Valvoline Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018 unless otherwise noted. Valvoline markets automotive products and services through Quick Lubes, Core North America and International segments.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Sales | $607 million | $557 million | +9% |
| Gross profit / margin | $211 million / 34.8% | $183 million / 32.9% | +$28 million; +1.9 percentage points |
| Operating income / margin | $104 million / 17.1% | $87 million / 15.6% | +$17 million |
| Net income | $73 million | $53 million | +38% |
| Diluted EPS | $0.39 | $0.28 | +39% |
| Adjusted EBITDA (non-GAAP) | $120 million | $101 million | +$19 million |
| Operating cash flow | $59 million | $85 million | -$26 million |
| Free cash flow (non-GAAP) | $31 million | $58 million | -$27 million |
Sales growth reflected $30 million from mix and price, $18 million from volume, $4 million from acquisitions, partly offset by $2 million of currency impact. Lubricant volume increased 3% to 43.4 million gallons. Gross margin improvement was attributed mainly to favorable product and channel mix, cost-reduction actions and a more stable raw-material cost environment.
Segments and material changes
- Quick Lubes: Sales rose 15% to $218 million; operating income was unchanged at $38 million. System-wide same-store sales grew 8.3%, and the system added 106 net stores year over year. Higher labor costs, new-store ramp-up costs and increased corporate cost allocations weighed on margins and earnings.
- Core North America: Sales rose 7% to $248 million; operating income increased 48% to $46 million. Improved retail branded volume, favorable mix and cost reductions more than offset lower lubricant volumes, particularly in the installer channel.
- International: Sales rose 4% to $141 million; operating income increased 11% to $20 million. Volume growth, including contribution from an Eastern European acquisition and stronger performance in certain Asia-Pacific markets, supported results; currency was a modest offset.
SG&A increased $12 million to $117 million, principally due to incentive and deferred compensation expense and investment in Quick Lubes and International. Net pension and postretirement income improved to $9 million from $2 million, while net interest expense declined $1 million to $16 million. The effective tax rate was 24.7%, versus 26.4%.
Cash, debt and liquidity
- At December 31, 2019, cash and cash equivalents were $162 million; total debt was $1.342 billion. Approximately 57% of borrowings carried fixed rates. The company reported $596 million of remaining capacity under its revolving credit and receivables facilities and compliance with debt covenants.
- Operating cash flow fell to $59 million, primarily due to working-capital changes and the prior-year period’s $28 million receivables sale, partly offset by higher earnings. Capital expenditures were $28 million; acquisitions used $6 million. Dividends paid were $21 million.
- Management stated that available cash, operating cash generation and financing were sufficient for the next 12 months’ expected requirements. The receivables facility was amended after quarter-end to extend maturity to November 19, 2021, with capacity and other terms substantially unchanged.
- Valvoline adopted the new lease standard on October 1, 2019, recognizing $253 million in operating lease assets and $224 million in noncurrent operating lease liabilities at quarter-end. Adoption materially affected the balance sheet but did not materially affect earnings or cash flows, or debt-covenant compliance.
Outlook, commentary and risks
The company’s fiscal 2020 priorities include expanding Quick Lubes, strengthening Core North America, growing International markets and developing services and products for future transportation needs. Management said its restructuring program remained on track and expected annualized pretax savings of approximately $40 million to $50 million, with full savings expected by the end of fiscal 2020; some savings may be reinvested. It did not provide formal consolidated earnings or revenue guidance in the supplied filing text.
Management cited exposure to general economic conditions, competition, working-capital needs and the ability to generate cash and comply with credit terms. Ordinary-course legal matters were not considered reasonably likely to have a material adverse effect; some matters were not estimable and had no accrual. The company reported no material changes to previously disclosed risk factors or market risks. The board declared a $0.113-per-share dividend payable March 16, 2020.
Most important facts for investors to verify
- Whether Quick Lubes same-store growth and new-store expansion can translate into improved segment margins after higher labor and ramp-up costs.
- Whether Core North America’s mix-driven margin gains are sustainable given lower installer-channel volumes and timing effects.
- Whether operating cash flow and free cash flow recover from the year-over-year decline as working capital normalizes.
- Progress toward the $40 million–$50 million restructuring savings target, including the portion reinvested in the business.
- Debt, variable-rate exposure and liquidity capacity, including the terms and availability of the amended receivables facility.
- The effect of lease obligations, pending legal matters and other commitments on future cash needs; non-GAAP adjusted EBITDA and free cash flow should be assessed alongside GAAP results.