Valvoline Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Amounts are in millions of dollars except per-share data. Valvoline operates Quick Lubes, Core North America, and International segments.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $591 | $569 | $1,148 | $1,114 |
| Gross profit | $203 | $207 | $386 | $402 |
| Gross margin | 34.3% | 36.4% | 33.6% | 36.1% |
| Operating income | $96 | $100 | $183 | $188 |
| Net income | $63 | $67 | $116 | $57 |
| Diluted EPS | $0.33 | $0.33 | $0.61 | $0.28 |
| Adjusted EBITDA | $122 | $122 | $223 | $230 |
Quarterly sales rose 4%, while gross profit and operating income declined. Six-month sales rose 3%, but gross profit fell 4%. Adjusted EBITDA was flat for the quarter and down $7 million for the half year. Six-month net income increased substantially year over year, mainly because the prior-year period included a large tax-reform charge; the 2019 period also benefited from lower tax rates and a $5 million Kentucky tax-related benefit.
Quarterly segment sales and operating income were: Quick Lubes $200 and $44 (prior year $158 and $38); Core North America $243 and $40 (prior year $258 and $46); International $148 and $23 (prior year $153 and $24). Quick Lubes same-store sales grew 10.8% in the quarter. Six-month lubricant gallons sold declined 3% to 86.4 million.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $134, capital expenditures were $48, and management-defined free cash flow was $86, versus $108, $30, and $78, respectively, in 2018. Investing used $85; financing used $20. Cash, cash equivalents and restricted cash increased $29 to $125, including $11 restricted for an acquisition.
- At March 31, cash and cash equivalents on the balance sheet were $114; total debt was $1,348, including $30 current and $1,318 long-term. Debt was approximately $1.3 billion at September 30, 2018. About 57% of borrowings had fixed rates.
- Remaining capacity under revolving facilities was $276 at March 31; the company reported compliance with debt covenants. Working capital was $373, and liquid assets were 124% of current liabilities. Management said liquidity should be sufficient for the next 12 months, subject to business and financing risks.
- Dividends paid in the half year totaled $40, or $0.212 per share. A further $0.106 quarterly dividend was declared for payment in June 2019.
Material changes, outlook and risks
- Business mix: Quick Lubes advanced on store growth, higher transactions and ticket, and 186 net new company-owned and franchised stores year over year. Core North America faced weak retail-channel demand, competitive pressure, lower branded volumes and installer-channel timing and account issues. International results were pressured by currency, Latin American softness and weakness in parts of Asia Pacific.
- Margins and comparability: The new revenue-recognition standard was adopted October 1, 2018. It reduced reported sales by $9 for the quarter and $24 for the half year versus prior guidance, while increasing reported gross profit by $4 in each period. The filing states the adoption was not material overall, but it affects period comparisons and classifications. The standard also resulted in a $13 million after-tax reduction to opening retained earnings.
- Restructuring: The company recognized $8 of restructuring and related expense in the first half and expected another $5–$9 during the remainder of fiscal 2019. It estimated annualized pretax cash savings of $40–$50 million, with most savings beginning in fiscal 2020 and full realization expected by year-end 2020. Benefits are uncertain and execution may disrupt operations.
- Supply interruption: A fire at a nearby third-party petrochemical terminal temporarily shut a Texas blending facility during the quarter. The facility sustained no damage and restarted in late April. Valvoline reported about $1 of incremental costs through March, expected further costs in the third quarter, estimated these additional expenses would not be material, and planned to pursue insurance recovery.
- Financing after quarter-end: On April 12, 2019, Valvoline amended and extended its credit agreement, replacing the prior facilities with a $575 term loan and $475 revolving facility, with five-year terms. Proceeds refinanced the outstanding term loan, revolver and $120 of the trade receivables facility, plus related costs. The filing cited lower expected interest costs and additional revolver capacity.
- Other developments: Valvoline acquired 40 service-center stores for $35 in the first half and acquired 12 Las Vegas stores after quarter-end. It also had a pending agreement to acquire a Serbian lubricant business and manufacturing facility, expected to close in the second half of fiscal 2019, subject to customary conditions.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management’s outlook includes restructuring savings and continued investment in growth initiatives; results remain subject to competitive, economic, currency, execution and liquidity risks. Ordinary-course legal matters were not considered reasonably likely to have a material adverse effect, based on information available.
Important facts for investors to verify
- Whether Quick Lubes growth and same-store momentum can offset continuing volume and margin pressure in Core North America and International.
- How much of the reported sales and margin movement reflects the revenue-accounting change versus underlying operating trends.
- Actual restructuring costs, timing and realized savings compared with the $40–$50 million annualized target.
- Costs and insurance recoveries related to the Texas supply interruption, and progress and final terms of the Serbian acquisition.
- Post-amendment debt, interest expense, borrowing availability, covenant headroom and the company’s ability to sustain dividends while funding investment and acquisitions.