Valvoline Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 31, 2020. Valvoline markets automotive and engine-maintenance products and operates quick-lube service centers through company-owned and franchised locations. The results are unaudited.
Financial performance
| Metric | Three months ended March 31, 2020 | Year-over-year | Six months ended March 31, 2020 | Year-over-year |
|---|---|---|---|---|
| Sales | $578 million | Down 2% | $1.185 billion | Up 3% |
| Gross profit | $207 million; 35.8% margin | $203 million; 34.3% margin | $418 million; 35.3% margin | $386 million; 33.6% margin |
| Operating income | $117 million; 20.2% margin | $96 million; 16.2% margin | $221 million; 18.6% margin | $183 million; 15.9% margin |
| Net income and diluted EPS | $63 million; $0.33 | Flat | $136 million; $0.72 | $116 million; $0.61 |
| Adjusted EBITDA (non-GAAP) | $134 million | $122 million | $254 million | $223 million |
Quarterly sales fell mainly on a 6% decline in lubricant gallons sold, partly offset by improved product and channel mix. Six-month sales benefited from mix, pricing and acquisitions, despite lower volumes and unfavorable currency effects. Margin gains reflected cost savings, lower raw-material costs and mix improvements. Six-month diluted EPS rose about 18% year over year.
Cash flow, liquidity and debt
- Six-month operating cash flow was $154 million, versus $134 million; capital expenditures were $57 million, versus $48 million. Company-defined free cash flow was $97 million, versus $86 million.
- Cash and cash equivalents were $774 million at March 31, 2020, compared with $159 million at September 30, 2019. Including restricted cash, the cash-flow statement reports $775 million.
- Total debt was $2.003 billion, up from $1.342 billion at September 30, 2019. Approximately half of borrowings carried fixed rates. The company reported compliance with debt covenants.
- Valvoline issued $600 million of 4.25% notes due 2030, redeemed $375 million of 5.50% notes due 2024, and prepaid $100 million of term debt. The refinancing generated a $19 million debt-extinguishment loss.
- The company drew $450 million on its revolver and $90 million under its receivables facility as precautionary liquidity measures. At March 31, remaining borrowing capacity was $46 million; an April amendment increased it to $103 million. Management reported more than $875 million of total liquidity, including approximately $775 million cash at the end of April.
Segment performance
- Quick Lubes: Quarterly sales rose 6% to $212 million, while operating income fell to $40 million from $44 million. Lower March transactions and higher labor and allocated corporate costs pressured profitability. Combined same-store sales growth was 0.7%, compared with 10.8% a year earlier.
- Core North America: Quarterly sales declined 2% to $238 million, but operating income increased to $47 million from $40 million. Cost reductions, lower raw-material costs and favorable mix supported margins.
- International: Quarterly sales fell 14% to $128 million and operating income fell to $18 million from $23 million, reflecting COVID-related volume declines, currency effects and lower joint-venture contributions.
Outlook, risks and notable items
- Valvoline withdrew its fiscal 2020 guidance on March 24, 2020. Management expected a significant adverse impact in the quarter ending June 30, primarily from reduced miles driven, volumes and sales. It described early signs of improvement in late April but emphasized the uncertainty and that volumes remained below pre-pandemic levels.
- Management said it believed liquidity was adequate for operating needs and commitments for at least the next 12 months. It also noted that a prolonged decline in driving or deferred vehicle maintenance could require further expense or spending reductions.
- Most company-owned stores and substantially all lubricant plants remained operating; over 97% of franchised stores were open, with 26 temporarily closed at March 31. The company offered franchisees low-interest loans, temporary royalty relief and extended payment terms.
- Valvoline suspended share repurchases in late March after repurchasing 3.4 million shares for $60 million during the quarter. It continued the $0.113-per-share quarterly dividend; a further dividend was declared in April.
- The company expected approximately $20 million of fiscal 2020 capital spending to be deferred, while continuing selected growth investments. Restructuring actions were expected to deliver annualized pretax savings of approximately $40–$50 million by fiscal year-end.
- Key COVID-19 risks include reduced demand and miles driven, franchisee distress, supply-chain disruption, possible operating interruptions, and uncertainty around the duration and severity of the pandemic. The company also cited increased cybersecurity exposure from remote work. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Subsequent events: an April receivables-facility amendment increased borrowing capacity; a May 6 credit agreement provided approximately $40 million to complete the China plant. The new lease standard adopted October 1, 2019 added lease assets and liabilities to the balance sheet without a material reported effect on income or cash flows.
Important facts for investors to verify
- Whether pandemic-related declines in miles driven, volumes and sales persist or worsen, especially in the June quarter.
- Cash generation, actual liquidity availability and covenant compliance as borrowings and operating conditions change.
- Debt costs and repayment capacity following the refinancing and pandemic-related facility draws.
- Whether the expected $40–$50 million annualized savings are achieved and how much is offset by ongoing costs or reinvestment.
- Whether franchisee support, temporary store closures and the China plant investment affect future cash needs or operating performance.