to operations. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. In addition, Ashland cannot predict the impact that the COVID-19 pandemic will have on its customers, vendors, suppliers and other business partners; however, any material effect on these parties could adversely impact Ashland. Ashland continues to successfully navigate the uncertain environment associated with the COVID-19 pandemic. Through the third quarter of fiscal 2022, Ashland has not experienced any additional major operating surprises related to the COVID-19 pandemic, continues to maintain supply chains in a challenging environment, had strong safety performance in the face of unprecedented pressures and improved operating discipline across each of its businesses. Ashland's businesses continued to show resiliency in the face of difficult economic circumstances. While sales were up in the quarter period-over-period, continued supply-chain and labor-shortage challenges inhibited Ashland's ability to meet strong overall customer demand. Ashland continues to carry a large backlog of unconfirmed orders it cannot commit to supply at this time. Ashland's overall liquidity remains strong and Ashland is able to meet its operating cash needs and other investing and financing cash requirements at this time, including those necessary to grow the business. The situation surrounding the COVID-19 pandemic remains fluid, and Ashland is actively managing its response in collaboration with customers, government officials, team members and business partners. For further information regarding the impact of the COVID-19 pandemic on the Company, please see Item 1A, Risk Factors in Ashland's most recent Form 10-K filed with theSEC .
Other items
Performance Adhesives
Ashland completed the sale of its Performance Adhesives business segment onFebruary 28, 2022 , resulting in proceeds to Ashland of approximately$1.7 billion , net of transaction costs. Ashland recognized an after-tax gain of$732 million within the Income from Discontinued Operations caption of the Statement of Consolidated Comprehensive Income (Loss) for the nine months endedJune 30, 2022 related to the sale of Performance Adhesives. Since this transaction represented 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 Performance Adhesives have been reflected as discontinued operations in the statement of Consolidated Comprehensive Income (Loss) and Statements of Condensed Consolidated Cash Flows. See Notes B and C of the Notes to the Condensed Consolidated Financial Statements for more information. Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statement of Consolidated Comprehensive Income (Loss) that were previously allocated to the Performance Adhesives segment do not qualify for classification within discontinued operations and are now reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were$1 million and$4 million for the three months endedJune 30, 2022 and 2021, respectively, and$8 million and$12 million for the nine months endedJune 30, 2022 and 2021, respectively. Ashland is currently implementing plans to eliminate certain of these costs. 36 --------------------------------------------------------------------------------
Debt Repayment Activities
Ashland used a portion of the proceeds from the sale of its Performance
Adhesives segment, during the second quarter of fiscal 2022, to prepay
2022 Stock repurchase program
OnMay 25, 2022 , Ashland's board of directors authorized a new, evergreen$500 million common share repurchase program (2022 stock repurchase program). The new authorization terminates and replaces the company's 2018$1 billion share repurchase program, which had$150 million outstanding at the date of termination.
2018 Stock repurchase program
InSeptember 2021 , under the 2018 stock repurchase program, Ashland entered into an accelerated share repurchase agreement (2021 ASR Agreement). Under the 2021 ASR Agreement, Ashland paid an initial purchase price of$450 million and received an initial delivery of 3.9 million shares of common stock duringSeptember 2021 . The bank exercised its early termination option under the 2021 ASR Agreement inFebruary 2022 , and an additional 0.7 million shares were repurchased, bringing the total shares repurchased upon settlement to 4.6 million. OnMarch 1, 2022 , under the 2018 stock repurchase program, Ashland entered into an agreement to repurchase an aggregate amount of$200 million of Ashland common stock using open-market purchases under rule 10b-18. OnApril 8, 2022 , Ashland completed repurchases under this agreement repurchasing a total of 2.15 million shares for a total amount of$200 million .
Operational business model changes and restructurings
As previously disclosed, during the second quarter of fiscal year 2020, Ashland changed the manner in which it manages the business moving from a functionally led to a business led organization. This new business-centric operational redesign of core operating systems and processes lead to a realignment in both the selling, general and administrative and research and development costs (SARD) associated with each business. In addition to the realignment of SARD, a productivity review with a focus on cost of goods sold (COGS) was also initiated. Based on these initiatives, Ashland targeted the following savings:
•
•
As of
RESULTS OF OPERATIONS - CONSOLIDATED REVIEW
Consolidated review
Net income
Ashland's net income is primarily affected by results within operating income, net interest and other expense, income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring.
•
Ashland's net income amounted to$36 million compared to$80 million for the three months endedJune 30, 2022 and 2021, respectively, or income of$0.65 and$1.29 diluted earnings per share, respectively.
•
Discontinued operations, which are reported net of taxes, resulted in expense of$15 million and income of$8 million during the three months endedJune 30, 2022 and 2021, respectively.
•
Income from continuing operations, which excludes results from discontinued
operations, amounted to income of
37
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The effective income tax rates were an expense of 2% and a benefit of 57% for the three months endedJune 30, 2022 and 2021, 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 expense of$59 million and$1 million for the three months endedJune 30, 2022 and 2021, respectively. This includes losses of$48 million and gains of$15 million on restricted investments, respectively, for the current and prior year quarters.
•
Other net periodic benefit loss amounted to a loss of
•
Income on acquisitions and divestitures, was$35 million and$2 million for the three months endedJune 30, 2022 and 2021, respectively, reflecting the gain on sale of an excess and unused parcel of land in the current quarter.
•
Operating income was
Year-to-date - Key financial results for the nine months ended
•
Ashland's net income amounted to$870 million compared to$176 million for the nine months endedJune 30, 2022 and 2021, respectively, or income of$15.28 and$2.87 diluted earnings per share, respectively.
•
Discontinued operations, which are reported net of taxes, resulted in income of$749 million and$37 million during the nine months endedJune 30, 2022 and 2021, respectively. The current period includes a$732 million gain on the sale of the Performance Adhesives business segment.
•
Income from continuing operations, which excludes results from discontinued
operations, amounted to income of
•
The effective income tax rates were an expense of 17% and a benefit of 34% for the nine months endedJune 30, 2022 and 2021, respectively, and were significantly impacted by certain tax discrete items in both the current and prior year periods.
•
Ashland incurred pretax net interest and other expense of$108 million and$18 million for the nine months endedJune 30, 2022 and 2021, respectively. This includes losses of$72 million and gains of$26 million on restricted investments, respectively, for the current and prior year periods.
•
Other net periodic benefit loss netted to zero for both the current and prior year periods. See Note K for more information.
•
Income on acquisitions and divestitures, was$42 million and$11 million for the nine months endedJune 30, 2022 and 2021, respectively, reflecting the gain on sale of two excess and unused parcels of land in the current period.
•
Operating income was
For further information on the items reported above, see the discussion in the comparative Statements of Consolidated Comprehensive Income (Loss) caption review analysis.
38
--------------------------------------------------------------------------------Operating income
Current Quarter - Operating income amounted to income of$77 million and$45 million for the three months endedJune 30, 2022 and 2021, respectively. The current and prior year quarters' operating income included certain key items that were excluded to arrive at Adjusted EBITDA and are quantified in the table below in the "EBITDA and Adjusted EBITDA" section. 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. As a result of these activities, Ashland recorded expenses in the current and prior year quarters. See Note D in the Notes to Condensed Consolidated Financial Statements for further information on the restructuring activities.
•
Inventory adjustment - Ashland recorded non-cash charges related to the fair value adjustment of inventory acquired from Schülke at the date of acquisition during the prior year quarter.
•
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 adjustments during the current and prior year quarters to its environmental liabilities and receivables related to operating facilities and previously divested businesses or non-operational sites. See Note L of the Notes to Condensed Consolidated Financial Statements for more information.
Operating income for the three months ended
Year-to-date - Operating income amounted to income of$212 million and$111 million for the nine months endedJune 30, 2022 and 2021, respectively. The current and prior year periods' operating income included certain key items that were excluded to arrive at Adjusted EBITDA and are quantified in the table below in the "EBITDA and Adjusted EBITDA" section. 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. As a result of these activities, Ashland recorded expenses in the current and prior year periods. See Note D in the Notes to Condensed Consolidated Financial Statements for further information on the restructuring activities.
•
Inventory adjustment - Ashland recorded non-cash charges related to the fair value adjustment of inventory acquired from Schülke at the date of acquisition during the prior year period.
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During the nine months ended
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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 adjustments during the current and prior year periods to its environmental liabilities and receivables related to operating facilities and previously divested businesses or non-operational sites. See Note L of the Notes to Condensed Consolidated Financial Statements for more information.
Operating income for the nine months ended
39
--------------------------------------------------------------------------------Non-operating key items affecting EBITDA
•
Income on acquisitions and divestitures, net - Ashland recorded income of$35 and$2 million during the three months endedJune 30, 2022 and 2021, respectively, and income of$42 million and$11 million during the nine months endedJune 30, 2022 and 2021, respectively. The income for the three and nine months endedJune 30, 2022 related to pre-tax gains related to the sale of excess corporate property. Additionally, Ashland recorded a$2 million gain and$3 million expense relating to transaction costs associated with Schülke during the three and nine months endedJune 30, 2021 , respectively, and a$14 million gain related to the sale of a Specialty Additives facility during the nine months endedJune 30, 2021 .
Statements of Consolidated Comprehensive Income (Loss) - caption review
A comparative analysis of the Statements of Consolidated Comprehensive Income (Loss) by caption is provided as follows for the three and nine months endedJune 30, 2022 and 2021. Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 Change 2022 2021 Change Sales$ 644 $ 543 $ 101 $ 1,759 $ 1,520 $ 239
The following table provides a reconciliation of the change in sales for the
three and nine months ended
Three months ended Nine months ended
(In millions) June 30, 2022 June 30, 2022
Volume $ 18 $ 37
Pricing/product mix 97 193
Foreign currency (26 ) (44 )
Acquisition 12 53
Change in sales $ 101 $ 239
Current Quarter - Sales for the current quarter increased $101 million compared
to the prior year quarter. Favorable volume, including the acquisition of
Schülke within the Personal Care reportable segment, and product pricing/product
mix associated with cost inflation pricing actions increased sales by $30
million and $97 million , respectively, partially offset by unfavorable foreign
currency exchange of $26 million .
Year-to-date - Sales for the current year increased $239 million compared to the
prior year period. Favorable volume, including the acquisition of Schülke within
the Personal Care reportable segment, and product pricing/product mix associated
with cost inflation pricing actions increased sales by $90 million and $193
million , respectively, partially offset by unfavorable foreign currency exchange
of $44 million .
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 Change 2022 2021 Change
Cost of sales $ 404 $ 370 $ 34 $ 1,139 $ 1,040 $ 99
Gross profit as a percent of sales 37.3 % 31.9 % 35.2 % 31.6 %
The following table provides a reconciliation of the change in cost of sales
between the three and nine months ended
Three months ended Nine months ended
(In millions) June 30, 2022 June 30, 2022
Changes in:
Volume $ 12 $ 24
Price/mix 28 68
Foreign currency (12 ) (23 )
Acquisition 6 30
Change in cost of sales $ 34 $ 99
40--------------------------------------------------------------------------------Current Quarter - Cost of sales for the current quarter increased$34 million compared to the prior year quarter. Price/mix, which includes cost inflation associated with plant manufacturing and shipping costs, and higher volume, including Schülke, increased cost of sales by$28 million and$18 million , respectively. These increases were partially offset by foreign currency exchange, which decreased cost of sales by$12 million . Disciplined pricing and mix actions by Ashland's commercial teams continue to improve operating margins as gross profit as a percentage of sales expanded 5.4 percentage points during the current quarter. Year-to-date - Cost of sales for the current year increased$99 million compared to the prior year period. Price/mix, which includes cost inflation associated with plant manufacturing and shipping costs, and higher volume, including Schülke, increased cost of sales by$68 million and$54 million , respectively. These increases were partially offset by foreign currency exchange, which decreased cost of sales by$23 million . Disciplined pricing and mix actions by Ashland's commercial teams continue to improve operating margins as gross profit as a percentage of sales expanded 3.6 percentage points during the current period. Three months endedJune 30 Nine months endedJune 30
(In millions) 2022 2021 Change 2022 2021 Change Selling, general and$ 127 $ 93 $ 34 $ 299 $ 274 $ 25 administrative expense As a percent of sales 19.7 % 17.1 % 17.0 % 18.0 %Current Quarter - Selling, general and administrative expense for the current quarter increased$34 million compared to the prior year quarter with expenses as a percent of sales increasing 2.6 percentage points. Key drivers of the fluctuation in selling, general and administrative expense compared to the prior year quarter were:
•
Expense of
•
$36 million and$22 million in net environmental-related expenses during the current and prior year quarter, respectively (see Note L for more information); and
•
Increases associated with the following: o Higher incentive pay of$6 million ; o Higher deferred and stock compensation expense of$4 million ; o Lower transition services income fromINEOS of$3 million ; o Higher salary and benefits of$2 million ; and o Higher Schülke expense of$1 million . Year-to-date - Selling, general and administrative expense for the current period increased$25 million compared to the prior year period with expenses as a percent of sales decreasing 1.0 percentage points. Key drivers of the fluctuation in selling, general and administrative expense compared to the prior year period were:
•
Expense of
•
•
$48 million and$35 million in net environmental-related expenses during the current and prior year period, respectively (see Note L for more information); and
•
Increases associated with the following: o Lower transition services income fromINEOS of$8 million ; o Higher deferred and stock compensation expense of$7 million ; o Higher Schülke expense of$6 million ; o Higher incentive pay of$4 million ; and o Higher salary, benefits and travel and entertainment expenses of$3 million . Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 Change 2022 2021 Change
Research and development expense
1$ 40 $ 37 $ 3 41
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Year-to-date - Research and development expense increased
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 Change 2022 2021 Change
Intangibles amortization expense
-
Year-to-date - The increase in amortization expense in the current year period
is due to the amortization of intangible assets associated with the Schülke
acquisition.
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 Change 2022 2021 Change
Equity and other income
Other income $ 1 $ 1 $ - $ 2 $ 7 $ (5 )
$ 1 $ 1 $ - $ 2 $ 7 $ (5 ) Year-to-date - Other income of$7 million in the prior year period is primarily due to a gain on sale of corporate property, plant and equipment of roughly$4 million . Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 Change 2022 2021 Change Net interest and other expense (income) Interest expense$ 14 $ 17 $ (3 ) $ 47 $ 50 $ (3 ) Loss (income) from restricted 45 (17 ) 62 59 (36 ) 95 investments Other financing costs - 1 (1 ) 2 4 (2 )$ 59 $ 1 $ 58 $ 108 $ 18 $ 90 Current Quarter - Net interest and other expense increased by$58 million during the current quarter compared to the prior year quarter. Interest expense decreased$3 million primarily due to lower debt levels during the current quarter compared to the prior year quarter. Restricted investments loss of$45 million and income$17 million included realized losses of$48 million compared to gains of$15 million for the three months endedJune 30, 2022 and 2021, respectively. See Note E for more information on the restricted investments. Year-to-date - Net interest and other expense increased by$90 million during the current period compared to the prior year period. Interest expense decreased$3 million primarily due to lower debt levels during the current period compared to the prior year period. Restricted investments loss of$59 million and income of$36 million included realized losses of$72 million compared to gains of$26 million for the nine months endedJune 30, 2022 and 2021, respectively. See Note E for more information on the restricted investments. Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 Change 2022 2021 Change
Other net periodic benefit loss
Year-to-date - Other net periodic benefit loss included a$1 million actuarial gain on the remeasurement of a pension plan during the current period and netted to zero in each period. See Note K for more information. Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 Change 2022 2021 Change
Net income on acquisitions and
$ 42 $ 11 $ 31 divestituresCurrent Quarter -The activity in the current quarter was related to a gain on the sale of excess corporate property. The activity in the prior year quarter related to a$2 million gain in transaction net costs associated with the acquisition of Schülke. 42 -------------------------------------------------------------------------------- Year-to-date - The activity in the current year was related to gains on the sale of excess corporate property. The activity in the prior year related to a$3 million expense associated with acquisition related transactional costs (including gains associated with foreign currency derivatives) and a$14 million gain related to the sale of a Specialty Additives facility. Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 Change 2022 2021 Change Income tax expense (benefit)$ 1 $ (26 ) $ 27 $ 25 $ (35 ) $ 60 Effective tax rate 2 % -57 % 17 % -34 %Current Quarter - 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 2% for the three months endedJune 30, 2022 and was impacted by jurisdictional income mix, as well as a net$1 million benefit primarily from favorable return to provision adjustments for certain jurisdictions.
The overall effective tax rate was a benefit of 57% for the three months ended
Year-to-date - 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 17% for the nine months endedJune 30, 2022 and was impacted by jurisdictional income mix, as well as net unfavorable discrete items of$3 million , primarily related to restructuring and separation activity partially offset by a favorable valuation allowance for certain foreign tax credits and adjustments to uncertain tax positions.
The overall effective tax rate was a benefit of 34% for the nine months ended
Adjusted income tax expense (benefit)
Key items are defined as the financial effects from significant transactions
that may have caused short-term fluctuations in net income and/or operating
income 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, excluding 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 consolidated basis assists investors in better
understanding Ashland's ongoing business performance and enhancing their ability
to compare period-to-period financial results.
43
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The effective tax rate during the three and nine months ended
•
Uncertain tax positions - Includes the impact from the settlement of uncertain tax positions with various taxing authorities;
•
Valuation allowances - Includes the impact from the release of certain foreign tax credit valuation allowances during 2022; and
•
Restructuring and separation activity - Includes the impact from company-wide
cost reduction programs, and the impact of the sale of a Specialty Additives
facility.
The following table is a calculation of the effective tax rate, excluding these
key items.
Three months ended Nine months ended
June 30 June 30
(In millions) 2022 2021 2022 2021
Income from continuing operations
before income taxes $ 52 $ 46 $ 146 $ 104
Key items (pre-tax) (a) 50 4 79 18
Adjusted income from continuing
operations
before income taxes $ 102 $ 50 $ 225 $ 122
Income tax expense (benefit) $ 1 $ (26 ) $ 25 $ (35 )
Income tax rate adjustments:
Tax effect of key items 16 1 22 3
Tax specific key items: (b)
Uncertain tax positions - 33 - 39
Valuation allowance - - 4 -
Restructuring and separation activity - - (10 ) 13
Total income tax rate adjustments 16 34 16 55
Adjusted income tax expense $ 17 $ 8 $
41
Effective tax rate, excluding key
items (Non-GAAP) (c) 16 % 16 % 18 % 16 %
(a)
See Adjusted EBITDA reconciliation table disclosed in this MD&A 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 disclosed in this MD&A.
(c)
Due to rounding conventions, the effective tax rate presented may not
recalculate precisely based on the numbers disclosed within this table.
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 Change 2022 2021 Change
Income (loss) from discontinued
operations (net of taxes) Performance Adhesives$ 4 $ 15 $ (11 ) $ 38 $ 51 $ (13 ) Composites/Marl facility - 2 (2 ) - 1 (1 ) Valvoline - 2 (2 ) - 2 (2 ) Asbestos (13 ) (8 ) (5 ) (13 ) (8 ) (5 ) Water Technologies (1 ) (1 ) - (1 ) (1 ) - Distribution (5 ) (2 ) (3 ) (7 ) (4 ) (3 )
Gain (loss) on disposal of discontinued
operations (net of taxes)
Performance Adhesives - - - 732 - 732
Composites/Marl facility - - - - (4 ) 4
$ (15 ) $ 8 $ (23 ) $ 749 $ 37 $ 712
Current Quarter - The activity for Water Technologies, Distribution, Valvoline
and Composites/Marl facility during the current and prior year quarters was
related to post-closing adjustments. The Performance Adhesives segment sales and
pre-tax operating income included in discontinued operations were $94 million
and $17 million , respectively, for the prior year quarter. The Performance
Adhesives activity for the current quarter related to post-closing adjustments.
Asbestos activity in each quarter primarily related to Ashland's annual update.
44
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Year-to-date - The activity for Water Technologies, Distribution, Valvoline and
Composites/Marl facility during the current and prior year periods was related
to post-closing adjustments. The Composites/Marl Facility gain activity for the
prior year period included post-closing purchase price dispute adjustments. The
Performance Adhesives segment sales and pre-tax operating income included in
discontinued operations were $171 million and $34 million , and $266 million and
$63 million , respectively, for the current and prior year periods. A $732
million gain on disposal was recorded in the current period associated with the
February 28, 2022 closing of the Performance Adhesives business segment
divestiture. Asbestos activity in each period primarily related to Ashland's
annual update.
Other comprehensive income (loss)
A comparative analysis of the components of other comprehensive income is
provided below for the three and nine months ended
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 Change 2022 2021 Change
Other comprehensive income
(loss) (net of taxes)
Unrealized translation gain
(loss) $ (86 ) $ 23 $ (109 ) $ (107 ) $ 37 $ (144 )
Unrealized gain (loss) on
commodity hedges (3 ) - (3 ) (2 ) - (2 )
$ (89 ) $ 23 $ (112 ) $ (109 ) $ 37 $ (146 ) •
For the three months endedJune 30, 2022 , the change in unrealized gain (loss) from foreign currency translation adjustments resulted in a loss of$86 million compared to a gain of$23 million for the three months endedJune 30, 2021 . The fluctuations in unrealized translation gains and losses are primarily due to translating foreign subsidiary financial statements from local currencies toU.S. Dollars.
•
For the three months ended
Year-to-date - Total other comprehensive income (loss), net of tax, for the
current year decreased
•
For the nine months endedJune 30, 2022 , the change in unrealized gain (loss) from foreign currency translation adjustments resulted in a loss of$107 million compared to a gain of$37 million for the nine months endedJune 30, 2021 . The fluctuations in unrealized translation gains and losses are primarily due to translating foreign subsidiary financial statements from local currencies toU.S. Dollars.
•
For the nine months ended
45
--------------------------------------------------------------------------------Use of non-GAAP measures
Ashland has included within this document the following non-GAAP measures, on both a consolidated and reportable segment basis, which are not defined withinU.S. GAAP and do not purport to be alternatives to net income or cash flows from operating activities as a measure of operating performance or cash flows:
•
EBITDA - net income (loss), plus income tax expense (benefit), net interest and other expenses, and depreciation and amortization.
•
Adjusted EBITDA - EBITDA adjusted for discontinued operations, income (loss) on acquisitions and divestitures, other income and (expense) and key items (including 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.
•
Adjusted diluted earnings per share (EPS) excluding intangibles amortization expense - Adjusted earnings per share adjusted for intangibles amortization expense net of tax, divided by the average outstanding diluted shares for the applicable period.
•
Free cash flow - operating cash flows less capital expenditures.
•
Ongoing free cash flow - operating cash flows less capital expenditures and certain other adjustments as applicable.
•
Ongoing free cash flow conversion - ongoing free cash flow divided by adjusted EBITDA.
Management believes the use of EBITDA and Adjusted EBITDA measures on a
consolidated and reportable segment basis assists investors in understanding the
ongoing operating performance by presenting comparable financial results between
periods. Ashland believes that by removing the impact of depreciation and
amortization and excluding certain non-cash charges, amounts spent on interest
and taxes and certain other charges that are highly variable from year to year,
EBITDA and Adjusted EBITDA provide Ashland's investors with performance measures
that reflect the impact to operations from trends in changes in sales, margin
and operating expenses, providing a perspective not immediately apparent from
net income and operating income. The adjustments Ashland makes to derive the
non-GAAP measures of EBITDA and Adjusted EBITDA exclude items which may cause
short-term fluctuations in net income and operating income and which Ashland
does not consider to be the fundamental attributes or primary drivers of its
business. EBITDA and Adjusted EBITDA provide disclosure on the same basis as
that used by Ashland's management to evaluate financial performance on a
consolidated and reportable segment basis and provide consistency in our
financial reporting, facilitate internal and external comparisons of Ashland's
historical operating performance and its business units and provide continuity
to investors for comparability purposes.
The Adjusted diluted EPS metric enables Ashland to demonstrate what effect key
items have on an earnings per diluted share basis by taking income (loss) from
continuing operations, adjusted for key items after tax that have been
identified in the Adjusted EBITDA table, and dividing by the average outstanding
diluted shares for the applicable period. Ashland's management believes this
presentation is helpful to illustrate how the key items have impacted this
metric during the applicable period.
The Adjusted diluted EPS, excluding intangibles amortization expense metric
enables Ashland to demonstrate the impact of non-cash intangibles amortization
expense on EPS, in addition to the key items previously mentioned. Ashland's
management believes this presentation is helpful to illustrate how previous
acquisitions impact applicable period results.
The free cash flow metrics enable 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 and ongoing free cash flow
includes the impact of capital expenditures from continuing operations and other
significant items impacting cash flow, providing a more complete picture of
current and future 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.
46
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Although Ashland may provide forward-looking guidance for Adjusted EBITDA,
Adjusted diluted EPS and ongoing 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 2020 Credit Agreement are based
on similar non-GAAP measures and are defined further in the sections that refer
to this metric.
EBITDA and Adjusted EBITDA
EBITDA totaled income of $157 million and $118 million for the three months
ended June 30, 2022 and 2021, respectively, and $1,185 million and $339 million
for the nine months ended June 30, 2022 and 2021, 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
ongoing operating performance by presenting the financial results between
periods on a more comparable basis.
Three months ended Nine months ended
June 30 June 30
(In millions) 2022 2021 2022 2021
Net income $ 36 $ 80 $ 870 $ 176
Income tax expense (benefit) 1 (26 ) 25 (35 )
Net interest and other expense 59 1 108 18
Depreciation and amortization 61 63 182 180
EBITDA 157 118 1,185 339
(Income) loss from discontinued operations
(net of tax) 15 (8 ) (749 ) (37 )
Key items included in EBITDA:
Restructuring, separation and other costs 1 (2 ) 3 10
Capital project impairment - - - 9
Environmental reserve adjustments 36 21 46 34
Inventory adjustment - 2 - 2
Gain on acquisitions and divestitures (35 ) (2 ) (42 ) (11 )
Total key items included in EBITDA 2 19 7 44
Adjusted EBITDA $ 174 $ 129 Total key items included in EBITDA$ 2 $ 19 $ 7 $ 44 Unrealized (gain) loss on securities 48 (15 ) 72 (26 ) Total key items, before tax$ 50 $ 4 $ 79 $ 18 47
--------------------------------------------------------------------------------
Diluted EPS and Adjusted Diluted EPS
The following table reflects theU.S. GAAP calculation for the income 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 from continuing operations in the following table has been prepared to illustrate the ongoing 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 consolidated basis assists investors in better understanding Ashland's ongoing business performance and enhances their ability to compare period-to-period financial results. Three months ended Nine months ended June 30 June 30 2022 2021 2022 2021 Diluted EPS from continuing operations (as reported)$ 0.93 $ 1.17 $ 2.12 $ 2.27 Key items, before tax: Restructuring, separation and other costs 0.02 (0.04 ) 0.06 0.16 Environmental reserve adjustments 0.65 0.33 0.81 0.54 Capital project impairment - - - 0.16 Inventory adjustment - 0.03 - 0.03 Unrealized (gain) loss on securities 0.87 (0.24 ) 1.26 (0.42 ) Net gain on acquisitions and divestitures (0.63 ) (0.03 ) (0.73 ) (0.17 ) Key items, before tax 0.91 0.05 1.40 0.30 Tax effect of key items (a) (0.29 ) (0.02 ) (0.39 ) (0.05 ) Key items, after tax 0.62 0.03 1.01 0.25 Tax specific key items: Restructuring and separation activity - - 0.18 (0.22 ) Valuation allowance - - (0.07 ) - Uncertain tax positions - (0.52 ) - (0.63 ) Tax specific key items (b) - (0.52 ) 0.11 (0.85 ) Total key items 0.62 (0.49 ) 1.12 (0.60 ) Adjusted diluted EPS from continuing operations (non-GAAP)$ 1.55 $ 0.68 $ 3.24 $ 1.67 Amortization expense adjustment (net of tax) (c)$ 0.34 $ 0.30 $ 1.00 $ 0.85 Adjusted diluted EPS from continuing operations (non-GAAP) excluding intangibles amortization expense$ 1.89 $ 0.98 $ 4.24 $ 2.52 (a)
Represents the diluted EPS impact from the tax effect of the key items that are 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 Statements of Consolidated Comprehensive Income (Loss) caption review section above.
(c)
Amortization expense adjustment (net of tax) tax rates were 20% and 21% for the three months endedJune 30, 2022 and 2021, respectively, and 20% and 21% for the nine months endedJune 30, 2022 and 2021, respectively.
RESULTS OF OPERATIONS - REPORTABLE SEGMENT REVIEW
Ashland's reportable segments include Life Sciences, Personal Care (formerly
Personal Care and Household), Specialty Additives, and Intermediates (formerly
Intermediates and Solvents). Unallocated and Other includes corporate governance
activities and certain legacy matters.
48
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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 companies. Ashland
allocates all significant costs to its reportable segments except for certain
significant company-wide restructuring activities, certain corporate governance
costs and other costs or activities 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
loss 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 discloses sales, operating income, depreciation and
amortization and EBITDA by reportable segment for the three and nine months
ended
Three months ended Nine months ended
June 30 June 30
(In millions - unaudited) 2022 2021 2022 2021
SALES
Life Sciences $ 228 $ 193 $ 602 $ 548
Personal Care 172 147 490 409
Specialty Additives 194 169 532 474
Intermediates 73 49 192 118
Intersegment sales (a) (23 ) (15 ) (57 ) (29 )
$ 644 $ 543 $ 1,759 $ 1,520
OPERATING INCOME (LOSS)
Life Sciences $ 51 $ 37 $ 115 $ 101
Personal Care 25 16 67 49
Specialty Additives (b) 35 15 79 36
Intermediates 30 11 72 17
Unallocated and other (64 ) (34 ) (121 ) (92 )
$ 77 $ 45 $ 212 $ 111
DEPRECIATION EXPENSE
Life Sciences $ 9 $ 9 $ 25 $ 26
Personal Care 10 10 28 29
Specialty Additives 16 16 48 49
Intermediates 2 4 9 10
Unallocated and other - 1 1 1
$ 37 $ 40 $ 111 $ 115
AMORTIZATION EXPENSE
Life Sciences $ 7 $ 7 $ 21 $ 21
Personal Care 11 11 35 30
Specialty Additives 5 5 14 14
Intermediates 1 - 1 -
$ 24 $ 23 $ 71 $ 65
EBITDA (c)
Life Sciences $ 67 $ 53 $ 161 $ 148
Personal Care 46 37 130 108
Specialty Additives 56 36 141 99
Intermediates 33 15 82 27
Unallocated and other (64 ) (33 ) (120 ) (91 )
$ 138 $ 108 $ 394 $ 291
(a)Intersegment sales from Intermediates are accounted for at prices that approximate fair value. All other intersegment transfers are accounted for at cost.
(b)
Includes a capital project impairment of$9 million for the nine months endedJune 30, 2021 relating to a long-term capital project plan change at a plant facility.
(c)
Excludes income (loss) from discontinued operations, other net periodic benefit
income (expense) and net income (loss) on divestitures, net. See the Statement
of Consolidated Comprehensive Income (Loss) for applicable amounts excluded.
49
--------------------------------------------------------------------------------Life Sciences
Life Sciences is comprised of pharmaceuticals, nutrition, nutraceuticals, agricultural chemicals, advanced materials and fine chemicals. Pharmaceutical solutions include controlled release polymers, disintegrants, film coatings, solubilizers, and tablet binders. Nutrition solutions include thickeners, stabilizers, emulsifiers and additives for enhancing mouthfeel, controlling moisture migration, reducing oil uptake and controlling color. Nutraceutical solutions include products for weight management, joint comfort, stomach and intestinal health, sports nutrition and general wellness, and providing custom formulation, toll processing and particle engineering solutions. Customers include pharmaceutical, food, beverage, nutraceuticals and supplements manufacturers, hospitals and radiologists and industrial manufacturers.
Life Sciences' sales increased
Operating income increased$14 million to income of$51 million for the current quarter. Favorable price/mix and higher volume increased operating income by$24 million and$6 million , respectively, partially offset by unfavorable foreign currency exchange and higher costs which decreased operating income by$6 million and$10 million , respectively. Current quarter EBITDA increased$14 million to$67 million . EBITDA margin increased 1.9 percentage points in the current quarter to 29.4%.
Fiscal 2022 year-to-date compared to fiscal 2021 year-to-date
Life Sciences' sales increased
Operating income increased$14 million to income of$115 million for the current period. Favorable price/mix and higher volume increased operating income by$28 million and$8 million , respectively, while unfavorable foreign currency and higher costs decreased operating income by$9 million and$13 million , respectively. Current period EBITDA increased$13 million to$161 . EBITDA margin decreased 0.3 percentage points in the current period to 26.7%.
EBITDA and Adjusted EBITDA reconciliation
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 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 Statements of Consolidated Comprehensive Income (Loss) caption. The following EBITDA presentation for the three and nine months endedJune 30, 2022 and 2021 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 Life Sciences. Life Sciences had no key items for the three and nine months endedJune 30, 2022 or 2021. Life
Sciences
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 2022 2021
Operating income $ 51 $ 37 $ 115 $ 101
Depreciation and amortization 16 16 46 47
EBITDA $ 67 $ 53 161 148
50--------------------------------------------------------------------------------
Personal Care
Personal Care is comprised of biofunctionals, preservatives, skin care, sun care, oral care, hair care and household. These businesses have a broad range of nature-based, biodegradable, and performance-enhancing ingredients for customer-driven solutions to help protect, renew, moisturize and revitalize skin and hair, and provide solutions for toothpastes, mouth washes and rinses, denture cleaning and care for teeth. Household supplies nature-derived rheology ingredients, biodegradable surface wetting agents, performance encapsulates, and specialty polymers for household, industrial and institutional cleaning products. Customers include formulators at large multinational branded consumer products companies and smaller, independent boutique companies. As previously disclosed, onApril 30, 2021 Ashland completed the$312 million acquisition of the personal care business from Schülke.
Personal Care's sales increased
Operating income increased$9 million to income of$25 million for the current quarter. Favorable price/mix, favorable impact of the Schülke acquisition and higher volume increased operating income by$6 million ,$3 million and$3 million , respectively. Unfavorable currency exchange and increased operating costs decreased operating income by$2 million and$1 million , respectively. Current quarter EBITDA increased$9 million to$46 million while Adjusted EBITDA increased$7 million to$46 million . Adjusted EBITDA margin increased 0.2 percentage points in the current quarter to 26.7%.
Fiscal 2022 year-to-date compared to fiscal 2021 year-to-date
Personal Care's sales increased
Operating income increased$18 million to income of$67 million for the current period. Favorable price/mix, lower costs, favorable impact of the Schülke acquisition and higher volume increased operating income by$3 million ,$6 million ,$6 million and$7 million , respectively. Unfavorable currency exchange decreased operating income by$4 million . Current period EBITDA increased$22 million to$130 million while Adjusted EBITDA increased$20 million to$130 million . Adjusted EBITDA margin decreased 0.4 percentage points in the current period to 26.5%.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation for the three and nine months endedJune 30, 2022 and 2021 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 Personal Care. The key items during the three and nine months endedJune 30, 2021 related to inventory adjustments within Personal Care. Personal Care Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 2022 2021 Operating income $ 25 $ 16 $ 67 $ 49 Depreciation and amortization 21 21 63 59 EBITDA $ 46 $ 37 130 108 Inventory adjustment - 2 - 2 Adjusted EBITDA $ 46 $ 39$ 130 $ 110 51
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Specialty Additives
Specialty Additives is comprised of rheology- and performance-enhancing additives serving the coatings, construction, energy, automotive and various industrial markets. Solutions include coatings additives for architectural paints, finishes and lacquers, cement- and gypsum- based dry mortars, ready-mixed joint compounds, synthetic plasters for commercial and residential construction, and specialty materials for industrial applications. Products include rheology modifiers (cellulosic and associative thickeners), foam-control agents, surfactants and wetting agents, pH neutralizers, advanced ceramics used in catalytic converters, and environmental filters, ingredients that aid the manufacturing process of ceramic capacitors, plasma display panels and solar cells, ingredients for textile printing, thermoplastic metals and alloys for welding. Products help improve desired functional outcomes through rheology modification and control, water retention, workability, adhesive strength, binding power, film formation, deposition and suspension and emulsification. Customers include global paint manufacturers, electronics and automotive manufacturers, textile mills, the construction industry, and welders.
Specialty Additives' sales increased$25 million to$194 million in the current quarter. Favorable product pricing/mix increased sales by$35 million . Unfavorable volume, unfavorable currency exchange decreased sales by$2 million and$8 million , respectively. Operating income increased$20 million to income of$35 million for the current quarter. Favorable pricing/mix increased operating income by$25 million . Higher costs and unfavorable foreign currency decreased operating income by$3 million and$2 million , respectively. Current quarter EBITDA increased$20 million to$56 million while Adjusted EBITDA increased$18 million to$57 million . Adjusted EBITDA margin increased 6.3 percentage points in the current quarter to 29.4%.
Fiscal 2022 year-to-date compared to fiscal 2021 year-to-date
Specialty Additives' sales increased$58 million to$532 million in the current period. Favorable product pricing/mix and volume increased sales by$66 million and$5 million , respectively. Unfavorable currency exchange decreased sales by$13 million . Operating income increased$43 million to income of$79 million for the current period. Favorable volume, favorable pricing/mix and a capital project impairment in the prior year period increased operating income by$40 million ,$1 million and$9 million , respectively. Higher costs and unfavorable foreign currency decreased operating income by$6 million and$1 million , respectively. Current period EBITDA increased$42 million to$141 million while Adjusted EBITDA increased$31 million to$142 million . Adjusted EBITDA margin increased 3.3 percentage points in the current period to 26.7%.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation for the three and nine months endedJune 30, 2022 and 2021 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 Specialty Additives. The key items related to a capital project impairment for the nine months endedJune 30, 2021 and environmental reserve adjustments for the three and nine endedJune 30, 2022 and 2021. Specialty Additives Three months ended June 30 Nine months ended June 30 (In millions) 2022 2021 2022 2021 Operating income $ 35 $ 15 $ 79 $ 36 Depreciation and amortization 21 21 62 63 EBITDA 56 36 141 99 Environmental reserve adjustments 1 3 1 3 Capital project impairment - - - 9 Adjusted EBITDA $ 57 $ 39$ 142 $ 111 52
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Intermediates
Intermediates is comprised of the production of 1,4 butanediol (BDO) and related derivatives, including 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 provided to Life Sciences, Personal Care, and Specialty Additives for use as a raw material.
Intermediates' sales increased$24 million to$73 million in the current quarter. Improved product pricing/mix increased sales by$29 million , partially offset by unfavorable volumes and unfavorable foreign currency exchange which decreases sales by$3 million and$2 million , respectively. Operating income increased$19 million to$30 million for the current quarter. Price/mix and lower costs increased operating income by$20 million and$2 million , respectively, and was partially offset by lower volume and unfavorable foreign currency which decreased operating income by$2 million and$1 million , respectively. Current quarter EBITDA increased$18 million to$33 million . EBITDA margin increased 14.6 percentage points in the current quarter to 45.2%.
Fiscal 2022 year-to-date compared to fiscal 2021 year-to-date
Intermediates' sales increased
Operating income increased$55 million to$72 million for the current period. Price/mix and lower operating costs increased operating income by$58 million and$3 million , respectively. Unfavorable volume and unfavorable currency exchange decreased operating income by$3 million each, respectively. Current period EBITDA increased$55 million to$82 million . EBITDA margin increased 19.8 percentage points in the current period to 42.7%.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation (as defined and described in the section above) for the three and nine months endedJune 30, 2022 and 2021 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. Intermediates had no key items for the three and nine months endedJune 30, 2022 or 2021.
Intermediates
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 2022 2021
Operating income $ 30 $ 11 $ 72 $ 17
Depreciation and amortization 3 4 10 10
EBITDA $ 33 $ 15 $ 82 $ 27
Unallocated and other
The following table summarizes the key components of the Unallocated and other
segment's operating income (loss) for the three and nine months ended June 30,
2022 and 2021.
Unallocated and Other
Three months ended June 30 Nine months ended June 30
(In millions) 2022 2021 2022 2021
Restructuring activities $ (2 ) $ (2 ) $ (11 ) $ (22 )
Environmental expenses (34 ) (18 ) (45 ) (30 )
Other expenses (primarily
governance and legacy expenses) (28 ) (14 ) (65 ) (40 )
Total expense $ (64 ) $ (34 ) $ (121 ) $ (92 )
53--------------------------------------------------------------------------------
Unallocated and other recorded expense of$64 million and$34 million for the three months endedJune 30, 2022 and 2021, respectively. The current and prior year quarter included expense of$2 million and$2 million , respectively, for restructuring activities mainly comprised of severance, lease abandonment and other restructuring costs related to company-wide cost reduction programs during the current and prior year quarter, respectively, as well as stranded costs of$1 million and$4 million associated with the Performance Adhesives divestiture.
The current quarter and prior year quarter included
Other expenses increase of
Fiscal 2022 year-to-date compared to fiscal 2021 year-to-date
Unallocated and other recorded expense of$121 million and$92 million for the nine months endedJune 30, 2022 and 2021, respectively. The current and prior year period included expense of$11 million and$22 million , respectively, for restructuring activities mainly comprised of severance, lease abandonment and other restructuring costs related to company-wide cost reduction programs during the current and prior year period, respectively, as well as stranded costs of$8 million and$12 million associated with the Performance Adhesives divestiture.
The current period and prior year period included
Other expenses increase of$25 million is primarily a result of increased incentive compensation expense, a gain of$4 million in the prior year period associated with excess corporate property sales as well as decreased transition services income associated with the Composites sale fromINEOS in the current period. FINANCIAL POSITION Liquidity Ashland believes that cash flow from operations, availability under existing credit facilities and arrangements, current cash and investment balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for Ashland's foreseeable working capital needs, capital expenditures at existing facilities, dividend payments and debt service obligations. Ashland's cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that the Company may complete may also impact its cash requirements. For information regarding the impact of COVID-19 on the Company, including on its liquidity and capital resources, please see item 1A, in Ashland's most recent Form 10-K filed with theSEC .
Cash flows
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 nine months ended
Nine months ended
June 30
(In millions) 2022 2021
Cash provided (used) by:
Operating activities from continuing operations $ 14 $ 314
Investing activities from continuing operations (60 ) (340 ) Financing activities from continuing operations (876 ) (243 ) Discontinued operations 1,348
73
Effect of currency exchange rate changes on cash and cash equivalents (7 )
4
Net increase (decrease) in cash and cash equivalents $ 419$ (192 ) 54
-------------------------------------------------------------------------------- Cash and cash equivalents increased$419 million for the nine months endedJune 30, 2022 compared to a$192 million decrease for the nine months endedJune 30, 2021 . The$419 million increase for the nine months endedJune 30, 2022 was primarily driven by the proceeds of the sale of the Performance Adhesives business segment of approximately$1.7 billion , net of transaction costs within discontinued operations cash flows, and$14 million of operating cash flows from continuing operations offset by short-term debt repayments of$365 million , long-term debt repayments of$250 million ,$247 million of cash tax payment within discontinued operations cash flows related to the sale of Performance Adhesives, and$200 million of stock repurchase activity. The$192 million decrease for the nine months endedJune 30, 2021 was primarily driven by repayment of short-term debt of$185 million and the purchase of the Schülke business for$308 million offset by$314 million of operating cash flows from continuing operations.
See the Statements of Condensed Consolidated Cash Flows for additional details.
Ashland expects cash tax payments of roughly
Free cash flow and other liquidity resources
The following represents Ashland's calculation of free cash flow and ongoing free cash flows for the disclosed periods. Free cash flow does not reflect adjustments for certain non-discretionary cash flows such as mandatory debt repayments.
(In millions) 2022
2021
Total cash flows provided by operating activities $ 14 $
314
from continuing operations less: Additions to property, plant and equipment (67 ) (74 ) Free cash flows (53 )
240
Cash (inflows) outflows from U.S. Accounts 42 (76 ) Receivable Sales Program (a) Restructuring-related payments (b) 9
35
Environmental and related litigation payments (c) 36 29 Ongoing free cash flow $ 34$ 228 Adjusted EBITDA (d) 443 346 Ongoing free cash flow conversion (e) 8 % 66 % (a)
Represents activity associated with the
(b)
Restructuring payments incurred during each period.
(c)
Represents cash outflows associated with environmental and related litigation payments which will be reimbursed by the environmental trust.
(d)
See adjusted EBITDA reconciliation.
(e)
Ongoing free cash flow divided by Adjusted EBITDA.
55
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Working capital (current assets minus current liabilities, excluding long-term
debt due within one year) amounted to $1,267 million and $792 million as of June
30, 2022 and September 30, 2021 , respectively. The increase in working capital
was the primary reason of the $194 million decline in ongoing free cash flows
between periods primarily as a result of increased inventories to navigate
supply-chain issues as well as cost inflation and increased accounts receivable
as a result of higher sales volumes. Higher cash tax payments of $32 million
also negatively impacted ongoing free cash flows between periods. Liquid assets
(cash, cash equivalents and accounts receivable) amounted to 203% and 65% of
current liabilities (excluding current liabilities held for sale) as of June 30,
2022 and September 30, 2021 , respectively.
The following summary reflects Ashland's cash, unused borrowing capacity and
liquidity as of
June 30 September
30
(In millions) 2022 2021 Cash and investment securities Cash and cash equivalents$ 629 $ 210 Restricted investments (a) 407 421 Unused borrowing capacity and liquidity Revolving credit facility 581
356
2018 accounts receivable securitization (foreign) 105
-
Accounts receivable sales program (U.S.) 58 12 (a) Includes$269 million and$333 million related to the Asbestos trust and$138 million and$88 million related to the Environmental trust as ofJune 30, 2022 andSeptember 30, 2021 , respectively. The borrowing capacity remaining under the$600 million revolving credit facility was$581 million due to an outstanding balance of zero, as well as a reduction of$19 million for letters of credit outstanding atJune 30, 2022 . In total, Ashland's available liquidity position, which includes cash, the revolving credit facility and foreign accounts receivable securitization facility, was$1,315 million atJune 30, 2022 , compared to$566 million atSeptember 30, 2021 . Ashland had$58 million of available liquidity under theU.S. Accounts Receivable Sales Program as ofJune 30, 2022 . Ashland also maintained$407 million of restricted investments to pay for future asbestos claims and environmental remediation and related litigation.
Capital resources
Debt
The following summary reflects Ashland's debt as ofJune 30, 2022 andSeptember 30, 2021 . June 30 September 30 (In millions) 2022 2021 Short-term debt (includes current portion of long-term debt) $ - $
374
Long-term debt (less current portion and debt issuance cost discounts) (a) 1,302 1,596 Total debt $ 1,302 $ 1,970 (a)
Includes
Debt as a percent of capital employed was 29% and 42% atJune 30, 2022 and atSeptember 30, 2021 , respectively. AtJune 30, 2022 , Ashland's total debt had an outstanding principal balance of$1,354 million , discounts of$37 million , and debt issuance costs of$15 million . There are no maturities of long-term debt due within the next five years.
Ashland credit ratings
Ashland's corporate credit ratings remained unchanged at BB+ byStandard & Poor's and Ba1 byMoody's Investor Services . As ofJune 30, 2022 , bothMoody's Investor Services andStandard & Poor's outlook remained at stable. Subsequent changes to these ratings or outlook may have an effect on Ashland's borrowing rate or ability to access capital markets in the future. 56 --------------------------------------------------------------------------------
Ashland debt covenant restrictions
Ashland's current credit agreement (the 2020 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 ofJune 30, 2022 , Ashland is in compliance with all debt agreement covenant restrictions under the 2020 Credit Agreement. The maximum consolidated net leverage ratio permitted under the 2020 Credit Agreement is 4.0. The 2020 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 2020 Credit Agreement defines Covenant Adjusted EBITDA as net income plus consolidated interest charges, taxes, depreciation and amortization expense, fees and expenses related to capital market transactions and proposed or actual acquisitions and divestitures, restructuring and integration charges, noncash stock and equity compensation expense, and any other nonrecurring expenses or losses that do not represent a cash item in such period or any future period; less any noncash gains or other items increasing net income. The computation of Covenant Adjusted EBITDA differs from the calculation of EBITDA and Adjusted EBITDA, which have been reconciled above in the "consolidated review" section. In general, consolidated indebtedness includes debt plus all purchase money indebtedness, banker's acceptances and bank guaranties, deferred purchase price of property or services, attributable indebtedness and guarantees. AtJune 30, 2022 , Ashland's calculation of the consolidated net leverage ratio was 1.2. The minimum required consolidated interest coverage ratio under the 2020 Credit Agreement is 3.0. The 2020 Credit Agreement defines the consolidated interest coverage ratio as the ratio of Covenant Adjusted EBITDA to consolidated interest charges for any measurement period. AtJune 30, 2022 , Ashland's calculation of the consolidated interest coverage ratio was 9.7. Any change in Covenant Adjusted EBITDA of$100 million would have an approximate 0.2x effect on the consolidated net leverage ratio and a 1.7x effect on the consolidated interest coverage ratio. The change in consolidated indebtedness of$100 million would affect the consolidated leverage ratio by approximately 0.2x.
Additional capital resources
Total equity
Total equity increased by$514 million sinceSeptember 30, 2021 to$3,266 million atJune 30, 2022 . The increase of$514 million was due to net income of$870 million and compensation expense and common shares issued of$5 million offset by$2 million of deferred losses on commodity hedges, stock repurchase activity of$200 million , dividends of$52 million , and deferred translation loss of$107 million . 2022 Stock repurchase program OnMay 25, 2022 , Ashland's board of directors authorized a new, evergreen$500 million common share repurchase program (2022 stock repurchase program). The new authorization terminates and replaces the company's 2018$1 billion share repurchase program, which had$150 million outstanding at the date of termination.
2018 Stock repurchase program
InSeptember 2021 , under the 2018 stock repurchase program, Ashland entered into an accelerated share repurchase agreement (2021 ASR Agreement). Under the 2021 ASR Agreement, Ashland paid an initial purchase price of$450 million and received an initial delivery of 3.9 million shares of common stock duringSeptember 2021 . The bank exercised its early termination option under the 2021 ASR Agreement inFebruary 2022 , and an additional 0.7 million shares were repurchased, bringing the total shares repurchased upon settlement to 4.6 million. OnMarch 1, 2022 , under the 2018 stock repurchase program, Ashland entered into an agreement to repurchase an aggregate amount of$200 million of Ashland common stock using open-market purchases under rule 10b-18. OnApril 8, 2022 , Ashland completed repurchases under this agreement repurchasing a total of 2.15 million shares for a total amount of$200 million . 57 --------------------------------------------------------------------------------
Stockholder dividends
OnMay 25, 2022 , Ashland's Board declared a quarterly cash dividend of$0.335 cents per share on the company's common stock representing a 12 percent increase from the previous quarter. The dividend was paid in the third quarter of fiscal 2022. Dividends of30 cents per share were paid in the third quarter of fiscal 2021 and the first and second quarter of fiscal 2022 and27.5 cents per share were paid in the first and second quarter of fiscal 2021.
Capital expenditures
Capital expenditures were
CRITICAL ACCOUNTING POLICIES
The preparation of Ashland's Condensed Consolidated Financial Statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosures of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and other intangible assets), income taxes, other liabilities and receivables associated with asbestos litigation and environmental remediation. These accounting policies are discussed in detail in "Management's Discussion and Analysis - Critical Accounting Policies" in Ashland's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions. Management has reviewed the estimates affecting these items with the Audit Committee of Ashland's Board of Directors. No material changes have been made to the valuation techniques during the nine months endedJune 30, 2022 . OUTLOOK Ashland issued its outlook for fiscal 2022 inNovember 2021 . Ashland now expects Sales and Adjusted EBITDA for fiscal year 2022 to be above the previously communicated ranges. This increased outlook assumes a headwind from negative foreign currency in the fiscal fourth quarter of approximately$30 million impacting Sales and$10 million impacting Adjusted EBITDA. PREVIOUS NEW FY 2022 Outlook FY 2022 Outlook Key Operating Metrics Sales$2.25 -$2.35 billion $2.35 -$2.40 billion Adjusted EBITDA$550 -$570 million $580 -$590 million
Ashland is unable to reconcile forward-looking adjusted EBITDA to forward-looking net income, the most closely comparable GAAP financial measure, because the information needed to provide such reconciliation would require unreasonable efforts.
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