Valvoline Inc. — Q3 FY2022 10-Q Summary
Business context and reporting period
Valvoline reported its fiscal third quarter and nine months ended June 30, 2022. The company operated through Retail Services, its North American service-center business, and Global Products, which sells automotive and engine-care products in more than 140 countries. On July 31, 2022, after quarter-end, Valvoline agreed to sell Global Products to Aramco.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales | $957 million, up 21% from $792 million | $2.701 billion, up 26% from $2.146 billion |
| Gross profit / margin | $276 million / 28.8%, versus $259 million / 32.7% | $770 million / 28.5%, versus $734 million / 34.2% |
| Operating income | $138 million, versus $131 million | $376 million, versus $386 million |
| Net income | $99 million, up from $97 million | $267 million, up from $252 million |
| Diluted EPS | $0.55, versus $0.53 | $1.47, versus $1.37 |
| Adjusted EBITDA | $180 million, versus $173 million | $494 million, versus $479 million |
Quarterly gross and operating margins declined year over year as raw-material and labor inflation, and the lag in passing cost increases through to customers, outweighed sales growth. Pricing contributed $123 million of quarterly sales growth; volume and mix contributed $44 million. Management said pricing actions were progressing.
For the nine months, operating cash flow was $191 million, down from $296 million. Capital expenditures were $102 million; reported free cash flow, a non-GAAP measure, was $89 million versus $190 million. Management attributed the operating-cash-flow decline primarily to a $118 million increase in net working capital, including higher receivables and inventory.
At June 30, cash and cash equivalents were $98 million and total debt was $1.700 billion. Current debt was $61 million. Approximately 87% of borrowings, including swaps, carried fixed rates; the company reported $578 million of remaining capacity under its revolver and Trade Receivables Facility and said it complied with debt covenants. Stockholders’ equity was $226 million.
Segments and changes versus prior periods
- Retail Services: Quarterly sales rose 16% to $384 million; adjusted EBITDA increased 1% to $113 million. System-wide same-store sales grew 9.9%, and the network reached 1,690 stores, 121 more than a year earlier. Margin pressure from product-cost inflation was largely offset by pricing actions.
- Global Products: Quarterly sales rose 24% to $573 million, with lubricant volume up 9%; adjusted EBITDA increased 7% to $87 million. For the nine months, adjusted EBITDA fell 4% to $245 million as price-cost lag outweighed sales growth. China restrictions and supply-chain constraints also affected operations and demand.
- Consolidated quarterly adjusted EBITDA increased 4%, while the gross margin fell 3.9 percentage points. For the nine months, operating income declined despite higher sales, in part reflecting inflation and separation-related expenses. Quarterly legacy and separation expenses were $11 million, versus $1 million a year earlier.
Outlook, significant events, and risks
Valvoline agreed to sell Global Products to Aramco for $2.65 billion in cash, subject to customary adjustments and closing conditions, including regulatory approvals. Closing was expected in late 2022 or early 2023. The company estimated net proceeds of approximately $2.25 billion after taxes and expenses, intended primarily for share repurchases, with the remainder for debt reduction and Retail Services growth. It expected to redeem the 2030 Notes at par under asset-sale covenants and repay certain Global Products-related debt. The sale was expected to be classified as held for sale and reported as discontinued operations beginning in Q4 FY2022.
Management forecast FY2022 operating cash flow of $290–$300 million and free cash flow of $140–$160 million, including expected separation cash outflows of $20–$30 million and capital expenditures of $160–$180 million. Management said raw-material costs could pressure Global Products profitability in Q4, while expecting continued pricing pass-through over time. The company also said it expected to discontinue its dividend after the sale and return value through share repurchases.
Key risks include whether the sale receives approvals and closes on the expected terms and schedule; separation costs and execution challenges; the post-sale reduction in business diversification; and reliance on Aramco under the planned product-supply agreement. Valvoline also identified potential brand-reputation effects, inflation, working-capital needs, COVID-19 disruptions in China, and ordinary-course legal claims. Management stated liquidity was sufficient for expected requirements over the next twelve months. Pending claims were not considered material based on information available, though outcomes remain uncertain.
Important facts for investors to verify
- Sale approvals, closing timing, final purchase-price adjustments, net proceeds, and the planned allocation of proceeds.
- Whether pricing catches up with input-cost inflation and whether segment margins recover, particularly in Global Products.
- Working-capital trends, operating cash conversion, and progress against the FY2022 free-cash-flow forecast.
- Post-sale leverage, debt repayment, share repurchases, and the expected dividend discontinuation.
- Terms and performance of the planned supply and brand arrangements with Aramco, and any material change in COVID-19, supply-chain, or legal risks.