Valvoline Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021; comparisons are to the corresponding 2020 periods unless otherwise noted. Financial amounts are in millions except per-share data.
Business context
Valvoline markets automotive and engine-maintenance products globally and operates and franchises quick-lube service centers. In the quarter, it realigned reporting into Retail Services and Global Products to support its strategic shift toward a services-driven business. Prior-period segment results were recast.
Financial performance
| Metric | Quarter ended June 30, 2021 | Nine months ended June 30, 2021 |
|---|---|---|
| Sales | $792; up 53% | $2,146; up 26% |
| Gross profit | $259; gross margin 32.7% | $734; gross margin 34.2% |
| Operating income | $131 | $386 |
| Net income | $97; diluted EPS $0.53 | $252; diluted EPS $1.37 |
| Adjusted EBITDA | $173 | $479 |
| Operating cash flow | Not separately stated | $296 |
| Free cash flow | Not separately stated | $190 |
Quarterly sales growth reflected higher volume and mix, pricing, currency and acquisitions. Sales increased in both segments. Retail Services quarterly sales rose 66% to $330, with system-wide same-store sales up 40.5%; adjusted EBITDA rose 107% to $112. Global Products sales rose 46% to $462 and adjusted EBITDA rose 17% to $81. These comparisons benefited from recovery against the prior-year pandemic-affected period.
Gross margin fell from 36.2% to 32.7% in the quarter and from 35.6% to 34.2% year to date. Management attributed pressure chiefly to rising raw-material costs and unfavorable LIFO inventory adjustments, with price increases lagging cost increases. Global Products adjusted EBITDA margin declined to 17.5% from 21.8% in the quarter; Retail Services adjusted EBITDA margin increased to 33.9% from 27.1%.
Cash, debt and capital allocation
At June 30, 2021, cash and cash equivalents were $226, total debt was $1,693, and total stockholders’ equity was $23. Cash declined from $760 at September 30, 2020, while debt declined from $1,962. Working capital was $511, compared with $994 at fiscal year-end; liquid assets were 141% of current liabilities, versus 269%.
Nine-month operating cash flow of $296 was partly offset by $351 of investing outflows, including $267 for acquisitions, and $483 of financing outflows. Capital expenditures were $106. Free cash flow was $190, and discretionary free cash flow was $275. The company paid $69 in dividends and repurchased $100 of shares during the nine months.
In January, Valvoline issued $535 of 2031 Notes and used the proceeds and cash on hand to redeem $800 of 2025 Notes for approximately $840, including an early-redemption premium. The resulting debt-extinguishment loss was $36. About 87% of borrowings, including swaps, had fixed rates. The company reported $586 of remaining capacity under its revolver and receivables facility and compliance with debt covenants.
Outlook, risks and unusual items
- Management forecast fiscal 2021 capital expenditures of approximately $160–$170. It expected near-term margin pressure as raw-material increases flow through inventory and pricing, and said further pricing actions were being implemented.
- Management said it believed available cash, operating cash generation and financing were sufficient to meet obligations and operating needs for the next 12 months. No specific earnings or revenue guidance was provided in the supplied filing text.
- COVID-19 impacts remained uncertain; management could not quantify the pandemic’s effect on current results or predict its duration and future effects. The prior-year comparison was affected by pandemic restrictions.
- Unusual or comparability items included the $36 debt-extinguishment loss, a nine-month $26 LIFO charge (versus a $12 credit in 2020), and favorable tax-related items. Management estimated a $25–$35 decrease over the next 12 months in indemnity obligations to the former parent, including certain unrecognized tax benefits.
- Routine litigation and claims were disclosed; management stated recorded accruals were not material and did not expect pending matters to have a material adverse effect based on information then available. The filing added a Kentucky exclusive-forum provision as a risk factor for certain shareholder disputes.
- Subsequent to quarter-end, the board declared a $0.125-per-share dividend and the company repurchased approximately 0.4 million shares for $11.
Most important facts for investors to verify
- Whether pricing actions catch up with raw-material cost inflation and LIFO impacts, and how that affects gross margins.
- How much reported growth reflects recovery from pandemic-depressed comparisons versus sustained underlying demand and store-level performance.
- Returns and cash-flow effects from the $267 of acquisitions and continued Retail Services expansion.
- Debt reduction, interest costs, liquidity and covenant headroom after the 2025 Notes redemption and shareholder returns.
- The realization and timing of the estimated $25–$35 reduction in former-parent indemnity obligations, and developments in litigation and COVID-19 exposure.