Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 environmental, 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 3,800 employees worldwide, Ashland serves customers in more than 100 countries.
Ashland’s sales generated outside of North America were 66% and 70% for the three months ended December 31, 2023 and 2022, respectively. Sales by region expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:
Three months ended
December 31
Sales by Geography
2023
2022
North America (a)
34
%
30
%
Europe (a)
33
%
35
%
Asia Pacific
24
%
25
%
Latin America & other
9
%
10
%
100
%
100
%
(a) Ashland includes only U.S. and Canada in its North America designation and includes Europe, the Middle East and Africa in its Europe designation.
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 ended December 31 was as follows:
Three months ended
December 31
Sales by Reportable Segment
2023
2022
Life Sciences
42
%
40
%
Personal Care
27
%
26
%
Specialty Additives
26
%
27
%
Intermediates
5
%
7
%
100
%
100
%
27
KEY DEVELOPMENTS
Uncertainty relating to the ongoing Ukraine/Russia and Israel/Hamas conflicts
Business disruptions, including those related to the ongoing conflicts between Ukraine/Russia and Israel/Hamas continue to impact businesses around the globe. While it is impossible to predict the effects of these conflicts such as possible escalating geopolitical tensions (including the imposition of existing and additional sanctions by the U.S. and the European Union on Russia), worsening macroeconomic and general business conditions, supply chain and shipping interruptions and unfavorable energy markets, the impact could be material. Ashland is closely monitoring these situations 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 in Russia, Ukraine, or Belarus. 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 to Russia and Belarus 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 to Ukraine, Russia, and Belarus represent less than 1% of total consolidated sales and less than 1% of total consolidated assets (related to accounts receivable).
Ashland does not have manufacturing operations in Israel. Sales to Israel represent approximately 1% of total consolidated sales and less than 1% of total consolidated assets (related to accounts receivable).
Other items
2023 Stock Repurchase Program
On June 28, 2023, Ashland's board of directors authorized a new evergreen $1 billion common share repurchase program (the 2023 Stock Repurchase Program). The new authorization terminated and replaced the 2022 Stock Repurchase Program, which had $200 million outstanding at the date of termination. As of December 31, 2023, $900 million remained available for repurchase under this authorization.
Stock Repurchase program agreements
During November 2023, under the 2023 Stock Repurchase Program, Ashland initiated a Rule 10b5-1 trading plan agreement to repurchase up to $100 million of its outstanding shares. The program was completed during December 2023, when Ashland paid a total of $100 million and received a delivery of 1.2 million shares of common stock.
Restructuring programs
As previously disclosed, in November 2023, Ashland is taking portfolio-optimization actions to further strengthen Ashland’s resilience and improve margins and returns. When completed, these portfolio actions are expected to result in improved Adjusted EBITDA margins of approximately 200 to 250 basis-points and returns on net assets of 150 to 200 basis-points. These actions are expected to reduce volatility, improve focus and decrease working capital and maintenance capital expenditures.
The impact of these portfolio actions for the three months ended December 31, 2023, resulted in accelerated depreciation charges of $21 million within the cost of sales caption of the Statements of Consolidated Comprehensive Income (Loss) and severance of $3 million and an impairment of a leased office building of $1 million within the selling, general and administrative caption of the Statements of Consolidated Comprehensive Income (Loss).
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RESULTS OF OPERATIONS – CONSOLIDATED REVIEW
Consolidated review
Overview
Key financial results for the three months ended December 31, 2023 and 2022 included the following:
Three months ended December 31
(In millions except per share data)
2023
2022
Change
Net income
$
26
$
40
$
(14
)
Diluted earnings per share net income
0.51
0.73
(0.22
)
Income from continuing operations
28
42
(14
)
Diluted earnings per share income from continuing operations
0.54
0.76
(0.22
)
Operating income (loss)
(18
)
37
(55
)
EBITDA (a)
34
93
(59
)
Adjusted EBITDA (a)
70
108
(38
)
Adjusted diluted EPS from continuing operations
excluding intangibles amortization expense (a)
0.45
0.97
(0.52
)
(a) These are non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" section below for reconciliations to U.S. GAAP.
Ashland's net income of $26 million ($0.51 diluted earnings per share) and $40 million ($0.73 diluted earnings per share) included a loss from discontinued operations of $2 million ($0.03 diluted earnings per share) in the current and prior year quarters, each respectively.
Results for Ashland’s continuing operations, diluted earnings per share from continuing operations and operating income for the current and prior year quarters included certain key items that were excluded to arrive at Adjusted EBITDA and are quantified in the “Use of Non-GAAP Financial Measures” section below. These pre-tax key items totaled expense of $3 million and income of $8 million for the three months ended December 31, 2023 and 2022 impacting continuing operations. Continuing operations was also impacted by favorable discrete tax items totaling $24 million and zero for the three months ended December 31, 2023 and 2022.
The pre-tax key items impacting operating income totaled expense of $34 million and expense of $13 million for the three months ended December 31, 2023 and 2022. Excluding these key items, the decrease in continuing operations, diluted earnings per share from continuing operations and operating income was primarily driven by lower sales and production volumes, partially offset by improved price versus raw material cost and lower selling, general and administrative expense. In addition, diluted earnings per share from continuing operations was also impacted by common share reductions from repurchases of Ashland common stock over the last twelve months. These common stock repurchases reduced the number of weighted average shares from 55 million diluted shares in the first quarter of fiscal 2023 to 51 million diluted shares in the first quarter of fiscal 2024.
Ashland’s Adjusted EBITDA was $70 million for the current quarter compared to $108 million in the prior year quarter (see U.S. GAAP reconciliation under “Use of Non-GAAP Financial Measures” below). The $38 million decrease in Adjusted EBITDA was primarily driven by lower sales and production volumes, partially offset by improved price versus raw material cost and lower selling, general and administrative expense. Adjusted diluted EPS from continuing operations (non-GAAP) excluding intangibles amortization expense was also impacted by these key factors along with the impact of common share repurchases noted above.
For further information on the items reported above, see the discussion in the comparative Statements of Consolidated Comprehensive Income (Loss) caption review analysis.
29
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 ended December 31, 2023 and 2022.
Three months ended December 31
(In millions)
2023
2022
Change
Sales
$
473
$
525
$
(52
)
The following table provides a reconciliation of the change in sales for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31, 2023
Volume
$
(51
)
Pricing
(6
)
Divestiture
(1
)
Foreign currency exchange
6
Change in sales
$
(52
)
Sales for the current quarter decreased $52 million compared to the prior year quarter. Lower sales volume was the primary factor.
Three months ended December 31
(In millions)
2023
2022
Change
Cost of sales
$
375
$
360
$
15
Gross profit as a percent of sales
20.7
%
31.4
%
The following table provides a reconciliation of the change in cost of sales between the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31, 2023
Changes in:
Operating Costs
$
54
Foreign currency exchange
4
Volume
(30
)
Price/mix
(13
)
Change in cost of sales
$
15
Cost of sales for the current quarter increased $15 million compared to the prior year quarter. Higher operating costs driven primarily by higher unit manufacturing cost associated with decreased plant loading to produce to demand (including $21 million due to accelerated depreciation for product line optimization activities associated with a Specialty Additives manufacturing facility) was the primary factor. This increase was partially offset by lower volume and product price/mix. Gross profit as a percentage of sales decreased 10.7% primarily as a result of lower sales volume and higher operating costs.
Three months ended December 31
(In millions)
2023
2022
Change
Selling, general and administrative expense
$
83
$
93
$
(10
)
As a percent of sales
17.5
%
17.7
%
Selling, general and administrative expense for the current quarter decreased $10 million compared to the prior year quarter with expenses as a percent of sales decreasing 0.2 percentage points. Key drivers of the fluctuation in selling, general and administrative expense compared to the prior year quarter were:
• $4 million and $8 million in net environmental-related expenses during the current and prior year quarter, respectively (see Note K for more information);
• Expense of $4 million and $1 million comprised of key items for severance, lease abandonment and other restructuring costs during the current and prior year quarter, respectively;
30
• $4 million impairment charge in the prior year quarter associated with the sale of a Specialty Additives manufacturing facility; and
• Lower variable compensation expenses (including stock-based compensation) between periods.
Three months ended December 31
(In millions)
2023
2022
Change
Research and development expense
$
12
$
13
$
(1
)
Research and development expense is generally consistent with the prior year quarter.
Three months ended December 31
(In millions)
2023
2022
Change
Intangibles amortization expense
$
21
$
23
$
(2
)
Intangibles amortization expense is generally consistent with the prior year quarter.
Three months ended December 31
(In millions)
2023
2022
Change
Equity and other income
$
2
$
1
$
1
Equity and other income is generally consistent with the prior year quarter.
Three months ended December 31
(In millions)
2023
2022
Change
Loss on acquisitions and divestitures, net
$
(2
)
$
—
$
(2
)
The activity in the current quarter primarily related to legal fees associated with ongoing divestiture activity.
Three months ended December 31
(In millions)
2023
2022
Change
Net interest and other income
Interest expense
$
13
$
14
$
(1
)
Interest income
(3
)
(4
)
1
Income from restricted investments
(36
)
(25
)
(11
)
Other financing costs
2
1
1
$
(24
)
$
(14
)
$
(10
)
Net interest and other income increased by $10 million during the current quarter compared to the prior year quarter. Interest expense and interest income remained primarily consistent during the current quarter compared to the prior year quarter. Restricted investments income of $36 million and $25 million included realized gains of $31 million compared to gains of $21 million for the three months ended December 31, 2023 and 2022, respectively. See Note D for more information on the restricted investments.
Three months ended December 31
(In millions)
2023
2022
Change
Other net periodic benefit loss
$
2
$
1
$
1
Other net periodic benefit loss for the three months ended December 31, 2023 primarily included interest cost of $4 million which was partially offset by expected return on plan assets of $2 million. See Note J for more information. Other net periodic benefit loss for the three months ended December 31, 2022 primarily included interest cost of $3 million which was partially offset by expected return on plan assets of $2 million. See Note J for more information.
Three months ended December 31
(In millions)
2023
2022
Change
Income tax expense (benefit)
$
(24
)
$
8
$
(32
)
Effective tax rate
-600
%
16
%
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 a benefit of 600% for the three months ended December 31, 2023 and was primarily impacted by jurisdictional income mix, as well as net favorable discrete items of $24 million primarily related to changes in foreign tax reform related activity.
31
The overall effective tax rate was 16% for the three months ended December 31, 2022 and was primarily impacted by jurisdictional income mix, as well as net favorable discrete items of $1 million.
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 financial 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 financial measure on a consolidated basis assists investors in better understanding Ashland’s ongoing business performance enhancing their ability to compare period-to-period financial results.
The effective tax rate during the three months ended December 31, 2023 was significantly impacted by foreign tax reform related activity. The effective tax rate during the three months ended December 31, 2022 was not impacted by tax specific key items.
The following table is a calculation of the effective tax rate, excluding these key items.
Three months ended
December 31
(In millions)
2023
2022
Income from continuing operations before income taxes
$
4
$
50
Key items (pre-tax) (a)
3
(8
)
Adjusted income from continuing operations
before income taxes
$
7
$
42
Income tax expense (benefit)
$
(24
)
$
8
Income tax rate adjustments:
Tax effect of key items (b)
1
(2
)
Tax specific key items: (c)
Other and tax reform related activity
24
—
Total income tax rate adjustments
25
(2
)
Adjusted income tax expense
$
1
$
6
Effective tax rate
600
%
16
%
Effective tax rate, excluding key items (Non-GAAP) (d)
13
%
15
%
(a) See Adjusted EBITDA reconciliation table disclosed in this Management, Discussion and Analysis for a summary of the key items, before tax.
(b) The tax rate specific to the jurisdiction in which the key item originates is used to calculate the tax effect of key items.
(c) For additional information on the effect that these tax specific key items had on EPS, see the Adjusted Diluted EPS table disclosed in this Management, Discussion and Analysis.
(d) 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)
2023
2022
Change
Loss from discontinued operations, net of income taxes
Performance Adhesives
$
(3
)
$
(1
)
$
(2
)
Asbestos-related litigation
1
—
1
Distribution
—
(1
)
1
$
(2
)
$
(2
)
$
—
The activity for the Performance Adhesives segment represents subsequent adjustments that were made in conjunction with post-closing tax items and disputes during the current and prior year quarters. The activity for Distribution was related to post-closing adjustments for environmental expenses. Asbestos-related activity included after-tax net adjustments to the asbestos reserves and receivables during the current quarter.
32
Other comprehensive income (loss)
A comparative analysis of the components of other comprehensive income is provided below for the three months ended December 31, 2023 and 2022.
Three months ended December 31
(In millions)
2023
2022
Change
Other comprehensive income (loss), net of tax
Unrealized translation gain
$
54
$
82
$
(28
)
Unrealized loss on commodity hedges
(1
)
(4
)
3
$
53
$
78
$
(25
)
Total other comprehensive income (loss), net of tax, for the current quarter decreased $25 million compared to the prior year quarter primarily as a result of the following:
• For the three months ended December 31, 2023 and 2022, the change in unrealized gain (loss) from foreign currency translation adjustments resulted in gains of $54 million and $82 million, respectively. The fluctuations in unrealized translation gains and losses are primarily due to translating foreign subsidiary financial statements from local currencies to U.S. Dollars.
• For the three months ended December 31, 2023 and 2022, 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 $1 million and $4 million for the three months ended December 31, 2023 and 2022, respectively.
Use of Non-GAAP Financial Measures
Ashland has included within this document the following non-GAAP financial measures, on both a consolidated and reportable segment basis, which are not defined within U.S. GAAP and do not purport to be alternatives to net income or cash flows from operating activities as a measure of operating performance or cash flows:
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin
EBITDA is defined as net income, plus income tax expense (benefit), net interest and other income, and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for discontinued operations and key items. Adjusted EBITDA margin is Adjusted EBITDA divided by sales.
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 financial 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 segments and provide continuity to investors for comparability purposes.
33
Adjusted Diluted Earnings Per Share (EPS)
Adjusted diluted EPS is defined as income from continuing operations, adjusted for key items, net of tax, divided by the average outstanding diluted shares for the applicable period. The Adjusted diluted EPS metric enables Ashland to demonstrate what effect key items have on an earnings per diluted share basis by taking income 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.
Adjusted Diluted Earnings Per Share (EPS) Excluding Intangibles Amortization Expense
The Adjusted diluted EPS excluding intangible amortization expense is adjusted earnings per share adjusted for intangibles amortization expense net of tax, divided by the average outstanding diluted shares for 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.
Free Cash Flow, Ongoing Free Cash Flow and Ongoing Free Cash Flow Conversion
Free cash flow is defined as operating cash flows less capital expenditures while ongoing free cash flow is operating cash flows less capital expenditures and certain other adjustments as applicable. Ongoing free cash flow conversion is ongoing free cash flow divided by adjusted EBITDA. These 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 include 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, ongoing free cash flow, and free cash flow conversion are non-GAAP liquidity measures that Ashland believes provide useful information to management and investors about Ashland's ability to convert Adjusted EBITDA to ongoing free cash flow. These liquidity measures are used regularly by Ashland's stakeholders and industry peers to measure the efficiency at providing cash from regular business activity. Free cash flow, ongoing free cash flow, and free cash flow conversion have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows such as mandatory debt repayments. The amount of mandatory versus discretionary expenditures can vary significantly between periods.
Other disclosures on non-GAAP financial measures
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 financial 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 financial 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 financial 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 financial measures and are defined further in the sections that reference this metric.
34
EBITDA and Adjusted EBITDA
EBITDA totaled income of $34 million and $93 million for the three months ended December 31, 2023 and 2022, 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.
These operating key items for the applicable periods are summarized as follows:
• Restructuring, separation and other costs – Ashland periodically implements company-wide and targeted 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 C in the Notes to 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 each year to its environmental liabilities and receivables primarily related to previously divested businesses or non-operational sites. See Note K of the Notes to Consolidated Financial Statements for more information.
• Accelerated depreciation – As a result of product line optimization activities at a Specialty Additives manufacturing plant, Ashland recorded accelerated depreciation due to changes in the expected useful life of certain property, plant and equipment during the three months ended December 31, 2023. See Note C of the Notes to Consolidated Financial Statements for more information.
• Argentina foreign currency devaluation – following the enactment by the Argentina government of a 50% peso devaluation against the dollar, Ashland recorded a currency devaluation charge within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss) for the three months ended December 31, 2023
• Asset impairments – Ashland recognized impairment charges to certain assets during 2023.
Three months ended
December 31
(In millions)
2023
2022
Net income
$
26
$
40
Income tax expense (benefit)
(24
)
8
Net interest and other income
(24
)
(14
)
Depreciation and amortization (a)
56
59
EBITDA
34
93
Loss from discontinued operations, net of income taxes
2
2
Key items included in EBITDA:
Restructuring, separation and other costs
4
1
Environmental reserve adjustments
4
8
Accelerated depreciation
21
—
Argentina currency devaluation impact
5
—
Asset impairments
—
4
Total key items included in EBITDA
34
13
Adjusted EBITDA
$
70
$
108
Total key items included in EBITDA
$
34
$
13
Unrealized gain on securities
(31
)
(21
)
Total key items, before tax
$
3
$
(8
)
(a) Depreciation and amortization excludes accelerated depreciation of $21 million for Specialty Additives for the three months ended December 31, 2023, which is included as a key item within this table as a component of Adjusted EBITDA.
35
Diluted EPS and Adjusted Diluted EPS
The following table reflects the U.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 financial 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.
In addition to the operating key items previously described, additional non-operating key items for the applicable periods are summarized as follows:
• Unrealized gain on securities – represents gains recognized on restricted investments related to the Asbestos trust and Environmental trust for each period. See Note D of the Notes to Consolidated Financial Statements for more information.
• Other and tax reform related activity – represents tax specific key items associated with foreign tax reform related activity for the three months ended December 31, 2023.
Three months ended
December 31
2023
2022
Diluted EPS from continuing operations (as reported)
$
0.54
$
0.76
Key items, before tax:
Restructuring, separation and other costs
0.08
0.02
Environmental reserve adjustments
0.08
0.14
Accelerated depreciation
0.41
—
Argentina currency devaluation impact
0.10
—
Asset impairments
—
0.07
Unrealized gain on securities
(0.60
)
(0.38
)
Key items, before tax
0.07
(0.15
)
Tax effect of key items (a)
(0.02
)
0.03
Key items, after tax
0.05
(0.12
)
Tax specific key items:
Other and tax reform related activity
(0.47
)
—
Tax specific key items (b)
(0.47
)
—
Total key items
(0.42
)
(0.12
)
Adjusted diluted EPS from continuing operations (non-GAAP)
$
0.12
$
0.64
Amortization expense adjustment (net of tax) (c)
$
0.33
$
0.33
Adjusted diluted EPS from continuing operations (non-GAAP) excluding intangibles amortization expense
$
0.45
$
0.97
(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 tax specific 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% for the three months ended December 31, 2023 and 2022.
36
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 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 December 31, 2023 and 2022.
Three months ended December 31
(In millions - unaudited)
2023
2022
Change
SALES
Life Sciences
$
200
$
207
$
(7
)
Personal Care
129
138
(9
)
Specialty Additives
122
143
(21
)
Intermediates
33
54
(21
)
Intersegment sales (a)
(11
)
(17
)
6
$
473
$
525
$
(52
)
OPERATING INCOME (LOSS)
Life Sciences
$
32
$
34
$
(2
)
Personal Care
2
11
(9
)
Specialty Additives
(32
)
1
(33
)
Intermediates
7
20
(13
)
Unallocated and other
(27
)
(29
)
2
$
(18
)
$
37
$
(55
)
DEPRECIATION EXPENSE
Life Sciences
$
9
$
10
$
(1
)
Personal Care
9
9
—
Specialty Additives (b)
35
14
21
Intermediates
3
3
—
Unallocated and other
—
—
—
$
56
$
36
$
20
AMORTIZATION EXPENSE
Life Sciences
$
7
$
7
$
—
Personal Care
11
12
(1
)
Specialty Additives
3
4
(1
)
Intermediates
—
—
—
$
21
$
23
$
(2
)
EBITDA (c)
Life Sciences
$
48
$
51
$
(3
)
Personal Care
22
32
(10
)
Specialty Additives
6
19
(13
)
Intermediates
10
23
(13
)
Unallocated and other
(27
)
(29
)
2
$
59
$
96
$
(37
)
(a) Intersegment sales from Intermediates are accounted for at prices that approximate fair value. All other intersegment sales are accounted for at cost.
(b) Depreciation includes accelerated depreciation of $21 million for Specialty Additives for the three months ended December 31, 2023.
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(c) Excludes loss from discontinued operations, other net periodic benefit loss. See the Statements of Consolidated Comprehensive Income (Loss) for applicable amounts excluded.
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.
The following table provides a reconciliation of the change in sales for the Life Sciences operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Sales change
Volume
$
(13
)
Price/mix
4
Foreign Currency
2
$
(7
)
The following table provides a reconciliation of the change in operating income for the Life Sciences operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Operating income change
Volume
$
(9
)
Cost
(3
)
Price/mix
8
Foreign Currency
2
$
(2
)
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 financial measures are defined as follows: EBITDA (operating income plus depreciation and amortization), Adjusted EBITDA (EBITDA adjusted for key items as applicable), and Adjusted EBITDA margin (Adjusted EBITDA divided by sales). 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 ended December 31, 2023 and 2022 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 ended December 31, 2022 related to $1 million for restructuring program within the Nutraceuticals business of the Life Sciences segment.
38
Life Sciences
Three months ended December 31
(In millions)
2023
2022
Change
Operating income
$
32
$
34
$
(2
)
Depreciation and amortization
16
17
(1
)
EBITDA
$
48
$
51
(3
)
Restructuring and other costs
—
1
(1
)
Adjusted EBITDA
$
48
$
52
$
(4
)
As a percent of sales
24.0
%
25.1
%
-110 bps
Three months ended December 31, 2023 compared to three months ended December 31, 2022
Life Sciences' sales, operating income and Adjusted EBITDA decreased in the current quarter due to lower volume and higher costs partially offset by favorable price/mix actions and favorable foreign currency exchange.
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.
The following table provides a reconciliation of the change in sales for the Personal Care operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Sales change
Volume
$
(12
)
Foreign Currency
2
Price/mix
1
$
(9
)
The following table provides a reconciliation of the change in operating income for the Personal Care operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Operating income change
Cost
$
(8
)
Volume
(4
)
Price/mix
3
$
(9
)
39
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation for the three months ended December 31, 2023 and 2022 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 ended December 31, 2023 or 2022.
Personal Care
Three months ended December 31
(In millions)
2023
2022
Change
Operating income
$
2
$
11
$
(9
)
Depreciation and amortization
20
21
(1
)
EBITDA
$
22
$
32
(10
)
As a percent of sales
17.1
%
23.2
%
-610 bps
Three months ended December 31, 2023 compared to three months ended December 31, 2022
Personal Care's sales, operating income and EBITDA decreased in the current quarter primarily due to higher costs and lower volume, partially offset by favorable price/mix.
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.
The following table provides a reconciliation of the change in sales for the Specialty Additives operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Sales change
Volume
$
(18
)
Price/mix
(4
)
Divestiture
(1
)
Foreign Currency
2
$
(21
)
The following table provides a reconciliation of the change in operating income for the Specialty Additives operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Operating income change
Costs (including accelerated depreciation)
$
(29
)
Volume
(3
)
Foreign Currency
(1
)
$
(33
)
40
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation for the three months ended December 31, 2023 and 2022 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 ended December 31, 2023 and 2022 related to $21 million accelerated depreciation in 2023 and an impairment charge of $4 million in 2022 both of which were associated with manufacturing facilities.
Specialty Additives
Three months ended December 31
(In millions)
2023
2022
Change
Operating income
$
(32
)
$
1
$
(33
)
Depreciation and amortization (a)
17
18
(1
)
EBITDA
(15
)
19
(34
)
Accelerated depreciation
21
—
21
Impairments
—
4
(4
)
Adjusted EBITDA
$
6
$
23
$
(17
)
As a percent of sales
4.9
%
16.1
%
-1120 bps
(a) Depreciation and amortization excludes accelerated depreciation of $21 million for Specialty Additives for the three months ended December 31, 2023, which is included as a key item within this table as a component of Adjusted EBITDA.
Three months ended December 31, 2023 compared to three months ended December 31, 2022
Specialty Additives sales, operating income and Adjusted EBITDA for the current quarter decreased primarily due to higher costs, including $21 million of accelerated depreciation for product line optimization activities associated with a Specialty Additives manufacturing facility and lower volume.
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.
The following table provides a reconciliation of the change in sales for the Intermediates operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Sales change
Volume
$
(11
)
Price/mix
(10
)
$
(21
)
The following table provides a reconciliation of the change in operating income for the Intermediates operating segment for the three months ended December 31, 2023 and 2022.
Three months ended
(In millions)
December 31
Operating income change
Volume
$
(5
)
Price/mix
(4
)
Cost
(4
)
$
(13
)
41
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation (as defined and described in the section above) for the three months ended December 31, 2023 and 2022 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 ended December 31, 2023 or 2022.
Intermediates
Three months ended December 31
(In millions)
2023
2022
Change
Operating income
$
7
$
20
$
(13
)
Depreciation and amortization
3
3
—
EBITDA
$
10
$
23
$
(13
)
As a percent of sales
30.3
%
42.6
%
-1230 bps
Three months ended December 31, 2023 compared to three months ended December 31, 2022
Intermediates' sales, operating income and EBITDA for the current quarter decreased primarily due to lower volume, unfavorable price/mix and higher costs.
Unallocated and other
The following table summarizes the key components of the Unallocated and other segment’s operating income (loss) for the three months ended December 31, 2023 and 2022.
Unallocated and Other
Three months ended December 31
(In millions)
2023
2022
Change
Restructuring activities
$
(4
)
$
(1
)
$
(3
)
Environmental expenses
(4
)
(8
)
4
Argentina currency devaluation impact
(5
)
—
(5
)
Loss on acquisitions and divestitures, net
(2
)
—
(2
)
Other expenses (primarily governance and legacy expenses)
(12
)
(20
)
8
Total expense
$
(27
)
$
(29
)
$
2
Three months ended December 31, 2023 compared to three months ended December 31, 2022
Unallocated and other recorded expense of $27 million and $29 million for the three months ended December 31, 2023 and 2022, respectively. The current and prior year quarter included expense of $4 million and $1 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.
The current quarter and prior year quarter included $4 million and $8 million for environmental expenses, respectively.
The remaining items included expense of $5 million related to the devaluation of the currency in Argentina and a loss of $2 million from acquisitions and divestitures during the current quarter.
Other expenses between periods were driven by decreases in governance and legacy expenses primarily associated with fluctuations in foreign currency, deferred compensation and stock compensation expense.
42
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.
On October 19, 2023, Ashland entered, through an Ireland based, wholly-owned, bankruptcy-remote consolidated special purpose entity (SPE), into a three-year agreement with a group of entities (buyers) to sell certain trade receivables, without recourse beyond the pledged receivables, of certain wholly-owned Ashland subsidiaries (Foreign Accounts Receivable Sales Program) primarily in Europe. Under the agreement, Ashland can transfer whole receivables up to a limit established by the buyer, which is currently set at €125 million. Ashland accounts for receivables transferred to buyers as part of this agreement as sales. See note G for more information on the Foreign Accounts Receivables Sale Program.
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 December 31, 2023 and 2022.
Three months ended
December 31
(In millions)
2023
2022
Cash provided (used) by:
Operating activities from continuing operations
$
201
$
(29
)
Investing activities from continuing operations
(26
)
(27
)
Financing activities from continuing operations
(139
)
(27
)
Discontinued operations
(14
)
(34
)
Effect of currency exchange rate changes on cash and cash equivalents
1
3
Net increase (decrease) in cash and cash equivalents
$
23
$
(114
)
Cash and cash equivalents increased $23 million for the three months ended December 31, 2023 compared to a $114 million decrease for the three months ended December 31, 2022.
The $23 million increase for the three months ended December 31, 2023 was primarily driven by operating cash inflows offset by payment of cash dividends, additions to property, plant and equipment, and stock repurchase activity of $20 million, $36 million, and $100 million, respectively. Operating cash flows from continuing operations were inflows of $201 million, while discontinued operations cash flows were outflows of $14 million.
The $114 million decrease for the three months ended December 31, 2022 was primarily driven by payment of cash dividends, additions to property, plant and equipment, and taxes paid on stock based compensation of $18 million, $23 million, and $9 million, respectively. Operating cash flows from continuing operations were outflows of $29 million, while discontinued operations cash flows were outflows of $34 million.
See the Statements of Condensed Consolidated Cash Flows for additional details.
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.
43
Three months ended
December 31
(In millions)
2023
2022
Total cash flows provided (used) by operating activities from continuing operations
$
201
$
(29
)
less:
Additions to property, plant and equipment
(36
)
(23
)
Free cash flows
165
(52
)
Cash (inflows) outflows from U.S. Accounts Receivable Sales Program (a)
(8
)
19
Cash (inflows) outflows from Foreign Accounts Receivable Sales Program (b)
(102
)
—
Restructuring-related payments (c)
3
1
Environmental and related litigation payments (d)
8
11
Ongoing free cash flow
$
66
$
(21
)
Net Income
26
40
Adjusted EBITDA (e)
70
108
Operating cash flow conversion (f)
773
%
-73
%
Ongoing free cash flow conversion (g)
94
%
-19
%
(a) Represents activity associated with the U.S. Accounts Receivable Sales Program impacting each period presented.
(b) Represents activity associated with the Foreign Accounts Receivable Sales Program impacting each period presented.
(c) Restructuring payments incurred during each period.
(d) Represents cash outflows associated with environmental and related litigation payments which will be reimbursed by the environmental trust.
(e) See adjusted EBITDA reconciliation.
(f) Operating cash flow conversion is defined as Cash flows provided by operating activities from continuing operations divided by Net income.
(g) Ongoing free cash flow conversion is defined as 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 $951 million and $1,050 million as of December 31, 2023 and September 30, 2023, respectively. The $99 million decrease in working capital was driven by a reduction in cash and cash equivalents, primarily associated with repurchases of common stock, and lower trade working capital (accounts receivable and inventories minus trade and other payables and accrued expenses and other liabilities) including sales of foreign accounts receivables under the new Foreign Accounts Receivable Sales Programs. See Note G for additional information. The $87 million increase in ongoing free cash flows between periods was primarily a result of reduced trade working capital additions reflecting a reduction in inventory balances as well as reduced incentive compensation payout compared to the prior year offset by $13 million in higher additions to property, plant and equipment. Liquid assets (cash, cash equivalents and accounts receivable) amounted to 153% and 166% of current liabilities as as of December 31, 2023 and September 30, 2023, respectively.
The following summary reflects Ashland’s cash, unused borrowing capacity and liquidity as of December 31, 2023 and September 30, 2023.
December 31
September 30
(In millions)
2023
2023
Cash and investment securities
Cash and cash equivalents
$
440
$
417
Restricted investments (a)
392
367
Unused borrowing capacity and liquidity
Revolving credit facility
596
594
2018 accounts receivable securitization (foreign)
—
104
U.S. Accounts Receivable Sales Program
—
—
(a) Includes $258 million and $243 million related to the Asbestos trust and $134 million and $124 million related to the Environmental trust as of December 31, 2023 and September 30, 2023, respectively.
44
The borrowing capacity remaining under the 2022 Credit Agreement was $596 million, which reflects the full $600 million Revolving Credit Facility less a reduction of $4 million for letters of credit outstanding at December 31, 2023. In total, Ashland’s available liquidity position, which includes cash and the revolving credit facility, was $1,036 million at December 31, 2023, compared to $1,115 million at September 30, 2023. Ashland had zero of available liquidity under the U.S. and Foreign Accounts Receivable Sales Programs, respectively, as of December 31, 2023. Ashland also maintained $392 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 of December 31, 2023 and September 30, 2023.
December 31
September 30
(In millions)
2023
2023
Short-term debt (includes current portion of long-term debt)
$
—
$
16
Long-term debt (less current portion and debt issuance cost discounts) (a)
1,341
1,314
Total debt
$
1,341
$
1,330
(a) Includes $13 million of debt issuance cost discounts as of December 31, 2023 and September 30, 2023 , respectively.
Debt as a percent of capital employed was 31% and 30% at December 31, 2023 and at September 30, 2023, respectively. At December 31, 2023, Ashland’s total debt had an outstanding principal balance of $1,386 million, discounts of $32 million, and debt issuance costs of $13 million. Ashland had no long-term debt (excluding debt issuance costs) maturing within the next 3 years, $4 million due in fiscal 2027 and $554 million due in 2028.
Ashland credit ratings
Ashland’s corporate credit ratings remained unchanged at BB+ by Standard & Poor’s and Ba1 by Moody’s Investor Services. As of December 31, 2023, both Moody’s Investor Services and Standard & 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.
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, mergers, sale of assets and restricted payments and other customary limitations. As of December 31, 2023, Ashland is in compliance with all debt agreement covenant restrictions under the 2022 Credit Agreement.
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. At December 31, 2023, Ashland’s calculation of the consolidated net leverage ratio was 2.1.
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. At December 31, 2023, Ashland’s calculation of the consolidated interest coverage ratio was 7.6.
45
Any change in Covenant Adjusted EBITDA of $100 million would have an approximate 0.4x 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 decreased by $44 million since September 30, 2023 to $3,053 million at December 31, 2023. The decrease of $44 million was due to net income of $26 million and $54 million of deferred translation gains, offset by compensation expense and common shares issued of $2 million, stock repurchase activity of $101 million (includes $1 million in excise tax), dividends of $20 million, and losses on commodity hedges of $1 million.
2023 Stock Repurchase program
On June 28, 2023, Ashland's board of directors authorized a new evergreen $1 billion common share repurchase program (the "2023 Stock Repurchase Program"). The new authorization terminated and replaced the 2022 Stock Repurchase Program, which had $200 million outstanding at the date of termination. As of December 31, 2023, $900 million remained available for repurchase under this authorization.
Stock repurchase program agreements
During November 2023, under the 2023 Stock Repurchase Program, Ashland initiated a Rule 10b5-1 trading plan agreement to repurchase up to $100 million of its outstanding shares. The program was completed during December 2023, when Ashland paid a total of $100 million and received a delivery of 1.2 million shares of common stock.
Stockholder dividends
Ashland paid a dividend of 38.5 cents per share for the first quarter of fiscal 2024 and 33.5 cents per share in the first quarter of fiscal 2023.
Capital expenditures
Capital expenditures were $36 million for the three months ended December 31, 2023 compared to $23 million for the three months ended December 31, 2022.
CRITICAL ACCOUNTING POLICIES
The preparation of Ashland’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosures of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and other intangible assets), income taxes, other liabilities and receivables associated with asbestos litigation and environmental remediation. These accounting policies are discussed in detail in “Management’s Discussion and Analysis – Critical Accounting Policies” in Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023. 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 ended December 31, 2023.
OUTLOOK
There is growing evidence of a convergence between Ashland’s sales volume and customer end-market demand. While traditionally a seasonally slower period, demand in January demonstrated sequential improvement with similar trends into February order build.
Current demand patterns suggest a potential recovery with continued momentum into the second half of the fiscal year. Demand evolution in the subsequent months will further narrow the range of recovery scenarios.
Ashland’s portfolio optimization actions continue to make progress and include the consolidation of Ashland’s carboxymethylcellulose (CMC) production capacity into Alizay, France resulting in a closure of CMC production
46
capacity in Hopewell, Virginia during the fiscal second quarter of 2024. Other actions to improve Ashland’s industrial methylcellulose (MC) and hydroxyethycellulose (HEC) businesses continue to be assessed.
Ashland expects to realize a partial return to more typical margins during the second quarter, primarily a result of a forecasted increase in sales and production volumes, with continued improvement throughout the fiscal year. Overall, for the fiscal-second quarter the company expects sales in the range of $565 million to $585 million and adjusted EBITDA in the range of $115 million to $125 million. For the full fiscal year, Ashland expects sales in the range of $2.15 billion to $2.25 billion and adjusted EBITDA in the range of $460 million to $500 million.
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland’s market risk exposure at December 31, 2023 is generally consistent with the types of market risk exposures presented in Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
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