Valvoline Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023. The quarter includes the March 1 sale of the former Global Products business; its results are presented as discontinued operations. Continuing operations are principally the automotive service-center business.
Financial performance
- Quarterly revenue: Continuing-operations net revenue was $344.5 million, up 16% from $296.0 million. System-wide same-store sales rose 13.5%; management cited pricing, higher transactions, non-oil-change services and 120 net new stores versus the prior year.
- Profitability: Gross profit was $126.7 million, up 18%, with gross margin of 36.8% versus 36.3%. Operating income increased to $61.2 million from $40.0 million; operating margin was 17.8% versus 13.5%. Continuing-operations income was $32.9 million, or diluted EPS of $0.19, compared with $23.0 million and $0.13.
- Adjusted EBITDA: Continuing-operations adjusted EBITDA, a non-GAAP measure, was $87.1 million, up from $69.4 million. Management attributed the increase to sales growth and cost efficiency, partly offset by growth-related SG&A investment.
- Six-month results: Revenue rose 16% to $677.3 million; gross profit increased 12% to $245.5 million. Gross margin declined to 36.2% from 37.6%, which management attributed mainly to cost pass-through pricing, higher labor and product expenses. Operating income was $90.5 million versus $92.0 million; continuing-operations income was $59.9 million versus $57.2 million.
- Reported net income: Quarterly net income was $1.227 billion, including $1.194 billion from discontinued operations. Six-month net income was $1.309 billion, including $1.249 billion from discontinued operations. These results were driven largely by the sale gain and are not representative of recurring continuing-operations earnings.
- Cash flow: For the six months, continuing-operations operating cash flow was $173.5 million versus $46.8 million. Capital expenditures were $79.4 million; reported continuing-operations free cash flow was $94.1 million, versus negative $10.9 million. Total cash provided by investing activities was $2.527 billion, including $2.623 billion from discontinued operations, primarily sale proceeds.
- Liquidity and debt: Cash and equivalents were $2.335 billion at March 31, compared with $23.4 million at September 30, 2022. Total debt was $1.597 billion; $471.2 million of revolving capacity remained available. About 92% of borrowings, including swaps, had fixed interest rates. The company reported compliance with debt covenants and management said it expected sufficient liquidity for the next 12 months.
- Capital returns: The company repurchased 4.9 million shares for $170.0 million during the quarter; six-month repurchases totaled $257.4 million. It paid $21.8 million in dividends during the six months and discontinued its dividend after fiscal Q1.
Material changes and notable items
- On March 1, 2023, Valvoline completed the sale of Global Products to Aramco for $2.65 billion in cash consideration and received net proceeds of $2.38 billion. It recognized a preliminary pre-tax gain of $1.6 billion, subject to final purchase-agreement settlements.
- Valvoline repaid the Trade Receivables Facility in connection with the sale. Its amended senior credit agreement became effective March 1 and includes a $475 million term loan and a $475 million revolver.
- Six-month results included a $26.5 million income-tax benefit from releasing valuation allowances related to legacy tax attributes, alongside $24.4 million of additional expense for an indemnity obligation to its former parent under an amended Tax Matters Agreement.
- After quarter-end, the company repurchased 2.9 million shares for $100.1 million through May 5. On May 10 it announced its intention to commence a modified Dutch auction tender offer for up to $1.0 billion of shares, subject to market conditions and a price range yet to be set.
Outlook, commentary and risks
- Management expects a fiscal 2023 effective tax rate of approximately 25.5%–26.5%, excluding discrete items. It expects to use the remaining share-repurchase authorization within 18 months of the Global Products sale and expects to redeem the 2030 Notes within 12 months of closing, subject to market conditions.
- The strategy is to expand the retail service footprint, grow same-store and non-oil-change sales, develop fleet-service offerings and invest in the evolving vehicle market. No specific revenue or earnings guidance is provided in the supplied filing text.
- Valvoline now depends on a long-term supply agreement with the divested Global Products business for substantially all lubricants and certain ancillary products used in its stores. A transition-services agreement is also in place, expected to last no more than 18 months.
- The filing identifies risks from macroeconomic and financial-market instability, including potential disruption to access to cash held at financial institutions. More than $2.3 billion of cash was held across financial institutions, the majority in U.S. government money-market funds. Management also cites general economic, competitive, pandemic and execution uncertainties.
- Ordinary-course legal claims were disclosed; management stated that recorded accruals were adequate and pending matters were not expected to have a material adverse effect based on information then available. The sale gain remains preliminary, and the filing notes uncertainty around the tender offer and other forward-looking expectations.
Important facts for investors to verify
- Final sale proceeds, purchase-price adjustments and the ultimate gain on disposal.
- Recurring performance of continuing operations, separated from the one-time disposal gain and tax-related items; also monitor margins and the pace of store and same-store-sales growth.
- Execution and funding of planned share repurchases or the proposed tender offer, and the implications of ending the dividend.
- Debt repayment plans, interest-rate exposure, liquidity and the company’s ability to manage its cash balances and financial-institution counterparties.
- Supply continuity, pricing and terms under the post-sale agreement with Global Products, as well as remaining transition and legacy obligations.