Valvoline Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended March 31, 2021. Valvoline markets automotive maintenance products and operates and franchises quick-lube service centers. All amounts are U.S. dollars.
Financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Sales | $701 million | $578 million | $1,354 million | $1,185 million |
| Gross profit | $247 million | $207 million | $475 million | $418 million |
| Gross margin | 35.2% | 35.8% | 35.1% | 35.3% |
| Operating income | $131 million | $117 million | $255 million | $221 million |
| Net income | $68 million | $63 million | $155 million | $136 million |
| Diluted EPS | $0.37 | $0.33 | $0.84 | $0.72 |
| Net margin | 9.7% | 10.9% | 11.4% | 11.5% |
Q2 sales increased 21% year over year, driven by volume and mix, pricing, acquisitions, and favorable currency. Q2 gross profit rose, but gross margin declined as rising raw-material costs and unfavorable LIFO adjustments offset mix benefits. SG&A increased, including from higher variable compensation, wages, advertising, and acquisition costs. Net interest and financing expense included a $36 million loss on extinguishment of debt.
For the six months, operating cash flow was $190 million, capital expenditures were $74 million, and management-defined free cash flow was $116 million (versus $154 million, $57 million, and $97 million, respectively, in the prior-year period). Cash and cash equivalents were $247 million at March 31, 2021, down from $760 million at September 30, 2020.
Total debt was $1.720 billion, compared with $1.962 billion at September 30, 2020. The company reported $557 million of remaining borrowing capacity under its revolving credit and trade receivables facilities, and approximately $26 million under China facilities. It said it was in compliance with debt covenants and that approximately 86% of borrowings, including swaps, had fixed rates. Working capital was $521 million, versus $994 million at fiscal year-end.
Segment performance and changes
- Quick Lubes: Q2 sales were $285 million, up 34%; operating income was $63 million, up 58%. Combined system same-store sales increased 20.2%. The system had 1,548 stores at quarter-end, including 673 company-operated locations.
- Core North America: Q2 sales were $242 million, up 2%, while operating income fell 19% to $38 million. Rising input costs, price-cost lag, and a $7 million unfavorable year-over-year LIFO impact pressured results.
- International: Q2 sales increased 36% to $174 million and operating income rose 56% to $28 million, reflecting volume growth, stronger joint-venture contributions, and currency benefits.
During the six months, Valvoline acquired 100 service-center stores for $223 million and opened 16 stores. It also issued $535 million of 3.625% notes due 2031 and used proceeds plus cash to redeem its $800 million 4.375% notes due 2025. The company repurchased over 4 million shares for $100 million and paid $46 million in dividends during the half-year.
Outlook, risks, and unusual items
- Management forecast fiscal 2021 capital expenditures of approximately $160 million to $170 million, primarily funded by operating cash flow. No specific earnings or revenue guidance is provided in the supplied filing text.
- Management said it expected sufficient liquidity for the next 12 months, while noting cash generation depends on economic conditions, competition, and other business risks.
- COVID-19 continued to affect miles driven and demand; the company said the pandemic’s future duration, severity, and business impact could not be reasonably estimated.
- Management expected near-term margin pressure as rising raw-material costs were passed through to customers.
- The company estimated a $25 million to $35 million decrease in indemnity obligations to its former parent over the next 12 months, related to statute expirations and anticipated audit settlements.
- Ordinary-course legal matters were not considered likely to have a material adverse effect based on information available. The filing added an exclusive Kentucky forum provision for specified shareholder disputes as a risk factor.
- On April 27, 2021, after quarter-end, the trade receivables facility was amended to extend maturity to April 2024 and increase remaining capacity to $87 million as of March 31, 2021.
Important facts for investors to verify
- Whether Quick Lubes’ elevated same-store sales and store expansion persist beyond pandemic-related comparisons and recent acquisitions.
- How quickly pricing offsets raw-material inflation and whether LIFO-related margin pressure continues, particularly in Core North America.
- Cash conversion, liquidity after acquisitions and debt redemption, and the company’s ability to fund planned capital expenditures while returning capital to shareholders.
- The realized effect of the 2031 notes refinancing on ongoing interest costs, leverage, and debt maturities.
- Whether COVID-19, distributor restocking, or other market conditions materially change demand, volumes, or the outlook.