Valvoline Inc. (10-Q) — quarter ended June 30, 2020
Business context and reporting period
Valvoline markets engine and automotive maintenance products and services through Quick Lubes, Core North America and International segments. This filing covers the third quarter and first nine months of fiscal 2020; comparisons are with the corresponding 2019 periods. Amounts are in millions of dollars unless stated otherwise.
Financial results and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Sales | $516 | $613 | $1,701 | $1,761 |
| Gross profit / margin | $187 / 36.2% | $207 / 33.8% | $605 / 35.6% | $593 / 33.7% |
| Operating income / margin | $88 / 17.1% | $102 / 16.6% | $309 / 18.2% | $285 / 16.2% |
| Net income | $59 | $65 | $195 | $181 |
| Diluted EPS | $0.32 | $0.34 | $1.04 | $0.96 |
| Adjusted EBITDA (non-GAAP) | $106 | $126 | $360 | $349 |
Quarterly sales fell 16%, primarily on lower volumes amid COVID-19 restrictions; lubricant gallons sold declined 20%. Gross margin improved despite lower sales, reflecting mix, lower raw-material costs and cost savings. Quarterly net income declined 9%; diluted EPS declined 6%. For the nine months, sales decreased 3%, while gross profit and operating income rose, supported by cost and mix improvements. Adjusted EBITDA fell 16% for the quarter but increased 3% year to date.
Cash flow and liquidity: Nine-month operating cash flow was $271, versus $214 in 2019; capital expenditures were $94, yielding reported free cash flow of $177 versus $141. Cash and cash equivalents were $751 at June 30, 2020, up from $159 at September 30, 2019. Working capital was $947. Management reported more than $1.3 billion of total liquidity, including $553 of remaining capacity under the revolver and receivables facility.
Debt and balance sheet: Total debt was approximately $2.0 billion, compared with $1.3 billion at September 30, 2019; stockholders’ deficit was $188. Approximately 80% of borrowings had fixed rates after interest-rate swaps. The company reported compliance with debt covenants and no meaningful debt maturities until 2024. Adoption of lease accounting added substantial lease assets and liabilities; prior-period balance sheets were not recast.
Material changes and segment performance
- Quick Lubes: Quarterly sales were $199, down 6%; operating income was $36, down $12. Lower transactions and labor costs weighed on results. Same-store sales improved through the quarter, with June up 7.1% year over year; the combined quarterly same-store-sales decline was 8%.
- Core North America: Quarterly sales were $207, down 20%, but operating income increased to $51 from $38. Margin gains reflected favorable product/channel mix, lower costs and reduced discretionary spending.
- International: Quarterly sales were $110, down 23%; operating income was $12, down $8, reflecting lower volumes, currency effects and weaker joint-venture contributions. Recovery varied by region, with Latin America particularly affected.
Quarterly consolidated operating income declined $14 despite higher reported operating margin. The nine-month increase in net interest and financing expense included a $19 loss on extinguishing the 2024 Notes. A $15 redemption premium was paid as part of that debt refinancing.
Outlook, management commentary and risks
- Valvoline withdrew its fiscal 2020 guidance on March 24, 2020. Management said fiscal 2020 operating income, before the anticipated reduction to the indemnity obligation discussed in the filing, was expected to approximate fiscal 2019 operating income. The company expected COVID-19 to continue adversely affecting results through fiscal year-end; the duration and severity could not be estimated.
- Management cited improving sequential sales and miles-driven trends after April lows, while noting July trends remained below the prior year. It believed liquidity was sufficient for operating needs and obligations for at least the next 12 months, subject to substantial pandemic uncertainty.
- Management estimated COVID-19 reduced operating income by approximately $30–$35 for the nine months, most of the impact occurring in the third quarter. Risks include renewed restrictions, reduced driving and maintenance, disruption to customers, franchisees and suppliers, operational interruptions, and cybersecurity threats associated with remote work.
- The company borrowed to strengthen liquidity, suspended share repurchases, deferred certain spending and planned to defer approximately $20 of fiscal 2020 capital expenditures while continuing selected growth investments. It also provided franchisee support, including low-interest loans, temporary royalty waivers and extended payment terms.
- The restructuring program was expected to deliver annualized pretax savings of approximately $40–$50 million by the end of fiscal 2020; management did not expect material remaining restructuring costs. A roughly $30 million tax valuation allowance was expected in fiscal 2020, with an offsetting reduction in the estimated indemnity obligation and no expected net-income impact.
- Subsequent events: the board declared a $0.113-per-share dividend payable September 15, 2020. In July, Valvoline entered an additional $100 million interest-rate swap.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect; some claims had no accrual because losses were not considered probable or reasonably estimable. Disclosure controls were reported effective, with no significant quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether miles driven, same-store sales and volumes continued to recover after the reported quarter, and the sensitivity of earnings to renewed restrictions.
- Cash generation and the sustainability of liquidity, considering elevated debt, facility terms, interest costs and planned capital spending.
- Segment margin trends—especially the extent to which Core North America’s gains and Quick Lubes’ recovery persisted.
- Progress toward the stated $40–$50 million restructuring savings and any effects of reinvestment or remaining costs.
- The treatment and timing of the anticipated tax valuation allowance and indemnity-obligation reduction, and any subsequent impact on reported results.
- Dividend continuation and the timing or conditions for resuming share repurchases; future dividends remain subject to board approval.