ASHLAND INC. ASHLAND 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.
BUSINESS OVERVIEW
Ashland profile
Ashland is a global additives and specialty ingredients company with a conscious and proactive mindset for environment, social and governance (ESG). The Company serves customers in a wide range of consumer and industrial markets, including architectural coatings, construction, energy, food and beverage, nutraceuticals, personal care and pharmaceutical. With approximately 3,900 employees worldwide, Ashland serves customers in more than 100 countries. Ashland's sales generated outside ofNorth America was 70% and 68% for the three months endedDecember 31, 2022 and 2021, respectively. Sales by region expressed as a percentage of total consolidated sales for the three months endedDecember 31 were as follows: Three months ended December 31 Sales by Geography 2022 2021 North America (a) 30 % 32 % Europe 35 % 35 % Asia Pacific 25 % 25 % Latin America & other 10 % 8 % 100 % 100 % (a)
Ashland includes only
Reportable segments
Ashland's reportable segments include Life Sciences, Personal Care, Specialty Additives and Intermediates. 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 months endedDecember 31 was as follows: Three months ended December 31 Sales by Reportable Segment 2022 2021 Life Sciences 40 % 33 % Personal Care 26 % 29 % Specialty Additives 27 % 30 % Intermediates 7 % 8 % 100 % 100 % KEY DEVELOPMENTS
Business results current quarter
Ashland recorded net income of$40 million (income of$42 million in continuing operations and a loss of$2 million in discontinued operations) and net income of$48 million (income of$32 million in continuing operations and$16 million in discontinued operations) in the current and prior year quarters, respectively. Ashland's EBITDA of$93 million decreased by$25 million for the current quarter, while Ashland's Adjusted EBITDA of$108 million 27 -------------------------------------------------------------------------------- increased by$2 million for the current quarter, each compared to the prior year quarter (seeU.S. GAAP reconciliation below under consolidated review). The increase was primarily driven by improved pricing and mix, substantially offset by increased plant, manufacturing and shipping costs, unfavorable foreign currency exchange, and lower sales volumes. Life Sciences experienced strong global demand for pharmaceutical ingredients, while Specialty Additives and Personal Care experienced weaker demand driven primarily by the impact of COVID-19 on theChina re-opening, the general economic slowdown inEurope and significant distributor destocking inChina andEurope . Additionally operating costs within Specialty Additives was impacted by planned plant maintenance shutdowns plus COVID-19 dynamics which resulted in an extended unplanned plant shutdown at the company'sNanjing ,China , facility late in the quarter.
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 consolidated sales and less than 1% of total consolidated assets (related to accounts receivable).
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 first quarter of fiscal 2023, 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, the COVID-19 impact related to theChina re-opening did negatively impact demand during the current quarter for both the Specialty Additives and Personal Care business segments. Additionally Specialty Additives was also impacted by extended unplanned plant shutdowns at itsNanjing ,China , facility as a result of these same dynamics. Ashland's overall liquidity remains strong and Ashland is more than able to meet its operating cash needs and other investing and financing cash requirements at this time, including those necessary to grow the business as economic conditions improve. 28 -------------------------------------------------------------------------------- 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 .
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), income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring.
Key financial results for the three months ended
•
Ashland's net income amounted to$40 million compared to$48 million for the three months endedDecember 31, 2022 and 2021, respectively, or income of$0.73 and$0.83 diluted earnings per share, respectively.
•
Discontinued operations, which are reported net of taxes, resulted in a loss of$2 million and income of$16 million during the three months endedDecember 31, 2022 and 2021, respectively.
•
Income from continuing operations, which excludes results from discontinued
operations, amounted to income of
•
The effective income tax rates were an expense of 16% and 13% for the three
months ended
•
Ashland incurred pretax net interest and other income of$14 million and expense of$5 million for the three months endedDecember 31, 2022 and 2021, respectively. This includes gains of$21 million and$4 million on restricted investments, respectively, for the current and prior year quarters.
•
Other net periodic benefit income (loss) resulted in a loss of
•
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.
Operating income
Operating income/loss amounted to income of$37 million and$42 million for the three months endedDecember 31, 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 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 restructuring activities.
•
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 primarily related to previously divested businesses
or non-operational sites. See Note L of the Notes to Condensed Consolidated
Financial Statements for more information.
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Asset impairments - During the three months endedDecember 31, 2022 , Ashland incurred an impairment charge associated with the pending sale of a Specialty Additives manufacturing facility. See Note B of the Notes to Condensed Consolidated Financial Statements for more information.
Operating income for the three months ended
Statements of Consolidated Comprehensive Income (Loss) - caption review
A comparative analysis of the Statements of Consolidated Comprehensive Income (Loss) by caption is provided as follows for the three months endedDecember 31, 2022 and 2021. Three months ended December 31 (In millions) 2022 2021 Change Sales$ 525 $ 512 $ 13
The following table provides a reconciliation of the change in sales for the
three ended
Three months ended
(In millions) December 31, 2022
Volume $ (25 )
Pricing 62
Foreign currency exchange (24 )
Change in sales $ 13
Sales for the current quarter increased $13 million compared to the prior year
quarter. Favorable product pricing associated with cost inflation pricing
actions increased sales by $62 million which was partially offset by lower sales
volume and unfavorable foreign currency exchange of $25 million and $24 million ,
respectively.
Three months ended December 31
(In millions) 2022 2021 Change
Cost of sales $ 360 $ 351 $ 9
Gross profit as a percent of sales 31.4 % 31.4 %
The following table provides a reconciliation of the change in cost of sales
between the three months ended
Three months ended
(In millions) December 31, 2022
Changes in:
Volume $ (22 )
Price/mix 7
Foreign currency exchange (10 )
Operating costs 34
Change in cost of sales $ 9
Cost of sales for the current quarter increased $9 million compared to the prior
year quarter. Price/mix and higher operating costs, which includes cost
inflation associated with plant manufacturing and shipping costs (as well as
planned and unplanned plant shutdowns and maintenance), increased cost of sales
by $7 million and $34 million , respectively. These increases were partially
offset by lower volume and foreign currency exchange, which decreased cost of
sales by $22 million and $10 million , respectively. Gross profit as a percentage
of sales held steady at 31.4% driven by pricing and mix improvement actions
across business segments.
Three months ended December 31
(In millions) 2022 2021 Change
Selling, general and administrative expense
$ 11 As a percent of sales 17.7 % 16.0 % 30
-------------------------------------------------------------------------------- Selling, general and administrative expense for the current quarter increased$11 million compared to the prior year quarter with expenses as a percent of sales increasing 1.7 percentage points. Key drivers of the fluctuation in selling, general and administrative expense compared to the prior year quarter were:
•
•
Three months ended December 31
(In millions) 2022 2021 Change
Research and development expense
-
Research and development expense is consistent with the prior year quarter.
Three months ended December 31
(In millions) 2022 2021 Change
Intangibles amortization expense
Intangibles amortization expense is primarily consistent with the prior year
quarter.
Three months ended December 31
(In millions) 2022 2021 Change
Net interest and other expense (income)
Interest expense $ 14 $ 16 $ (2 )
Interest income (4 ) - (4 )
Income from restricted investments (25 ) (12 ) (13 )
Other financing costs 1 1 -
$ (14 ) $ 5 $ (19 )
Net interest and other expense (income) decreased by $19 million during the
current quarter compared to the prior year quarter. Interest expense decreased
$2 million primarily due to lower debt levels during the current quarter
compared to the prior year quarter. Restricted investments income of $25 million
and $12 million included gains of $21 million compared to $4 million for the
three months ended December 31, 2022 and 2021, respectively. See Note E for more
information on the restricted investments.
Three months ended December 31
(In millions) 2022 2021 Change
Other net periodic benefit loss
Other net periodic benefit loss for the three months endedDecember 31, 2022 primarily included interest cost of$3 million which was partially offset by expected return on plan assets of$2 million . Three months ended December 31 (In millions) 2022 2021 Change Income tax expense$ 8 $ 5 $ 3 Effective tax rate 16 % 13 % 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 16% for the three months endedDecember 31, 2022 and was primarily impacted by jurisdictional income mix, as well as net favorable discrete items of$1 million .
The overall effective tax rate was 13% for the three months ended
Adjusted income tax expense (benefit)
Key items are defined as the financial effects from significant transactions that may have caused short-term fluctuations in net income and/or operating income which Ashland believes do not accurately reflect Ashland's
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underlying business performance and trends. Tax specific key items are defined
as the financial effects from tax specific financial transactions, tax law
changes or other matters that fall within the definition of key items as
previously described. The effective tax rate, excluding key items, which is a
non-GAAP measure, has been prepared to illustrate the ongoing tax effects of
Ashland's operations. Management believes investors and analysts use this
financial measure in assessing Ashland's business performance and that
presenting this non-GAAP measure on a consolidated basis assists investors in
better understanding Ashland's ongoing business performance and enhancing their
ability to compare period-to-period financial results.
The effective tax rate during the three months ended
The following table is a calculation of the effective tax rate, excluding these
key items.
Three months ended
December 31
(In millions) 2022 2021
Income from continuing operations before income taxes
37
Key items (pre-tax) (a) (8 )
-
Adjusted income from continuing operations before income taxes$ 42 $ 37 Income tax expense (benefit)$ 8 $ 5 Income tax rate adjustments: Tax effect of key items (2 ) - Total income tax rate adjustments (2 )
-
Adjusted income tax expense$ 6 $
5
Effective tax rate, excluding key items (Non-GAAP) (c) 15 %
13 %
(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 December 31
(In millions) 2022 2021 Change
Income (loss) from discontinued operation (net of taxes)
Performance Adhesives $ (1 ) $ 17 $ (18 )
Distribution (1 ) (1 ) -
$ (2 ) $ 16 $ (18 )
The activity for Distribution during the current and prior year quarters was
related to post-closing adjustments for environmental expenses. The Performance
Adhesives segment operations had sales and pre-tax operating income included in
discontinued operations of $96 million and $22 million for the prior year
quarter.
Other comprehensive income (loss)
A comparative analysis of the components of other comprehensive income is
provided below for the three months ended
Three months ended December 31
(In millions) 2022 2021 Change
Other comprehensive income (loss) (net of
taxes)
Unrealized translation gain (loss) $ 82 $ (17 ) $ 99
Unrealized loss on commodity hedges (4 ) (3 ) (1 )
$ 78 $ (20 ) $ 98
32-------------------------------------------------------------------------------- Total other comprehensive income (loss), net of tax, for the current quarter increased$98 million compared to the prior year quarter primarily as a result of the following:
•
For the three months endedDecember 31, 2022 , the change in unrealized gain (loss) from foreign currency translation adjustments resulted in a gain of$82 million compared to a loss of$17 million for the three months endedDecember 31, 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 endedDecember 31, 2022 and 2021, the change in commodity hedges is primarily due to the fluctuations of the market prices of the underlying commodities. Commodity hedges resulted in unrealized losses of$4 million and$3 million for the three months endedDecember 31, 2022 and 2021.
Use of non-GAAP measures
Ashland has included within this document the following non-GAAP measures, on both a consolidated and reportable segment basis, which are not defined withinU.S. GAAP and do not purport to be alternatives to net income or cash flows from operating activities as a measure of operating performance or cash flows:
•
EBITDA - net income (loss), plus income tax expense (benefit), net interest and other expenses, and depreciation and amortization.
•
Adjusted EBITDA - EBITDA adjusted for noncontrolling interests, discontinued operations, net income (loss) on acquisitions and divestitures, other income and (expense) and key items (including 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.
33
--------------------------------------------------------------------------------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. 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 forU.S. GAAP-reported financial measures or a reconciliation of forward-looking non-GAAP financial measures to the most directly comparableU.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 byU.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 withU.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 2022 Credit Agreement are based on similar non-GAAP measures and are defined further in the sections that reference this metric.
EBITDA and Adjusted EBITDA
EBITDA totaled income of$93 million and$118 million for the three months endedDecember 31, 2022 and 2021, respectively. EBITDA and Adjusted EBITDA results in the table below have been prepared to illustrate the ongoing effects of Ashland's operations, which exclude certain key items previously described. Management believes the use of such non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis. Three months ended December 31 (In millions) 2022 2021 Net income$ 40 $ 48 Income tax expense 8 5 Net interest and other expense (income) (14 )
5
Depreciation and amortization 59
60
EBITDA 93
118
Loss (income) from discontinued operations (net of tax) 2 (16 ) Key items included in EBITDA: Restructuring, separation and other costs 1
1
Environmental reserve adjustments 8
3
Asset impairments 4
-
Total key items included in EBITDA 13
4
Adjusted EBITDA$ 108 $
106
Total key items included in EBITDA$ 13 $ 4 Unrealized gain on securities (21 ) (4 ) Total key items, before tax$ (8 ) $ - 34
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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 endedDecember 31 2022 2021
Diluted EPS from continuing operations (as reported)
$ 0.55 Key items, before tax: Restructuring, separation and other costs 0.02
0.02
Environmental reserve adjustments 0.14 0.05 Asset impairments 0.07 - Unrealized gain on securities (0.38 ) (0.07 ) Key items, before tax (0.15 ) - Tax effect of key items (a) 0.03 - Key items, after tax (0.12 ) -
Adjusted diluted EPS from continuing operations (non-GAAP)
$ 0.55 Amortization expense adjustment (net of tax) (b)$ 0.33
$ 0.97 $ 0.88 (a)
Represents the diluted EPS impact from the tax effect of the key items that are identified above.
(b)
Amortization expense adjustment (net of tax) tax rates were 20% for the three
months ended
RESULTS OF OPERATIONS - REPORTABLE SEGMENT REVIEW
Ashland's reportable segments include Life Sciences, Personal Care, Specialty Additives, and Intermediates. Unallocated and Other includes corporate governance activities and certain legacy matters.
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
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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 months ended
Three months ended
December 31
(In millions - unaudited) 2022 2021
SALES
Life Sciences $ 207 $ 170
Personal Care 138 147
Specialty Additives 143 156
Intermediates 54 53
Intersegment sales (a) (17 ) (14 )
$ 525 $ 512
OPERATING INCOME (LOSS)
Life Sciences $ 34 $ 21
Personal Care 11 15
Specialty Additives 1 17
Intermediates 20 16
Unallocated and other (29 ) (27 )
$ 37 $ 42
DEPRECIATION EXPENSE
Life Sciences $ 10 $ 8
Personal Care 9 9
Specialty Additives 14 16
Intermediates 3 3
$ 36 $ 36
AMORTIZATION EXPENSE
Life Sciences $ 7 $ 7
Personal Care 12 12
Specialty Additives 4 5
Intermediates - -
$ 23 $ 24
EBITDA (b)
Life Sciences $ 51 $ 36
Personal Care 32 36
Specialty Additives 19 38
Intermediates 23 19
Unallocated and other (29 ) (27 )
$ 96 $ 102
(a)Intersegment sales from Intermediates are accounted for at prices that approximate fair value. All other intersegment sales are accounted for at cost.
(b)
Excludes income (loss) from discontinued operations and other net periodic benefit loss. See the Statement of Consolidated Comprehensive Income (Loss) for applicable amounts excluded.
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--------------------------------------------------------------------------------Life Sciences
Life Sciences is comprised of pharmaceuticals, nutrition, nutraceuticals, agricultural chemicals, diagnostic films (formerly known as advanced materials) and fine chemicals. Pharmaceutical solutions include controlled release polymers, disintegrants, tablet coating, thickeners, solubilizers, and tablet binders. Nutrition solutions include thickeners, stabilizers, emulsifiers and additives for enhancing mouthfeel, controlling moisture migration, reducing oil uptake and binding structured foods. Nutraceutical solutions include products for weight management, joint comfort, stomach and intestinal health, sports nutrition and general wellness. The nutraceutical business also provides 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$37 million in the current quarter. Higher volume and favorable pricing increased sales by$23 million each, respectively, while unfavorable foreign currency exchange decreased sales by$9 million . Life Sciences experienced strong global demand for pharmaceutical ingredients throughout the current quarter. Operating income increased$13 million to income of$34 million for the current quarter. Favorable price/mix and higher volume increased operating income by$24 million and$11 million , respectively, while unfavorable foreign currency exchange and higher costs decreased operating income by$7 million and$15 million , respectively. Current quarter EBITDA increased$15 million to$51 million while adjusted EBITDA increased$16 million to$52 million . Adjusted EBITDA margin increased 3.9 percentage points in the current quarter to 25.1%.
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 months endedDecember 31, 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. The key items during the three months endedDecember 31, 2022 related to$1 million for restructuring program within theNutraceuticals business of the Life Sciences segment. Life Sciences Three months ended December 31 (In millions) 2022 2021 Operating income $ 34$ 21 Depreciation and amortization 17 15 EBITDA $ 51$ 36 Restructuring and other costs 1 - Adjusted EBITDA $ 52$ 36 37
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Personal Care
Personal Care is comprised of biofunctionals, microbial protectants (preservatives), skin care, sun care, oral care, hair care and household solutions. These businesses have a broad range of natural, nature-derived, biodegradable, and high-performance 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.
Personal Care' sales decreased$9 million to$138 million in the current quarter. Lower volume and unfavorable foreign currency exchange decreased sales by$15 million and$7 million , respectively. These decreases were partially offset by favorable product pricing which increased sales by$13 million . Personal Care sales were negatively impacted by the COVID-19 impact related to theChina re-opening and significant destocking within the distribution channel, particularly inEurope . Operating income decreased$4 million to income of$11 million for the current quarter. Lower volume, higher operating costs and unfavorable foreign currency exchange decreased operating income by$6 million ,$6 million and$2 million , respectively. These decreases were partially offset by favorable price/mix which increased operating income by$10 million . Current quarter EBITDA decreased$4 million to$32 million . EBITDA margin decreased 1.3 percentage points in the current quarter to 23.2%. EBITDA reconciliation The following EBITDA presentation for the three months endedDecember 31, 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. Personal Care had no key items for the three months endedDecember 31, 2022 or 2021. Personal Care Three months ended December 31 (In millions) 2022 2021 Operating income $ 11$ 15 Depreciation and amortization 21 21 EBITDA $ 32$ 36 Specialty Additives Specialty Additives is comprised of rheology and performance-enhancing additives serving the architectural 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 decreased$13 million to$143 million in the current quarter. Lower volume and unfavorable foreign currency exchange decreased sales by$25 million and$7 million , respectively. Those decreases were partially offset by favorable product pricing which increased sales by$19 million . Specialty Additives sales 38 --------------------------------------------------------------------------------
were negatively impacted by the COVID-19 impact related to the
Operating income decreased$16 million to income of$1 million for the current quarter. Lower volume, higher operating costs, asset impairments, and unfavorable foreign currency exchange decreased operating income by$6 million ,$15 million ,$4 million , and$1 million , respectively. Operating costs were negatively impacted by COVID-19 dynamics inChina which resulted in additional extended unplanned plant shutdowns, that were in addition to planned plant maintenance shutdowns. These decreases were partially offset by favorable pricing/mix which increased operating income by$10 million . Current quarter EBITDA decreased$19 million to$19 million while Adjusted EBITDA decreased$15 million to$23 million . Adjusted EBITDA margin decreased 8.3 percentage points in the current quarter to 16.1%.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation for the three months endedDecember 31, 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 during the three months endedDecember 31, 2022 related to an impairment charge of$4 million associated with a manufacturing facility. Specialty Additives Three months ended December 31 (In millions) 2022 2021 Operating income $ 1$ 17 Depreciation and amortization 18 21 EBITDA 19 38 Asset impairments 4 - Adjusted EBITDA $ 23$ 38 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. BDO is also supplied to Life Sciences, Personal Care, and Specialty Additives for use as a raw material.
Intermediates' sales increase$1 million to$54 million in the current period. Favorable product pricing increased sales by$8 million . These increases were substantially offset by lower volume and unfavorable foreign currency exchange decreased sales by$6 million and$1 million , respectively. Operating income increased$4 million to$20 million for the current quarter. Price/mix increased operating income by$11 million and was partially offset by lower volume, higher production costs and unfavorable foreign currency exchange which decreased operating income by$3 million ,$3 million and$1 million , respectively. Current quarter EBITDA increased$4 million to$23 million . EBITDA margin increased 6.8 percentage points in the current quarter to 42.6%. 39 --------------------------------------------------------------------------------
EBITDA reconciliation
The following EBITDA presentation (as defined and described in the section above) for the three months endedDecember 31, 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 months endedDecember 31, 2022 or 2021. Intermediates Three months ended December 31 (In millions) 2022 2021 Operating income $ 20$ 16 Depreciation and amortization 3 3 EBITDA $ 23$ 19 Unallocated and other The following table summarizes the key components of the Unallocated and other segment's operating income (loss) for the three endedDecember 31, 2022 and 2021. Unallocated and Other Three months ended December 31 (In millions) 2022 2021 Restructuring activities $ (1 ) $ (5 ) Environmental expenses (8 ) (3 ) Other expenses (primarily governance and legacy expenses) (20 ) (19 ) Total expense $ (29 ) $ (27 )
Unallocated and other recorded expense of$29 million and$27 million for the three months endedDecember 31, 2022 and 2021, respectively. The current and prior year quarters included expense of$1 million and$5 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 quarters, respectively, which included stranded costs of$4 million for prior year quarter associated with the Performance Adhesives divestiture.
The current quarter and prior year quarter included
Other expenses between periods were driven by increases in governance and legacy expenses primarily associated with fluctuations in foreign currency, deferred compensation and stock compensation.
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.
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--------------------------------------------------------------------------------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 three months ended
Three months ended
December 31
(In millions) 2022 2021Cash provided (used) by: Operating activities from continuing operations $ (29 ) $
14
Investing activities from continuing operations (27 ) (7 )
Financing activities from continuing operations (27 ) (11 )
Discontinued operations (34 ) (9 )
Effect of currency exchange rate changes on cash and cash equivalents
3 (3 )
Net decrease in cash and cash equivalents $ (114 ) $ (16 )
Cash and cash equivalents decreased
The
The$16 million decrease for the three months endedDecember 31, 2021 was primarily driven by payment of cash dividends of$17 million and additions to property, plant and equipment of$15 million offset by net proceeds from short-term debt of$11 million . Operating cash flows from continuing operations were inflows of$14 million , while discontinued operations cash flows were outflows of$9 million .
Free cash flow and other liquidity resources
The following represents Ashland's calculation of free cash flow and ongoing free cash flow 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 (used) by operating $ (29 ) $
14
activities from continuing operations less: Additions to property, plant and equipment (23 ) (15 ) Free cash flow (52 ) (1 ) Cash (inflows) outflows from U.S. Accounts 19
10
Receivable Sales Program (a) Restructuring-related payments (b) 1
4
Environmental and related litigation payments 11 13 (c) Ongoing free cash flow $ (21 ) $ 26 Adjusted EBITDA (d) 108 106 Ongoing free cash flow conversion (e) -19 % 25 % (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.
Working capital (current assets minus current liabilities, excluding long-term debt due within one year) amounted to$1,260 million and$1,215 million as ofDecember 31, 2022 andSeptember 30, 2022 , respectively. The$45 million increase in working capital was the primary reason of the$47 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 41 -------------------------------------------------------------------------------- inflation and reduced accrued expenses as a result of annual incentive program payouts, which were$24 million higher than the prior year's quarter. Liquid assets (cash, cash equivalents and accounts receivable) amounted to 190% of current liabilities as ofDecember 31, 2022 andSeptember 30, 2022 , respectively.
The following summary reflects Ashland's cash, unused borrowing capacity and
liquidity as of
December 31 September 30 (In millions) 2022
2022
Cash and investment securities Cash and cash equivalents $ 532 $ 646 Restricted investments (a) 404 374 Unused borrowing capacity and liquidity Revolving credit facility 581
581
2018 accounts receivable securitization (foreign) 106
99
Accounts receivable sales program (U.S.) - - (a) Includes$259 million and$245 million related to the Asbestos trust and$145 million and$129 million related to the Environmental trust as ofDecember 31, 2022 andSeptember 30, 2022 , 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 atDecember 31, 2022 . In total, Ashland's available liquidity position, which includes cash, the revolving credit facility and foreign accounts receivable securitization facility, was$1,219 million atDecember 31, 2022 , compared to$1,326 million atSeptember 30, 2022 . Ashland had no available liquidity under theU.S. Accounts Receivable Sales Program as ofDecember 31, 2022 . Ashland also maintained$404 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 ofDecember 31, 2022 andSeptember 30, 2022 . December 31 September 30 (In millions) 2022 2022 Short-term debt (includes current portion of long-term debt) $ - $ - Long-term debt (less current portion and debt issuance cost discounts) (a) 1,316 1,270 Total debt $ 1,316 $ 1,270 (a)
Includes
Debt as a percent of capital employed was 28% atDecember 31, 2022 and atSeptember 30, 2022 , respectively. AtDecember 31, 2022 , Ashland's total debt had an outstanding principal balance of$1,366 million , discounts of$36 million , and debt issuance costs of$14 million . Ashland had no long-term debt (excluding debt issuance costs) maturing within the next 4 years and$4 million due in fiscal 2027.
Ashland credit ratings
Ashland's corporate credit ratings remained unchanged at BB+ by
Ashland debt covenant restrictions
Ashland's current credit agreement (the 2022 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,
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mergers, sale of assets and restricted payments and other customary limitations.
As of
The maximum consolidated net leverage ratio permitted under the 2022 Credit Agreement is 4.0. The 2022 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 2022 Credit Agreement defines Covenant Adjusted EBITDA as net income plus consolidated interest charges, taxes, depreciation and amortization expense, fees and expenses related to capital market transactions and proposed or actual acquisitions and divestitures, restructuring and integration charges, noncash stock and equity compensation expense, and any other nonrecurring expenses or losses that do not represent a cash item in such period or any future period; less any noncash gains or other items increasing net income. The computation of Covenant Adjusted EBITDA differs from the calculation of EBITDA and Adjusted EBITDA, which have been reconciled above in the "consolidated review" section. In general, consolidated indebtedness includes debt plus all purchase money indebtedness, banker's acceptances and bank guaranties, deferred purchase price of property or services, attributable indebtedness and guarantees. AtDecember 31, 2022 , Ashland's calculation of the consolidated net leverage ratio was 1.3. The minimum required consolidated interest coverage ratio under the 2022 Credit Agreement is 3.0. The 2022 Credit Agreement defines the consolidated interest coverage ratio as the ratio of Covenant Adjusted EBITDA to consolidated interest charges for any measurement period. AtDecember 31, 2022 , Ashland's calculation of the consolidated interest coverage ratio was 10.8. Any change in Covenant Adjusted EBITDA of$100 million would have an approximate 0.2x effect on the consolidated net leverage ratio and a 1.8x 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$98 million sinceSeptember 30, 2022 to$3,318 million atDecember 31, 2022 . The increase of$98 million was due to net income of$40 million and deferred translation gain of$82 , offset by dividends of$18 million , common shares issued under stock incentive plans of$2 million and$4 million of deferred loss on commodity hedges.
Stockholder dividends
Ashland paid a dividend of
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, 2022 . 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 three months endedDecember 31, 2022 . 43 --------------------------------------------------------------------------------
OUTLOOK
Ashland issued its outlook for fiscal 2023 inNovember 2022 . This outlook has not changed and remains the same as shown in the table below. Ashland continues to expect sales in the range of$2.5 billion to$2.7 billion for fiscal year 2023, consistent with prior expectations. In addition, the company continues to expect Adjusted EBITDA to be within the prior outlook range of$600 million to$650 million , with the current forecast model indicating earnings below the mid-point of that range. FY2023 Outlook Key Operating Metrics Sales$2.5 -$2.7 billion Adjusted EBITDA$600 -$650 million
Ashland is unable to reconcile forward-looking adjusted EBITDA to forward-looking net income, the most closely comparable GAAP financial measure, because the information needed to provide such reconciliation would require unreasonable efforts.
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