Valvoline Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. This is an annual report; quarterly data are included, but the filing primarily reports full-year results. Valvoline completed its separation from Ashland on May 12, 2017 and operates through Core North America, Quick Lubes and International.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales | $2.084 billion | $1.929 billion | Up 8% |
| Gross profit / margin | $778 million / 37.3% | $761 million / 39.5% | Profit up 2%; margin down 2.2 percentage points |
| Operating income | $532 million | $431 million | Up 23% |
| Net income | $304 million | $273 million | Up 11% |
| Diluted EPS | $1.49 | $1.60 | Down 7% |
| Adjusted EBITDA (non-GAAP) | $517 million | $457 million | Up 13% |
| Cash from operating activities | $(130) million | $311 million | Down $441 million |
| Capital expenditures | $68 million | $66 million | Up $2 million |
| Free cash flow (non-GAAP) | $196 million | $245 million | Down $49 million |
Revenue growth reflected higher volume, pricing and product mix, plus Quick Lubes acquisitions. Lubricant volume rose 3% to 179.7 million gallons. Higher base-oil costs pressured gross margins. Operating income also benefited from pension-related income and remeasurement gains recorded outside segment results; these items make reported operating performance less directly comparable.
Segments and material changes
| Segment | FY2017 sales | FY2017 operating income | Notable comparison |
|---|---|---|---|
| Core North America | $1.004 billion | $199 million | Sales up 3%; operating income down from $212 million. Margin pressure reflected higher raw-material costs. |
| Quick Lubes | $541 million | $130 million | Sales up 18%; operating income rose from $117 million. Growth included acquisitions and higher volume. |
| International | $539 million | $76 million | Sales up 9%; operating income rose from $74 million. Higher costs and pricing timing weighed on margin. |
Quick Lubes ended the year with 384 company-owned and 743 franchised Valvoline Instant Oil Change locations. Combined same-store sales growth was 7.4%. The company acquired 43 stores during FY2017, including 28 Time-It Lube locations. On October 2, 2017, it acquired another 56 franchise service centers for $60 million.
Cash, debt and liquidity
- Cash and cash equivalents were $201 million at September 30, 2017, including $102 million held by foreign subsidiaries. Total debt was $1.124 billion, compared with $743 million a year earlier.
- FY2017 operating cash outflow chiefly reflected $394 million of discretionary funding to the U.S. qualified pension plan, other pension contributions and higher interest and tax payments. The company issued $400 million of 4.375% notes due 2025 and used net proceeds to fund the pension contribution; management characterized the transaction as leverage-neutral.
- Working capital was $327 million. Liquid assets were 123% of current liabilities. Revolver capacity available was $436 million; a further $50 million was available under the receivables securitization facility. The company reported compliance with debt covenants and stated that it expected sufficient liquidity for the next 12 months.
- Approximately 68% of outstanding borrowings had fixed rates. Management estimated that a 100-basis-point increase in variable rates would add about $4 million to annual pretax interest expense.
- The company paid $0.20 per share in dividends during FY2017 and repurchased approximately 2 million shares for $50 million. A $150 million repurchase authorization had $100 million remaining at year-end.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management’s stated priorities are growing the Quick Lubes network, expanding in selected international markets, and investing in product innovation and digital capabilities. It expected only nominal additional separation costs in FY2018.
- After pension de-risking actions, management did not expect significant required contributions to the U.S. qualified plan for several years; it expected approximately $14 million of FY2018 contributions to U.S. non-qualified and non-U.S. plans.
- FY2017 included $32 million of separation costs, a $68 million pension/postretirement remeasurement gain, $70 million of non-service pension income, a $16 million benefit from an Ashland tax-indemnity adjustment and a $5 million insurance-reserve benefit. Adjusted EBITDA excludes certain such items and is non-GAAP.
- Key risks include base-oil and additive price volatility and the timing or ability to pass costs through; competition and concentration among major Core North America customers; substantial indebtedness; franchisee execution and store growth; international currency, regulatory and joint-venture risks; product liability and environmental exposure; and potential tax indemnities connected with the Ashland separation and tax-free distribution.
- Valvoline reported no currently pending legal matter it believed would have a material adverse effect; it cautioned that outcomes are uncertain. The filing also describes potential indemnity exposure if the Ashland distribution fails to qualify for intended tax treatment. Management and the auditor reported effective internal control over financial reporting, and the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- How much FY2017 operating-income and Adjusted EBITDA growth reflects recurring segment performance versus pension-related income, remeasurement gains and other adjustments.
- Whether pricing can offset future raw-material cost increases without further gross-margin deterioration.
- Cash generation after excluding the one-time pension contribution, alongside debt service, pension commitments and the company’s dividend and repurchase plans.
- Execution and returns from Quick Lubes acquisitions and expansion, including the post-year-end 56-store acquisition and franchisee performance.
- Potential Ashland-related tax indemnities, customer concentration and the refinancing or covenant implications of the debt structure.