ash-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission file number 333-211719

ASHLAND GLOBAL HOLDINGS INC.

(a Delaware corporation)

I.R.S. No. 81-2587835

50 E. RiverCenter Boulevard

Covington, Kentucky 41011

Telephone Number (859) 815-3333

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  No 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).   Yes  No 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

Large Accelerated Filer

 

 

Accelerated Filer

 

Non-Accelerated Filer

 

 

Smaller Reporting Company

 

(Do not check if a smaller reporting company.)

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  No 

At June 30, 2018, there were 62,426,191 shares of Registrant’s Common Stock outstanding.  

 

 

 

 


 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

 

 

 

Three months ended

 

 

Nine months ended

 

 

June 30

 

 

June 30

 

(In millions except per share data - unaudited)

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales

$

971

 

 

$

870

 

 

$

2,787

 

 

$

2,380

 

Cost of sales

 

681

 

 

 

635

 

 

 

1,993

 

 

 

1,729

 

Gross profit

 

290

 

 

 

235

 

 

 

794

 

 

 

651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

203

 

 

 

182

 

 

 

537

 

 

 

494

 

Research and development expense

 

21

 

 

 

20

 

 

 

64

 

 

 

61

 

Equity and other income

 

 

 

 

4

 

 

 

7

 

 

 

9

 

Operating income

 

66

 

 

 

37

 

 

 

200

 

 

 

105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest and other financing expense

 

33

 

 

 

51

 

 

 

93

 

 

 

203

 

Other net periodic benefit income

 

 

 

 

 

 

 

1

 

 

 

3

 

Net loss on acquisitions and divestitures

 

(2

)

 

 

(6

)

 

 

(3

)

 

 

(7

)

Income (loss) from continuing operations before income taxes

 

31

 

 

 

(20

)

 

 

105

 

 

 

(102

)

Income tax expense (benefit)

 

(5

)

 

 

(4

)

 

 

10

 

 

 

(49

)

Income (loss) from continuing operations

 

36

 

 

 

(16

)

 

 

95

 

 

 

(53

)

Income (loss) from discontinued operations (net of income taxes)

 

 

 

 

(14

)

 

 

9

 

 

 

138

 

Net income (loss)

 

36

 

 

 

(30

)

 

 

104

 

 

 

85

 

Net income attributable to noncontrolling interest (a)

 

 

 

 

3

 

 

 

 

 

 

27

 

Net income (loss) attributable to Ashland

$

36

 

 

$

(33

)

 

$

104

 

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share - Note L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.57

 

 

$

(0.26

)

 

$

1.51

 

 

$

(0.85

)

Income (loss) from discontinued operations attributable to Ashland

 

 

 

 

(0.28

)

 

 

0.16

 

 

 

1.78

 

Net income (loss) attributable to Ashland

$

0.57

 

 

$

(0.54

)

 

$

1.67

 

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share - Note L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.56

 

 

$

(0.26

)

 

$

1.49

 

 

$

(0.85

)

Income (loss) from discontinued operations attributable to Ashland

 

 

 

 

(0.28

)

 

 

0.15

 

 

 

1.78

 

Net income (loss) attributable to Ashland

$

0.56

 

 

$

(0.54

)

 

$

1.64

 

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

36

 

 

$

(30

)

 

$

104

 

 

$

85

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized translation gain (loss)

 

(140

)

 

 

105

 

 

 

(82

)

 

 

19

 

Pension and postretirement obligation adjustment

 

 

 

 

 

 

 

 

 

 

(4

)

Net change in available-for-sale securities

 

2

 

 

 

4

 

 

 

4

 

 

 

10

 

Other comprehensive income (loss)

 

(138

)

 

 

109

 

 

 

(78

)

 

 

25

 

Comprehensive income (loss)

 

(102

)

 

 

79

 

 

 

26

 

 

 

110

 

Comprehensive income attributable to noncontrolling interest

 

 

 

 

3

 

 

 

 

 

 

27

 

Comprehensive income (loss) attributable to Ashland

$

(102

)

 

$

76

 

 

$

26

 

 

$

83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

For the three and nine months ended June 30, 2017, this represents the income attributable to the previous noncontrolling interest in Valvoline Inc., whose results are now included within discontinued operations.  See Note B for more information.

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2


 

 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

(In millions - unaudited)

 

June 30

2018

 

 

September 30

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

182

 

 

$

566

 

Accounts receivable (a)

 

 

690

 

 

 

612

 

Inventories - Note F

 

 

656

 

 

 

634

 

Other assets

 

 

144

 

 

 

91

 

Total current assets

 

 

1,672

 

 

 

1,903

 

Noncurrent assets

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Cost

 

 

3,826

 

 

 

3,762

 

Accumulated depreciation

 

 

1,933

 

 

 

1,792

 

Net property, plant and equipment

 

 

1,893

 

 

 

1,970

 

Goodwill - Note G

 

 

2,447

 

 

 

2,465

 

Intangibles - Note G

 

 

1,249

 

 

 

1,319

 

Restricted investments - Note E

 

 

304

 

 

 

302

 

Asbestos insurance receivable - Note K

 

 

181

 

 

 

209

 

Deferred income taxes

 

 

28

 

 

 

28

 

Other assets

 

 

450

 

 

 

422

 

Total noncurrent assets

 

 

6,552

 

 

 

6,715

 

Total assets

 

$

8,224

 

 

$

8,618

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Short-term debt - Note H

 

$

82

 

 

$

235

 

Trade and other payables

 

 

397

 

 

 

409

 

Accrued expenses and other liabilities

 

 

263

 

 

 

324

 

Total current liabilities

 

 

742

 

 

 

968

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

Long-term debt - Note H

 

 

2,450

 

 

 

2,584

 

Asbestos litigation reserve - Note K

 

 

631

 

 

 

694

 

Deferred income taxes

 

 

243

 

 

 

375

 

Employee benefit obligations - Note J

 

 

186

 

 

 

191

 

Other liabilities

 

 

573

 

 

 

400

 

Total noncurrent liabilities

 

 

4,083

 

 

 

4,244

 

Commitments and contingencies - Note K

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

3,399

 

 

 

3,406

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

8,224

 

 

$

8,618

 

 

 

 

 

 

 

 

 

 

(a)

Accounts receivable includes an allowance for doubtful accounts of $9 million at both June 30, 2018 and September 30, 2017.

 

 

 

 

 

 

 

 

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

3


 

 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

 

Common

 

 

Paid-in

 

 

Retained

 

 

comprehensive

 

 

 

 

 

(In millions - unaudited)

 

stock

 

 

capital

 

 

earnings

 

 

income (loss)

 

(a)

Total

 

BALANCE AT SEPTEMBER 30, 2017

 

$

1

 

 

$

931

 

 

$

2,696

 

 

$

(222

)

 

$

3,406

 

Total comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

104

 

 

 

 

 

 

 

104

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(78

)

 

 

(78

)

Regular dividends, $0.70 per common share

 

 

 

 

 

 

 

 

 

 

(44

)

 

 

 

 

 

 

(44

)

Common shares issued under stock incentive and other plans (b)

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

11

 

BALANCE AT JUNE 30, 2018

 

$

1

 

 

$

942

 

 

$

2,756

 

 

$

(300

)

 

$

3,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

At June 30, 2018 and September 30, 2017, the after-tax accumulated other comprehensive loss attributable to Ashland of $300 million and $222 million, respectively, was each comprised of net unrealized translation losses of $328 million and $246 million, respectively, net unrealized gains on available-for-sale securities of $25 million and $21 million, respectively, and unrecognized prior service credits as a result of certain employee benefit plan amendments of $3 million for each period.

(b)

Common shares issued were 308,779 for the nine months ended June 30, 2018.

 

 

 

 

 

 

 

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

4


 

 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS

 

 

 

 

 

Nine months ended

 

 

 

June 30

 

(In millions - unaudited)

 

2018

 

 

2017

 

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM

 

 

 

 

 

 

 

 

CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Net income

 

$

104

 

 

$

85

 

Income from discontinued operations (net of income taxes)

 

 

(9

)

 

 

(138

)

Adjustments to reconcile income from continuing operations to

 

 

 

 

 

 

 

 

cash flows from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

236

 

 

 

218

 

Original issue discount and debt issuance costs amortization

 

 

7

 

 

 

108

 

Deferred income taxes

 

 

(3

)

 

 

(4

)

Distributions from affiliates

 

 

1

 

 

 

1

 

Stock based compensation expense

 

 

20

 

 

 

14

 

Excess tax benefit on stock based compensation

 

 

4

 

 

 

2

 

Loss on early retirement of debt

 

 

 

 

 

9

 

Realized gains and investment income on available-for-sale securities

 

 

(10

)

 

 

(9

)

Net loss on acquisitions and divestitures

 

 

 

 

 

4

 

Pension contributions

 

 

(8

)

 

 

(6

)

Gain on post-employment plan remeasurement

 

 

 

 

 

(2

)

Change in operating assets and liabilities (a)

 

 

(213

)

 

 

(152

)

Total cash flows provided by operating activities from continuing operations

 

 

129

 

 

 

130

 

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM

 

 

 

 

 

 

 

 

CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(102

)

 

 

(126

)

Proceeds from disposal of property, plant and equipment

 

 

1

 

 

 

4

 

Purchase of operations - net of cash acquired

 

 

(11

)

 

 

(680

)

Proceeds from sale of operations

 

 

1

 

 

 

4

 

Life insurance payments

 

 

(37

)

 

 

 

Net purchase of funds restricted for specific transactions

 

 

(10

)

 

 

(2

)

Reimbursement from restricted investments

 

 

25

 

 

 

19

 

Proceeds from sales of available-for-sale securities

 

 

17

 

 

 

19

 

Purchase of available-for-sale securities

 

 

(17

)

 

 

(19

)

Proceeds from the settlement of derivative instruments

 

 

1

 

 

 

5

 

Payments for the settlement of derivative instruments

 

 

(3

)

 

 

(3

)

Total cash flows used by investing activities from continuing operations

 

 

(135

)

 

 

(779

)

CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

FROM CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

1,100

 

Repayment of long-term debt

 

 

(135

)

 

 

(913

)

Premium on long-term debt

 

 

 

 

 

(17

)

Proceeds from (repayment of) short-term debt

 

 

(158

)

 

 

69

 

Debt issuance costs

 

 

(1

)

 

 

(15

)

Cash dividends paid

 

 

(44

)

 

 

(62

)

Stock based compensation employee withholding taxes paid in cash

 

 

(8

)

 

 

(14

)

Total cash flows provided (used) by financing activities from continuing operations

 

 

(346

)

 

 

148

 

CASH PROVIDED (USED) BY CONTINUING OPERATIONS

 

 

(352

)

 

 

(501

)

Cash provided (used) by discontinued operations

 

 

 

 

 

 

 

 

Operating cash flows

 

 

(34

)

 

 

123

 

Investing cash flows

 

 

 

 

 

(293

)

Financing cash flows

 

 

 

 

 

(17

)

Total cash used by discontinued operations

 

 

(34

)

 

 

(187

)

Effect of currency exchange rate changes on cash and cash equivalents

 

 

2

 

 

 

(8

)

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(384

)

 

 

(696

)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

 

 

566

 

 

 

1,017

 

Change in cash and cash equivalents held by Valvoline

 

 

 

 

 

171

 

CASH AND CASH EQUIVALENTS - END OF PERIOD

 

$

182

 

 

$

492

 

 

 

 

 

 

 

 

 

 

 

(a)

Excludes changes resulting from operations acquired or sold.

 

 

 

 

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

5


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and Securities and Exchange Commission (SEC) regulations.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Additionally, certain prior period data, primarily related to discontinued operations, have been reclassified in the Consolidated Financial Statements and accompanying notes to conform to the current period presentation, as further described in this section.  These statements omit certain information and footnote disclosures required for complete annual financial statements and, therefore, should be read in conjunction with Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.  Results of operations for the period ended June 30, 2018 are not necessarily indicative of the expected results for the remaining quarter in the fiscal year.

On May 12, 2017, Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. which represented approximately 83% of the total outstanding shares of Valvoline Inc.'s common stock.  This separation from Valvoline represented a strategic shift in Ashland's business and qualified as a discontinued operation.  Accordingly, Valvoline's operating results and cash flows for the three and nine months ended June 30, 2017 have been classified as discontinued operations within the Condensed Consolidated Financial Statements.  See Note B for additional information on the separation of Valvoline Inc.

Subsequent to completing the separation from Valvoline Inc., Ashland's operations are managed within the following three reportable segments:  Specialty Ingredients, Composites and Intermediates and Solvents.

Use of estimates, risks and uncertainties

The preparation of Ashland’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities.  Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill and other intangible assets), income taxes and liabilities and receivables associated with asbestos litigation and environmental remediation.  Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

Ashland’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions.  Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies and changes in the prices of certain key raw materials, can have a significant effect on operations.  While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.

New accounting standards

A description of new U.S. GAAP accounting standards issued or adopted during the current year is required in interim financial reporting.  A detailed listing of new accounting standards relevant to Ashland is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017.  The following standards relevant to Ashland were either issued or adopted in the current period, or will become effective in a subsequent period.

In May 2014, the FASB issued accounting guidance outlining a single comprehensive five step model for entities to use in accounting for revenue arising from contracts with customers (ASC 606 Revenue from Contracts with Customers).  The new guidance supersedes most current revenue recognition guidance, in an effort to converge the revenue recognition principles within U.S. GAAP.  This new guidance also requires entities to disclose certain quantitative and qualitative information regarding the nature, amount, timing and

6


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

uncertainty of qualifying revenue and cash flows arising from contracts with customers.  Ashland has formed an implementation team that is continuing to evaluate the impact of the new standard on the Condensed Consolidated Financial Statements and the adoption method options available, as well as the overall impact the new guidance will have on the organization.  The assessment process consists of categorizing Ashland’s revenue streams and reviewing the current internal accounting policies and practices to determine potential differences that would result from applying the requirements of the new standard to revenue contracts.  Additional discussions and meetings with each revenue stream team have occurred to solicit input and to identify potential impacts and appropriate changes to Ashland’s business processes, systems and controls to support the revenue recognition and disclosure requirements under the new standard.  Based on various preliminary assessments conducted to date, Ashland has identified agreements with distributors and customers that are subject to rebate and incentive programs that could contain elements of material rights and/or variable consideration.  Ashland does not currently believe that these elements would result in a material change to how revenue would be recognized for these agreements.  Ashland is currently completing the last phase of its implementation, which includes final assessment documentation and internal control design for the new standard.  Ashland intends to adopt this standard using the modified retrospective approach and does not believe the impact will be material to the Condensed Consolidated Financial Statements but does expect there to be significant additional disclosures within the Notes to Condensed Consolidated Financial Statements.  This guidance becomes effective for Ashland on October 1, 2018.

In February 2018, the FASB issued guidance which permits entities to reclassify tax effects stranded in accumulated other comprehensive income (AOCI) as a result of U.S. tax reform legislation to retained earnings.  Additionally, this guidance requires entities to disclose whether they made an election to reclassify the tax effects and to disclose their accounting policy for releasing income tax effects from AOCI. This guidance becomes effective for Ashland on October 1, 2019.  Ashland is currently evaluating the impact this guidance may have on Ashland’s Condensed Consolidated Financial Statements.

In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Statement of Consolidated Comprehensive Income (Loss).  This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Statement of Consolidated Comprehensive Income (Loss) as other employee compensation costs from services rendered during the period.  All other components of the net periodic benefit cost will be presented separately outside of the operating income caption.  This guidance must be applied retrospectively.  Ashland elected to early adopt this guidance on October 1, 2017, which resulted in a reclassification of $3 million in income from the selling, general and administrative expense and cost of sales captions to the other net periodic benefit income caption in the Statement of Consolidated Comprehensive Income (Loss) for the nine months ended June 30, 2017.  The components of net periodic benefits income (costs) reclassified primarily relate to interest cost, expected return on assets, curtailments, settlements and actuarial gains and losses.  Ashland did not have to adjust the classification of service cost since it previously was recorded within the caption required by the new guidance.  See Note J for additional information on net periodic benefit costs.

In March 2016, the FASB issued new accounting guidance for certain aspects of share-based payments to employees.  This guidance requires all excess tax benefits and tax deficiencies related to share-based payments to be recognized as income tax expense in the Statements of Consolidated Comprehensive Income (Loss) instead of additional paid-in capital, and changes the classification of excess tax benefits from a financing activity to an operating activity within the Statements of Condensed Consolidated Cash Flows.  This guidance also allows entities to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.  In addition, this guidance increases the amount an employer can withhold to cover income taxes on awards and still qualify for equity classification and requires that cash paid by an employer when directly withholding shares for tax-withholding purposes be classified as a financing activity within the Statements of Condensed Consolidated Cash Flows.  The guidance became effective for Ashland and was adopted on October 1, 2017.  The guidance specifically related to the Statements of Consolidated Comprehensive Income (Loss)

7


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

was adopted prospectively while the guidance related to the Statements of Condensed Consolidated Cash Flows was adopted retrospectively, as required by the guidance.  Additionally, Ashland made a policy election to account for forfeitures when they occur across all share-based awards.  Upon adoption, the overall impact on Ashland's Condensed Consolidated Financial Statements was not significant.

 

NOTE B – VALVOLINE

Ashland Separation of Valvoline

On September 22, 2015, Ashland announced that the Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the new Ashland (now known as Ashland Global Holdings Inc.) and Valvoline Inc.  The initial step of the separation, the initial public offering (IPO) of Valvoline Inc., closed on September 28, 2016.  As discussed further within the Final Separation section of this Note, Ashland completed the distribution of its remaining shares in Valvoline Inc. on May 12, 2017.  The new Ashland is a premier global leader in providing specialty chemical solutions to customers in a wide range of consumer and industrial markets. Key markets and applications include pharmaceutical, personal care, food and beverage, architectural coatings, adhesives, automotive, construction and energy

After completing the IPO on September 28, 2016 and before the distribution of its remaining shares on May 12, 2017, Ashland owned 170 million shares of Valvoline Inc.’s common stock which represented approximately 83% of the total outstanding shares of Valvoline Inc.’s common stock.  As a result, Ashland continued to consolidate Valvoline within the Condensed Consolidated Financial Statements up until the distribution of the remaining shares.  The resulting outside stockholders’ interests in Valvoline Inc., which were approximately 17%, was presented separately as a noncontrolling interest within Ashland’s equity in the Condensed Consolidated Balance Sheets up until the distribution of the remaining shares.  The amount of consolidated net income attributable to these minority holders is presented as a separate caption on the Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended June 30, 2017.

Final Separation

Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. as a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017.  Based on the shares of Ashland common stock outstanding as of May 5, 2017, the record date for the distribution, each share of Ashland common stock received 2.745338 shares of Valvoline common stock in the distribution.  The distribution was recorded at the carrying amount of Valvoline Inc.'s net assets which was a deficit of $187 million as of May 12, 2017, as follows:

8


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

May 12

 

(In millions)

2017

 

ASSETS

 

 

 

Current assets

 

 

 

Cash and cash equivalents

$

179

 

Accounts receivable, net

 

385

 

Inventories

 

153

 

Other current assets

 

24

 

Total current assets

 

741

 

Noncurrent assets

 

 

 

Net property, plant and equipment

 

357

 

Goodwill

 

329

 

Equity and other unconsolidated investments

 

31

 

Deferred income taxes

 

391

 

Other noncurrent assets

 

93

 

Total noncurrent assets

 

1,201

 

Total assets

 

1,942

 

LIABILITIES AND EQUITY

 

 

 

Current liabilities

 

 

 

Short-term debt

 

75

 

Current portion of long-term debt

 

16

 

Trade and other payables

 

353

 

Other current liabilities

 

34

 

Total current liabilities

 

478

 

Noncurrent liabilities

 

 

 

Long-term debt

 

662

 

Employee benefit obligations

 

826

 

Other long-term liabilities

 

163

 

Total noncurrent liabilities

 

1,651

 

Total liabilities

 

2,129

 

Net deficit

$

(187

)

 

A Tax Matters Agreement between Ashland and Valvoline Inc. governs the rights and obligations after the separation regarding certain income taxes and other taxes, including certain tax liabilities and benefits, attributes, returns and contests.

Discontinued Operations Assessment

Valvoline met the criteria to qualify as a discontinued operation and accordingly, its operating results and cash flows for the three and nine months ended June 30, 2017 have been classified as discontinued operations within the Condensed Consolidated Financial Statements.  See Note D for more information.

Costs of transaction

Ashland recognized separation costs of $1 million and $28 million for the three months ended June 30, 2018 and 2017, respectively, and $9 million and $82 million for the nine months ended June 30, 2018 and 2017, respectively.  Of these amounts, $13 million of separation costs directly related to Valvoline and were included within the discontinued operations caption of the Statement of Consolidated Comprehensive Income (Loss) for the nine months ended June 30, 2017, respectively.  Otherwise, separation costs are recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss).

 

9


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE C – ACQUISITIONS AND DIVESTITURES

Pharmachem

Background

On May 17, 2017, Ashland completed its acquisition of the stock of Pharmachem Laboratories, Inc. (Pharmachem), a leading provider of quality ingredients to the global health and wellness industries and high-value differentiated products to fragrance and flavor houses.  At the acquisition date, Pharmachem had approximately $300 million in annual revenues and 14 manufacturing facilities located in the United States and Mexico.  New Jersey-based Pharmachem develops, manufactures and supplies custom and branded nutritional and fragrance products.  Ashland has included Pharmachem within the Specialty Ingredients reportable segment.  

Purchase price allocation

The acquisition was recorded by Ashland using the purchase method of accounting in accordance with applicable U.S. GAAP whereby the total purchase price was allocated to tangible and intangible assets and liabilities acquired based on respective fair values.  Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.  The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition.  None of the goodwill is expected to be deductible for income tax purposes.

The all-cash purchase price of Pharmachem was $680 million which included working capital adjustments of approximately $20 million.  The following table summarizes the values of the assets acquired and liabilities assumed at the date of acquisition.

 

 

 

At

 

 

 

May 17, 2017

 

Purchase price allocation (in millions)

 

As Adjusted

 

Assets:

 

 

 

 

Accounts receivable

 

$

52

 

Inventory

 

 

74

 

Other current assets

 

 

4

 

Intangible assets

 

 

330

 

Goodwill

 

 

290

 

Property, plant and equipment

 

 

94

 

Other noncurrent assets

 

 

20

 

Liabilities:

 

 

 

 

Accounts payable

 

 

(33

)

Deferred tax - net

 

 

(137

)

Other noncurrent liabilities

 

 

(14

)

Total purchase price

 

$

680

 

 

As of June 30, 2018, the purchase price allocation for the acquisition was finalized.  During the nine months ended June 30, 2018, there were subsequent adjustments of $3 million to property, plant and equipment, $1 million to accounts payable and $1 million to deferred tax liabilities.  The combined impact of these adjustments resulted in an increase to goodwill of $3 million. 

Intangible assets identified

The purchase price allocation included $330 million of certain definite-lived intangible assets which are being amortized over the estimated useful life in proportion to the economic benefits consumed.  The determination of the useful lives is based upon various industry studies, historical acquisition experience,

10


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

economic factors, and future cash flows of the combined company.  In addition, Ashland reviewed certain technological trends and considered the relative stability in the current Pharmachem customer base.

The following details the total intangible assets identified as of May 17, 2017.

 

 

 

 

 

 

 

Weighted-average

amortization period

Intangible asset type (in millions)

 

Value

 

 

(years)

Trademarks and trade names

 

$

26

 

 

15

Intellectual property

 

 

68

 

 

22

Customer and supplier relationships

 

 

236

 

 

20

Total

 

$

330

 

 

 

 

Vornia Limited

In January 2018, Ashland completed the acquisition of Vornia Limited for $12 million, of which $1 million will be paid in future periods.  Vornia Limited’s principal activity is the design, development and fabrication of customized biomaterial solutions.  The purchase price allocation primarily included $8 million of intellectual property and $4 million of goodwill and has been included within the Specialty Ingredients reportable segment.

Specialty Ingredients Joint Venture

During September 2016, Ashland entered into a definitive sale agreement to sell its ownership interest in a Specialty Ingredients joint venture in China, which primarily served the construction end market.  Ashland recognized a loss of $12 million before tax in 2016 to recognize the assets at fair value less cost to sell, using Level 2 nonrecurring fair value measurements.  

During June 2017, Ashland completed the transfer of its ownership interest in the joint venture and recognized an additional loss of $4 million during the three and nine months ended June 30, 2017 primarily related to a license fee and tax adjustments. The loss was reported within the net loss on acquisitions and divestitures caption within the Statement of Consolidated Comprehensive Income (Loss).  

Ashland determined this transaction did not qualify for discontinued operations treatment since it did not represent a strategic shift that had or will have a major effect on Ashland’s operations and financial results.

Specialty Ingredients Facility

During the three months ended June 30, 2017, Ashland committed to a plan to reorganize certain operations within the Specialty Ingredients reportable segment resulting in the closure of a manufacturing facility that was previously operational.  As a result of this closure, the remaining value for primarily machinery and equipment related to this facility was written off, which resulted in an $11 million charge for these assets as well as an additional $2 million reserve for employee costs associated with the facility closure during the three and nine months ended June 30, 2017. 

During the three months ended June 30, 2018, Ashland was in the process of finalizing the sale of the facility.  As a result, Ashland recognized a loss of $2 million before tax to recognize the building and land at fair value less cost to sell, using Level 2 nonrecurring fair value measurements.  The loss was reported within the net loss on acquisitions and divestitures caption within the Statement of Consolidated Comprehensive Income (Loss) for the three and nine months ended June 30, 2018.    

 

 

NOTE D – DISCONTINUED OPERATIONS

In previous periods, Ashland has divested certain businesses that have qualified as discontinued operations.  The operating results from these divested businesses and subsequent adjustments related to ongoing assessments of certain retained liabilities and tax items have been recorded within the discontinued operations caption in the Statements of Consolidated Comprehensive Income (Loss) for all periods presented and are discussed further within this note.

11


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

As previously discussed in Notes A and B, Ashland completed the distribution of its remaining 170 million shares of common stock of Valvoline Inc. on May 12, 2017.  Ashland determined that the Valvoline separation qualified as a discontinued operation, in accordance with U.S. GAAP, since it represents a strategic shift for Ashland and has a major effect on Ashland's operations and financial results.  Accordingly, Valvoline's operating results and cash flows for the three and nine months ended June 30, 2017 have been classified as discontinued operations within the Condensed Consolidated Financial Statements.  The activity during the three and nine months ended June 30, 2018 generally represents subsequent adjustments that were made in conjunction with the Tax Matters Agreement.

Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos.  Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (Riley), a former subsidiary of Ashland, which qualified as a discontinued operation, and from the 2009 acquisition of Hercules LLC (formerly Hercules Incorporated), a wholly-owned subsidiary of Ashland.  Adjustments to the recorded litigation reserves and related insurance receivables are recorded within discontinued operations.  See Note K for more information related to the adjustments on asbestos liabilities and receivables.  

During 2011, Ashland completed the sale of substantially all of the assets and certain liabilities of its global distribution business, which previously comprised the Ashland Distribution (Distribution) reportable segment. Ashland determined that this sale qualified as a discontinued operation, in accordance with U.S. GAAP, since Ashland does not have significant continuing involvement in the Distribution business. Ashland has made subsequent adjustments to the discontinued operations caption related to the sale.

On July 31, 2014, Ashland completed the sale of the Ashland Water Technologies (Water Technologies) business.  Ashland made subsequent post-closing adjustments to the discontinued operations caption as defined by the definitive agreement during the three and nine months ended June 30, 2017.

Components of amounts reflected in the Statements of Consolidated Comprehensive Income (Loss) related to discontinued operations are presented in the following table for the three and nine months ended June 30, 2018 and 2017.  

 

Three months ended

 

 

Nine months ended

 

 

June 30

 

 

June 30

 

(In millions)

2018

 

 

2017

 

 

2018

 

 

2017

 

Income (loss) from discontinued operations (net of tax)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valvoline

$

(7

)

 

$

12

 

 

$

1

 

 

$

161

 

Asbestos-related litigation

 

9

 

 

 

(25

)

 

 

12

 

 

 

(25

)

Distribution

 

(2

)

 

 

 

 

 

(3

)

 

 

 

Water Technologies

 

 

 

 

(1

)

 

 

(1

)

 

 

2

 

 

$

 

 

$

(14

)

 

$

9

 

 

$

138

 

 

12


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table presents a reconciliation of the historically reported captions within Ashland's Statements of Consolidated Income (Loss) for the income from discontinued operations attributable to Valvoline for the three and nine months ended June 30, 2017.

 

Three

 

 

Nine

 

 

months ended

 

 

months ended

 

(In millions)

June 30, 2017

 

 

June 30, 2017

 

Income (loss) from discontinued operations attributable to Valvoline

 

 

 

 

 

 

 

Sales

$

234

 

 

$

1,237

 

Cost of sales

 

(148

)

 

 

(750

)

Selling, general and administrative expense

 

(50

)

 

 

(222

)

Research and development expense

 

(1

)

 

 

(8

)

Equity and other income

 

3

 

 

 

17

 

Pretax operating income of discontinued operations

 

38

 

 

 

274

 

Net interest and other financing expense

 

(5

)

 

 

(22

)

Pretax income of discontinued operations

 

33

 

 

 

252

 

Income tax expense

 

(21

)

 

 

(91

)

Income from discontinued operations

$

12

 

 

$

161

 

 

NOTE E – FAIR VALUE MEASUREMENTS

As required by U.S. GAAP, Ashland uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value and related disclosures for instruments measured at fair value.  Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement.  The three levels within the fair value hierarchy are described as follows.

Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date.  Unobservable inputs reflect Ashland’s own assumptions about what market participants would use to price the asset or liability.  The inputs are developed based on the best information available in the circumstances, which might include Ashland’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

13


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  Assets and liabilities that are measured using significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.  For all other assets and liabilities for which unobservable inputs are used (Level 3), fair value is derived using fair value models, such as a discounted cash flow model or other standard pricing models that Ashland deems reasonable.

The following table summarizes financial instruments subject to recurring fair value measurements as of June 30, 2018.

 

Carrying

 

 

Total

fair

 

 

Quoted prices

in active

markets for

identical

assets

 

 

Significant

other

observable

inputs

 

 

Significant

unobservable

inputs

 

(In millions)

value

 

 

value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

182

 

 

$

182

 

 

$

182

 

 

$

 

 

$

 

Restricted investments (a)

 

334

 

 

 

334

 

 

 

334