Valvoline Inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2023. Results are for continuing operations unless noted. Valvoline completed the sale of its Global Products business to Aramco on March 1, 2023; that business is presented as discontinued operations.
Financial performance
| Metric | Three months ended June 30, 2023 | Change vs. 2022 | Nine months ended June 30, 2023 |
|---|---|---|---|
| Net revenue | $376.2 million | +19% | $1,053.5 million; +17% |
| Gross profit / margin | $150.7 million / 40.1% | +18%; margin 40.3% prior year | $396.2 million / 37.6% |
| Operating income | $86.5 million | +$25.4 million | $177.0 million |
| Income from continuing operations | $64.5 million | +$24.7 million | $124.4 million |
| Diluted EPS, continuing operations | $0.40 | $0.22 prior year | $0.73 |
| Adjusted EBITDA, continuing operations | $110.4 million | +28% | $270.8 million; $228.2 million prior year |
Quarterly system-wide same-store sales grew 12.5%, supported by higher average tickets from pricing and service mix, and increased transactions. The system added 114 net stores year over year, reaching 1,804. Quarterly gross margin was nearly flat: pricing, mix and labor efficiency benefits were largely offset by product and store costs. Nine-month gross margin declined from 38.6%, primarily due to higher product and store expenses.
Reported net income was $61.6 million for the quarter versus $98.2 million a year earlier, including discontinued operations of a $2.9 million loss versus $58.4 million income. For the nine months, reported net income of $1.371 billion included $1.246 billion of discontinued-operations income, principally the sale gain; it is not representative of recurring continuing-operations earnings. The sale generated a $1.572 billion pretax gain.
Cash flow, liquidity and debt
- For the nine months, continuing-operations operating cash flow was $249.9 million, compared with $126.9 million. Continuing-operations free cash flow, a non-GAAP measure, was $124.0 million versus $37.4 million; capital expenditures were $125.9 million.
- Consolidated operating cash flow was negative $48.4 million, reflecting $298.3 million of cash used by discontinued operations, including sale-related tax and separation payments. Investing cash flow included $2.621 billion from discontinued operations, principally sale proceeds.
- At June 30, cash and cash equivalents were $526.7 million, short-term investments $424.1 million, and total debt $1.592 billion. The company also had $471.2 million of available revolving-credit capacity and reported compliance with debt covenants.
- Approximately 88% of borrowings, including swaps, had fixed interest rates. Management said liquidity was sufficient for expected requirements over the next 12 months.
- The 2030 Senior Notes indenture may require an offer to repurchase all such notes at par in Q2 FY2024 using excess asset-sale proceeds, unless amended or addressed through another transaction.
Capital allocation and outlook
Valvoline repurchased 30.1 million shares for $1.133 billion in Q3, including a tender offer for 27.0 million shares at $38 each. Nine-month repurchases totaled 37.9 million shares for approximately $1.390 billion. The tender offer left $340.4 million under the applicable authorization at quarter-end. The company discontinued its dividend after Q1 FY2023 and expected to use the remaining authorization for repurchases within 12 months, subject to market conditions.
Management expected a fiscal 2023 effective tax rate of approximately 25.5%–26.5%, excluding discrete items. It attributed Q3 Adjusted EBITDA growth to sales growth and improved vehicle traffic, partly offset by growth-related SG&A investment. Interest income on sale proceeds also supported continuing-operations earnings. The filing gives no broader quantified operating earnings guidance.
Material changes, unusual items and risks
- The Global Products divestiture fundamentally changed the business mix and comparability of reported results. Valvoline has a long-term supply agreement to purchase substantially all lubricants and certain ancillary products for its stores from the former business.
- The company recognized a $26.5 million tax benefit from releasing valuation allowances on legacy tax attributes, alongside $24.4 million of expense for an increased estimated indemnity obligation to its former parent under an amended Tax Matters Agreement.
- Higher pension and postretirement non-service expense and product/store costs weighed on results. Some adjusted performance measures exclude these and other items; the company cautions that non-GAAP measures are not substitutes for GAAP results.
- Valvoline identified potential exposure to financial-institution instability because it holds substantial cash and investments with financial institutions; it noted that access to deposits above FDIC limits is not guaranteed. It also cited general economic, competitive and operating risks. Ordinary-course legal claims were not considered material based on information available.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported nine-month earnings and cash generation reflects the Global Products sale, related taxes and discontinued operations rather than recurring retail performance.
- The timing and funding of any required 2030 Notes repurchase offer, and the effect on liquidity and leverage.
- Whether continuing-operations cash flow can sustain store expansion and shareholder returns after sale proceeds are deployed.
- The economics and continuity of the post-sale product supply agreement, and any remaining transition or indemnity obligations.
- Execution of the remaining share-repurchase authorization, including the impact of the reduced share count on per-share results and financial flexibility.
- Concentration and accessibility of cash and short-term investments across financial institutions, alongside the company’s stated liquidity assessment.