ash-10q_20190331.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 March 31, 2019

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 every Interactive Data File required to be submitted 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 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

 

 

 

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 March 31, 2019, there were 62,712,232 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

 

 

Six months ended

 

 

March 31

 

 

March 31

 

(In millions except per share data - unaudited)

2019

 

 

2018

 

 

2019

 

 

2018

 

Sales

$

667

 

 

$

672

 

 

$

1,243

 

 

$

1,253

 

Cost of sales

 

469

 

 

 

449

 

 

 

893

 

 

 

851

 

Gross profit

 

198

 

 

 

223

 

 

 

350

 

 

 

402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

136

 

 

 

146

 

 

 

279

 

 

 

300

 

Research and development expense

 

17

 

 

 

18

 

 

 

34

 

 

 

37

 

Equity and other income (loss)

 

(1

)

 

 

4

 

 

 

 

 

 

2

 

Operating income (loss)

 

44

 

 

 

63

 

 

 

37

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest and other expense (income)

 

(3

)

 

 

24

 

 

 

52

 

 

 

49

 

Other net periodic benefit income (loss)

 

(1

)

 

 

1

 

 

 

17

 

 

 

1

 

Net income (loss) on divestitures

 

 

 

 

 

 

 

(3

)

 

 

(1

)

Income (loss) from continuing operations before income taxes

 

46

 

 

 

40

 

 

 

(1

)

 

 

18

 

Income tax expense (benefit)

 

1

 

 

 

(2

)

 

 

25

 

 

 

8

 

Income (loss) from continuing operations

 

45

 

 

 

42

 

 

 

(26

)

 

 

10

 

Income from discontinued operations (net of income taxes)

 

31

 

 

 

31

 

 

 

54

 

 

 

59

 

Net income (loss)

$

76

 

 

$

73

 

 

$

28

 

 

$

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share - Note L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.72

 

 

$

0.66

 

 

$

(0.41

)

 

$

0.15

 

Income from discontinued operations

 

0.49

 

 

 

0.51

 

 

 

0.86

 

 

 

0.95

 

Net income (loss)

$

1.21

 

 

$

1.17

 

 

$

0.45

 

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share - Note L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.71

 

 

$

0.65

 

 

$

(0.41

)

 

$

0.15

 

Income from discontinued operations

 

0.48

 

 

 

0.50

 

 

 

0.86

 

 

 

0.93

 

Net income (loss)

$

1.19

 

 

$

1.15

 

 

$

0.45

 

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

76

 

 

$

73

 

 

$

28

 

 

$

69

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized translation gain (loss)

 

(9

)

 

 

55

 

 

 

(40

)

 

 

58

 

Pension and postretirement obligation adjustment

 

 

 

 

 

 

 

(6

)

 

 

 

Net change in investment securities

 

 

 

 

(6

)

 

 

 

 

 

2

 

Other comprehensive income (loss)

 

(9

)

 

 

49

 

 

 

(46

)

 

 

60

 

Comprehensive income (loss)

$

67

 

 

$

122

 

 

$

(18

)

 

$

129

 

 

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2


 

 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

(In millions - unaudited)

 

March 31, 2019

 

 

September 30, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

164

 

 

$

294

 

Accounts receivable (a)

 

 

522

 

 

 

522

 

Inventories - Note F

 

 

599

 

 

 

596

 

Other assets

 

 

63

 

 

 

60

 

Held for sale - Note B

 

 

739

 

 

 

240

 

Total current assets

 

 

2,087

 

 

 

1,712

 

Noncurrent assets

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Cost

 

 

3,167

 

 

 

3,172

 

Accumulated depreciation

 

 

1,580

 

 

 

1,526

 

Net property, plant and equipment

 

 

1,587

 

 

 

1,646

 

Goodwill - Note G

 

 

2,279

 

 

 

2,304

 

Intangibles - Note G

 

 

1,135

 

 

 

1,185

 

Restricted investments - Note E

 

 

296

 

 

 

312

 

Asbestos insurance receivable - Note K

 

 

175

 

 

 

179

 

Deferred income taxes

 

 

28

 

 

 

28

 

Other assets

 

 

411

 

 

 

416

 

Held for sale - Note B

 

 

 

 

 

477

 

Total noncurrent assets

 

 

5,911

 

 

 

6,547

 

Total assets

 

$

7,998

 

 

$

8,259

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Short-term debt - Note H

 

$

261

 

 

$

254

 

Trade and other payables

 

 

280

 

 

 

331

 

Accrued expenses and other liabilities

 

 

232

 

 

 

328

 

Held for sale - Note B

 

 

147

 

 

 

163

 

Total current liabilities

 

 

920

 

 

 

1,076

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

Long-term debt - Note H

 

 

2,275

 

 

 

2,275

 

Asbestos litigation reserve - Note K

 

 

587

 

 

 

612

 

Deferred income taxes

 

 

283

 

 

 

286

 

Employee benefit obligations - Note J

 

 

145

 

 

 

156

 

Other liabilities

 

 

426

 

 

 

422

 

Held for sale - Note B

 

 

 

 

 

26

 

Total noncurrent liabilities

 

 

3,716

 

 

 

3,777

 

Commitments and contingencies - Note K

 

 

 

 

 

 

 

 

Stockholders’ equity - Note M

 

 

3,362

 

 

 

3,406

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

7,998

 

 

$

8,259

 

 

 

 

 

 

 

 

 

 

(a)

Accounts receivable includes an allowance for doubtful accounts of $3 million at both March 31, 2019 and September 30, 2018.

 

 

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, 2018

 

$

1

 

 

$

946

 

 

$

2,750

 

 

$

(291

)

 

$

3,406

 

Adoption of new accounting pronouncements (b)

 

 

 

 

 

 

 

 

 

 

34

 

 

 

(34

)

 

 

 

Total comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

 

28

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46

)

 

 

(46

)

Regular dividends, $0.50 per common share

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

 

(32

)

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

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

6

 

BALANCE AT MARCH 31, 2019

 

$

1

 

 

$

952

 

 

$

2,780

 

 

$

(371

)

 

$

3,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

At March 31, 2019 and September 30, 2018, the after-tax accumulated other comprehensive loss attributable to Ashland of $371 million and $291 million, respectively, was each comprised of net unrealized translation losses of $368 million and $328 million, respectively, net unrealized gains on investment securities of zero and $34 million, respectively, and unrecognized prior service costs as a result of certain employee benefit plan amendments of $3 million and unrecognized prior services credits of $3 million, respectively.

 

(b)

Represents the cumulative-effect adjustment related to the adoption of the new guidance related to the accounting for equity securities and the tax effects of intercompany transfers during fiscal 2019. See Note A for more information.

 

(c)

Common shares issued were 234,352 for the six months ended March 31, 2019.

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

4


 

ASHLAND GLOBAL HOLDINGS INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS

 

 

 

Six months ended

 

 

 

March 31

 

(In millions - unaudited)

 

2019

 

 

2018

 

CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES FROM

 

 

 

 

 

 

 

 

CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Net income (loss)

 

$

28

 

 

$

69

 

Income from discontinued operations (net of income taxes)

 

 

(54

)

 

 

(59

)

Adjustments to reconcile income from continuing operations to

 

 

 

 

 

 

 

 

cash flows from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

163

 

 

 

142

 

Original issue discount and debt issuance costs amortization

 

 

4

 

 

 

3

 

Deferred income taxes

 

 

2

 

 

 

4

 

Distributions from affiliates

 

 

 

 

 

1

 

Stock based compensation expense

 

 

13

 

 

 

13

 

Loss (income) from restricted investments

 

 

(2

)

 

 

(8

)

Excess tax benefit on stock based compensation

 

 

2

 

 

 

2

 

Net (income) loss on divestitures

 

 

3

 

 

 

1

 

Impairments

 

 

5

 

 

 

 

Pension contributions

 

 

(3

)

 

 

(7

)

Gain on pension and other postretirement plan remeasurements

 

 

(18

)

 

 

 

Change in operating assets and liabilities (a)

 

 

(137

)

 

 

(164

)

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

 

 

6

 

 

 

(3

)

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES FROM

 

 

 

 

 

 

 

 

CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(70

)

 

 

(52

)

Proceeds from disposal of property, plant and equipment

 

 

4

 

 

 

1

 

Purchase of operations

 

 

(1

)

 

 

(11

)

Proceeds from sales of operations

 

 

 

 

 

1

 

Life insurance payments

 

 

 

 

 

(37

)

Net purchase of funds restricted for specific transactions

 

 

(2

)

 

 

(8

)

Reimbursement from restricted investments

 

 

20

 

 

 

17

 

Proceeds from sales of securities

 

 

156

 

 

 

17

 

Purchase of securities

 

 

(156

)

 

 

(17

)

Proceeds from the settlement of derivative instruments

 

 

2

 

 

 

 

Payments for the settlement of derivative instruments

 

 

(2

)

 

 

(3

)

Total cash flows used by investing activities from continuing operations

 

 

(49

)

 

 

(92

)

CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

FROM CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(8

)

 

 

(3

)

Proceeds from (repayment of) short-term debt

 

 

11

 

 

 

(181

)

Cash dividends paid

 

 

(31

)

 

 

(28

)

Stock based compensation employee withholding taxes paid in cash

 

 

(8

)

 

 

(8

)

Total cash flows used by financing activities from continuing operations

 

 

(36

)

 

 

(220

)

CASH PROVIDED (USED) BY CONTINUING OPERATIONS

 

 

(79

)

 

 

(315

)

Cash used by discontinued operations

 

 

 

 

 

 

 

 

Operating cash flows

 

 

(41

)

 

 

(21

)

Investing cash flows

 

 

(8

)

 

 

(8

)

Total cash used by discontinued operations

 

 

(49

)

 

 

(29

)

Effect of currency exchange rate changes on cash and cash equivalents

 

 

(2

)

 

 

3

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(130

)

 

 

(341

)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

 

 

294

 

 

 

566

 

CASH AND CASH EQUIVALENTS - END OF PERIOD

 

$

164

 

 

$

225

 

 

 

 

 

 

 

 

 

 

(a)

Excludes changes resulting from operations acquired, sold or held for sale.

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 Global Holdings Inc.’s (Ashland or the Company) Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Results of operations for the period ended March 31, 2019 are not necessarily indicative of the expected results for the remaining quarters in the fiscal year.

On November 15, 2018, Ashland announced that it had signed a definitive agreement to sell substantially all of the assets and liabilities of its Composites segment and Intermediates and Solvents facility in Marl, Germany (Marl facility). This expected divestiture represents a strategic shift in Ashland's business and, in accordance with U.S. GAAP, qualified as a discontinued operation. As a result, the operating results and cash flows related to Composites and the Marl facility have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income (Loss) and Statements of Condensed Consolidated Cash Flows. The assets and liabilities that are to be sold have met the requirements to be classified within the Condensed Consolidated Balance Sheets under a held for sale designation. See Notes B and C for additional information on this expected divestiture.

As a result of classifying the Composites reporting segment as a discontinued operation, Ashland is now comprised of two reportable segments: Specialty Ingredients and Intermediates and Solvents. The financial information reported for Intermediates and Solvents excludes the activity from the Marl facility due to the expected divestiture.

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 pronouncements

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, 2018. The following standards relevant to Ashland were either issued or adopted in the current period or will become effective in a subsequent period.

6


 

Revenue recognition

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 and subsequent amendments to it superseded most current revenue recognition guidance, in an effort to converge the revenue recognition principles within U.S. GAAP. This new guidance required entities to disclose certain quantitative and qualitative information regarding the nature, amount, timing and uncertainty of qualifying revenue and cash flows arising from contracts with customers. Entities had the option of using a full retrospective or a modified retrospective approach to adopt the new guidance. This guidance became effective for Ashland on October 1, 2018.

Ashland formed an implementation team that evaluated 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 would have on the organization. The assessment process consisted of categorizing Ashland’s revenue streams and reviewing the current internal accounting policies and practices to determine potential differences that could result from applying the requirements of the new standard to revenue contracts. Additional discussions and meetings with each revenue stream team occurred to solicit input, identify potential impacts and appropriate changes to Ashland’s business processes, systems and controls to support the revenue recognition and disclosure requirements under the new standard.

Ashland elected to adopt this standard using the modified retrospective approach and determined that the overall impact was not material to the Condensed Consolidated Financial Statements. As a result, no cumulative-effect adjustment was made to retained earnings in the Condensed Consolidated Balance Sheets. Further, there has been no significant change to the manner and timing of recognizing revenue. However, there are significant additional disclosures within the Notes to Condensed Consolidated Financial Statements. ASC 606 requires disclosure of disaggregated revenue into categories that depict the nature of how Ashland's revenue and cash flows are affected by economic factors. Additionally, Ashland is required to disclose additional information related to its revenue recognition policy. See Note O for these additional disclosures.

Leases

In February 2016, the FASB issued new accounting guidance related to lease transactions. The main objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the right to use assets and obligations created by leases and to disclose key information about leasing arrangements. The presentation of the Statements of Consolidated Comprehensive Income (Loss) and the Statements of Condensed Consolidated Cash Flows is largely unchanged under this guidance. This guidance retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The guidance will become effective for Ashland on October 1, 2019 and it will have a significant effect on Ashland’s Condensed Consolidated Balance Sheet and disclosures.

In July 2018, the FASB amended this guidance to give entities the option to apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Ashland currently intends to utilize this transition method upon adopting the guidance.

Ashland has formed an implementation team and is quantifying the impact that this guidance will have within its Condensed Consolidated Financial Statements.

7


 

Other accounting pronouncements

In January 2016, the FASB issued accounting guidance related to the recognition and measurement as well as the presentation and disclosures for certain financial instruments. Most notably, the guidance requires entities to measure equity investments at fair value and to recognize any changes in fair value in net income rather than accumulated other comprehensive income (AOCI). The guidance became effective for Ashland on October 1, 2018 and resulted in Ashland recording a cumulative-effect adjustment to reclassify net after-tax unrealized gains of $34 million on its equity securities from AOCI to retained earnings. In the current period, the adoption of this guidance resulted in a significant impact to net income as Ashland recognized investment gains of $27 million for the three months ended March 31, 2019 and investment losses of $3 million for the six months ended March 31, 2019 within the net interest and other expense (income) caption on the Statement of Consolidated Comprehensive Income (Loss). The impact of this new guidance could continue to have a material impact on Ashland’s Statements of Consolidated Comprehensive Income (Loss) in prospective periods depending on the fluctuations of unrealized gains and losses within the investment securities portfolio. For current and future periods, the changes in fair value of the equity securities will no longer be classified within other comprehensive income under the new guidance. For further information on Ashland’s equity securities, see Note E.

In October 2016, the FASB issued new accounting guidance which requires entities to recognize the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs.  This guidance eliminates the exception under previous U.S. GAAP that the income tax effects of all intercompany transfers of assets other than inventory be deferred until the assets are sold to a third party or otherwise recovered through use.  This guidance became effective for Ashland on October 1, 2018 and was applied using a modified retrospective approach. Consequently, Ashland recorded a cumulative-effect adjustment to reclassify less than $1 million from other current assets and deferred taxes to retained earnings.

 

NOTE B – DIVESTITURES

Composites and Marl facility

On November 15, 2018, Ashland announced that it had signed a definitive agreement to sell its Composites segment and Intermediates and Solvents Marl facility to INEOS Enterprises in a transaction valued at $1.1 billion. Ashland will retain the remaining Intermediates and Solvents facility in Lima, Ohio primarily for its own internal business use. Ashland currently expects net proceeds from the sale to total approximately $1.0 billion and anticipates that the proceeds will be primarily used to reduce outstanding debt and other corporate purposes.

The transaction is expected to close by late summer, contingent on certain customary regulatory approvals, standard closing conditions and completion of required employee information and consultation processes. Upon the closing of this transaction, Ashland currently expects to recognize a gain within the Statements of Consolidated Comprehensive Income (Loss).

Since this transaction represents a strategic shift in Ashland’s business and had a major effect on Ashland’s operations and financial results, the operating results and cash flows related to Composites and the Marl facility have been reflected as discontinued operations in the Statements of Consolidated Comprehensive Income (Loss) and Statements of Condensed Consolidated Cash Flows. See Note C for the results of operations for Composites and the Marl facility for all periods presented.

Certain indirect corporate costs included within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss) that were previously allocated to the Composites segment and Marl facility do not qualify for classification within discontinued operations and are now reported as selling, general and administrative expense within continuing operations on a consolidated basis and within the Unallocated and other segment. These costs were $12 million during both the three months ended March 31, 2019 and 2018, and $23 million during both the six months ended March 31, 2019 and 2018. Ashland is currently implementing plans to eliminate these costs as part of the global restructuring program.

8


 

Subsequent to the completion of the sale, Ashland expects to provide certain transition services to INEOS Enterprises for a fee. While the transition services are expected to vary in duration depending upon the type of service provided, Ashland expects to reduce costs as the transition services are completed.

 

Other corporate assets

Ashland is currently in the process of pursuing options to divest several corporate assets, primarily related to land and buildings, that are expected to close within the next 12 months. The net property, plant and equipment value related to these sites was $6 million at March 31, 2019 and $9 million at September 30, 2018. During the three months ended March 31, 2019, a $5 million impairment charge was recorded within the selling, general and administrative expense caption of the Statement of Consolidated Comprehensive Income (Loss) for one of these corporate assets.

 

 

Held for sale classification

The assets and liabilities of Composites and the Marl facility along with other corporate asset divestitures for current and prior periods have been reflected as assets and liabilities held for sale. As a result, in accordance with U.S. GAAP standards, depreciation and amortization are no longer being recorded within the Statements of Consolidated Comprehensive Income (Loss) and the Condensed Consolidated Balance Sheets. These assets and liabilities are comprised of the following components:

 

 

March 31

 

 

September 30

 

(In millions)

2019

 

 

2018

 

Accounts receivable, net (a)

$

173

 

 

$

159

 

Inventories

 

67

 

 

 

67

 

Net property, plant and equipment

 

254

 

 

 

 

Goodwill

 

143

 

 

 

 

Intangibles

 

38

 

 

 

 

Deferred income taxes

 

7

 

 

 

 

Other assets

 

57

 

 

 

14

 

Current assets held for sale

$

739

 

 

$

240

 

 

 

 

 

 

 

 

 

Net property, plant and equipment

$

 

 

$

254

 

Goodwill

 

 

 

 

144

 

Intangibles

 

 

 

 

40

 

Deferred income taxes

 

 

 

 

7

 

Other assets

 

 

 

 

32

 

Noncurrent assets held for sale

$

 

 

$

477

 

 

 

 

 

 

 

 

 

Trade and other payables

$

112

 

 

$

152

 

Employee benefit obligations

 

22

 

 

 

 

Accrued expenses and other liabilities

 

10

 

 

 

11

 

Other liabilities

 

3

 

 

 

 

Current liabilities held for sale

$

147

 

 

$

163

 

 

 

 

 

 

 

 

 

Employee benefit obligations

 

 

 

 

23

 

Other liabilities

 

 

 

 

3

 

Noncurrent liabilities held for sale

$

 

 

$

26

 

 

 

 

 

 

 

 

 

 

(a)

Accounts receivable included an allowance for doubtful accounts of $3 million at both March 31, 2019 and September 30, 2018.

 

 

NOTE C– 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

9


 

operations caption in the Statements of Consolidated Comprehensive Income (Loss) for all periods presented and are discussed further within this note.

As previously described in Note B, Ashland announced that it had signed a definitive agreement on November 15, 2018 to sell its Composites segment and Intermediates and Solvents Marl facility. Ashland determined that this expected divestiture qualified as a discontinued operation, in accordance with U.S. GAAP, since it represents a strategic shift for Ashland and had a major effect on Ashland's operations and financial results. Accordingly, the operating results and cash flows for Composites and the Marl facility have been classified as discontinued operations within the Condensed Consolidated Financial Statements for all periods presented.

Ashland completed the distribution of its remaining 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 represented a strategic shift for Ashland and had a major effect on Ashland's operations and financial results. Ashland has made subsequent tax adjustments to the discontinued operations caption related to this transaction.

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 six months ended March 31, 2019 and 2018.

 

Three months ended

 

 

Six months ended

 

 

March 31

 

 

March 31

 

(In millions)

2019

 

 

2018

 

 

2019

 

 

2018

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Composites/Marl facility

$

28

 

 

$

24

 

 

$

53

 

 

$

49

 

Valvoline

 

1

 

 

 

4

 

 

 

1

 

 

 

7

 

Asbestos-related litigation

 

 

 

 

3

 

 

 

 

 

 

3

 

Water Technologies

 

2

 

 

 

 

 

 

1

 

 

 

 

Distribution

 

 

 

 

 

 

 

(1

)

 

 

 

 

$

31

 

 

$

31

 

 

$

54

 

 

$

59

 

The following table presents a reconciliation of the captions within Ashland's Statements of Consolidated Comprehensive Income (Loss) for the income (loss) from discontinued operations attributable to Composites and the Marl facility for the three and six months ended March 31, 2019 and 2018. Interest expense was allocated to discontinued operations based on Ashland’s mandatory debt prepayments upon the disposition of Composites and the Marl facility.

 

Three months ended

 

 

Six months ended

 

 

March 31

 

 

March 31

 

(In millions)

2019

 

 

2018

 

 

2019

 

 

2018

 

Income (loss) from discontinued operations attributable to Composites/Marl facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

$

284

 

 

$

302

 

 

$

559

 

 

$

563

 

Cost of sales

 

(217

)

 

 

(250

)

 

 

(434

)

 

 

(461

)

Selling, general and administrative expense

 

(19

)

 

 

(17

)

 

 

(41

)

 

 

(34

)

Research and development expense

 

(3

)

 

 

(3

)

 

 

(6

)

 

 

(5

)

Equity and other income (expense)

 

 

 

 

(1

)

 

 

3

 

 

 

2

 

Pretax operating income of discontinued operations

 

45

 

 

 

31

 

 

 

81

 

 

 

65

 

Net interest and other (expense) income

 

(6

)

 

 

(5

)

 

 

(12

)

 

 

(9

)

Pretax income of discontinued operations

 

39

 

 

 

26

 

 

 

69

 

 

 

56

 

Income tax expense

 

(11

)

 

 

(2

)

 

 

(16

)

 

 

(7

)

Income from discontinued operations

$

28

 

 

$

24

 

 

$

53

 

 

$

49

 

 

 

 

 

10


 

 

 

 

 

 

NOTE D – RESTRUCTURING ACTIVITIES

Ashland periodically implements company-wide restructuring programs related to acquisitions, divestitures and other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure.

Severance costs

During fiscal 2018, Ashland announced and initiated a company-wide cost reduction program as a result of ongoing strategic asset plans and activities. As part of this restructuring program, Ashland announced a voluntary severance offer (VSO) to certain qualifying employees that was formally approved during 2018. Additionally, during fiscal 2018, an involuntary program for employees was also initiated as part of the restructuring program. The VSO and involuntary programs resulted in a severance charge of $36 million during the September 2018 quarter of fiscal 2018.

During the three and six months ended March 31, 2019, these programs resulted in additional severance expense of zero and $4 million, respectively, which was primarily recorded within the selling, general and administrative expense caption of the Statement of Consolidated Comprehensive Income (Loss). As of March 31, 2019, the severance reserve for the company-wide restructuring program was $22 million.

Facility costs

Ashland incurred $1 million and $8 million of lease abandonment charges during the three and six months ended March 31, 2019, respectively, due to the exit from certain office facilities in conjunction with the company-wide cost reduction program. No charges were incurred for the three or six months ended March 31, 2018. The costs related to these reserves were recorded within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income (Loss) and are paid over the remaining lease terms.  As of March 31, 2019, the reserve for facility costs was $10 million.

The following table details at March 31, 2019, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves during the six months ended March 31, 2019. The severance and facility cost reserves were primarily recorded within accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2019.

(In millions)

Severance costs

 

 

Facility costs

 

 

Total

 

Balance as of September 30, 2018

 

36

 

 

 

7

 

 

 

43

 

Restructuring reserve

 

4

 

 

 

8

 

 

 

12

 

Utilization (cash paid)

 

(18

)

 

 

(5

)

 

 

(23

)

Balance as of March 31, 2019

$

22

 

 

$

10

 

 

 

32

 

 

Plant restructuring

During the three and six months ended March 31, 2019, Specialty Ingredients committed to a cost reduction plan within an existing manufacturing facility.  As a result, Ashland incurred restructuring charges of $20 million and $47 million for the three and six months ended March 31, 2019, respectively. These charges were recorded primarily within the cost of sales caption of the Statements of Consolidated Comprehensive Income (Loss) consisting of $38 million of accelerated depreciation and amortization, $5 million of severance and $4 million of plant closure costs during the six months ended March 31, 2019.  As of March 31, 2019, there was a restructuring reserve of $5 million related to the $5 million of severance costs and $4 million related to the $4 million of plant closure costs.  The restructuring plan is expected to be completed during fiscal 2019.

 

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,

11


 

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.

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.

12


 

The following table summarizes financial instruments subject to recurring fair value measurements as of March 31, 2019.

 

 

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