Valvoline Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 31, 2022. Valvoline operates Retail Services, a quick-lube service-center network, and Global Products, which sells automotive and engine-care products in more than 140 countries.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Sales | $886 million vs. $701 million; up 26% | $1.744 billion vs. $1.354 billion; up 29% |
| Gross profit / margin | $250 million / 28.2%, vs. $247 million / 35.2% | $494 million / 28.3%, vs. $475 million / 35.1% |
| Operating income / margin | $117 million / 13.2%, vs. $131 million / 18.7% | $238 million / 13.6%, vs. $255 million / 18.8% |
| Net income | $81 million vs. $68 million; up 19% | $168 million vs. $155 million |
| Diluted EPS | $0.45 vs. $0.37; up 22% | $0.93 vs. $0.84 |
| Adjusted EBITDA (non-GAAP) | $158 million vs. $157 million | $314 million vs. $306 million |
Quarterly gross profit margin contracted 7.0 percentage points and operating margin contracted 5.5 points year over year. Management attributed margin pressure to raw-material, labor and product-cost inflation, supply-chain challenges, and the dilutive effect of passing through price increases. Higher volume and favorable mix partly offset these pressures.
Segments and material period changes
- Retail Services: Quarterly sales rose 23% to $350 million; system-wide same-store sales grew 13.1%, and the network added 113 net stores year over year to reach 1,661. Quarterly adjusted EBITDA was flat at $95 million; operating income declined 4% to $77 million as labor inflation and product costs pressured profitability. For six months, sales grew 29%, operating income 16%, and adjusted EBITDA 17%.
- Global Products: Quarterly sales rose 29% to $536 million, while lubricant volume increased 9%; growth reflected pricing and demand across regions and channels. Quarterly operating income and adjusted EBITDA each rose 1%. For six months, operating income fell 11% and adjusted EBITDA fell 9%, as cost inflation and supply constraints outweighed sales growth.
- Consolidated quarterly sales growth reflected $113 million of pricing, $67 million of volume and mix, and $14 million of acquisitions, partly offset by $9 million of unfavorable currency effects.
Cash flow, debt and liquidity
- Six-month cash from operations was $96 million, down from $190 million. The company cited a $105 million increase in net working capital, particularly receivables growth associated with higher sales.
- Six-month capital expenditures were $67 million. Free cash flow, a non-GAAP measure, was $29 million versus $116 million; discretionary free cash flow was $80 million versus $175 million.
- At March 31, cash and cash equivalents were $118 million, versus $230 million at September 30, 2021. Total debt was approximately $1.695 billion; current debt was $47 million and long-term debt $1.648 billion. Approximately 87% of borrowings, including swaps, had fixed rates.
- Remaining borrowing capacity was $587 million under the revolving credit and trade receivables facilities, plus approximately $40 million under China facilities. The company reported compliance with debt covenants and said it expected available liquidity to cover requirements for the next 12 months.
- During the six months, Valvoline paid $45 million in dividends and repurchased $66 million of stock. It reported a $0.125-per-share quarterly dividend declared in April.
Outlook, risks and unusual items
- Management forecast FY2022 free cash flow of $260 million to $280 million, excluding separation-related cash outflows that could not then be reasonably estimated. Retail Services expected profitability to improve in the second half as incremental pricing addressed inflationary pressure.
- Valvoline is pursuing a separation of Retail Services and Global Products. Alternatives remain under evaluation; completion requires Board approval and no timetable was established. Separation-planning costs were $6 million for the quarter and $9 million year to date; management expected further planning costs during the rest of FY2022.
- Management highlighted uncertainty from COVID-19, inflation, supply-chain constraints and market conditions. In April 2022, restrictions in China temporarily disrupted local operations; the blending and packaging facility resumed near full capacity by late April, with local supply constraints noted.
- Prior-year net interest expense included costs associated with extinguishing $800 million of 2025 notes, helping explain the year-over-year decline in current-period interest expense. Other current-period adjusted EBITDA reconciling items included pension income, LIFO charges, business-interruption losses and IT transition costs.
- Ordinary-course legal matters were disclosed; management stated recorded liabilities were not material and pending matters were not expected to have a material adverse effect based on information then available. No material changes to previously disclosed risk factors or market risks were reported.
Investor verification points
- Track whether pricing keeps pace with raw-material, labor and supply-chain costs, particularly given the sharp quarterly gross and operating margin declines.
- Verify the timing, Board approval, costs and cash consequences of the proposed separation; the stated free-cash-flow forecast excludes unestimated separation outflows.
- Monitor working capital and operating cash conversion, including receivables and inventory, against the reported decline in operating cash flow and free cash flow.
- Assess segment trends separately: Retail Services’ recovery in profitability and Global Products’ ability to restore margins while sustaining volume growth.
- Monitor China operating conditions, COVID-19 effects, debt capacity and the company’s ability to sustain shareholder returns alongside investment needs.