Valvoline Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results for the three months ended that date. Valvoline markets automotive and engine products and operates quick-lube service centers through company-owned, franchised and joint-venture locations.
Financial results and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $2.353 billion | $2.390 billion |
| Gross profit / margin | $863 million / 36.7% | $810 million / 33.9% |
| Operating income / margin | $485 million / 20.6% | $398 million / 16.7% |
| Net income / diluted EPS | $317 million / $1.69 | $208 million / $1.10 |
| Adjusted EBITDA | $510 million | $478 million |
| Operating cash flow / free cash flow | $372 million / $221 million | $325 million / $217 million |
| Lubricant sales volume | 168.0 million gallons | 178.4 million gallons |
Fourth quarter: Sales were $652 million versus $629 million; operating income was $176 million versus $113 million; net income was $122 million versus $27 million; diluted EPS was $0.66 versus $0.14.
Liquidity and debt: Cash and cash equivalents were $760 million at year-end. Debt principal was approximately $1.981 billion, compared with $1.351 billion a year earlier; reported debt carrying value was $1.962 billion after discounts and issuance costs. The company reported $548 million of remaining borrowing capacity and more than $1.3 billion in total liquidity. It was compliant with debt covenants and had no meaningful debt maturities before 2024. Total assets were $3.051 billion and stockholders’ deficit was $76 million.
Material changes and operating performance
- Sales fell 1.5%, while lubricant volume declined 6%, primarily because COVID-19 restrictions reduced miles driven. Price and mix, acquisitions and Quick Lubes growth partly offset the volume and currency impacts.
- Gross margin improved 2.8 percentage points, supported by lower raw-material costs, favorable product and channel mix, and savings from the restructuring program. Operating income rose 21.9% and net income rose 52.4% year over year.
- Quick Lubes: Sales rose 7% to $883 million; system-wide same-store sales grew 2.3%, the 14th consecutive year of growth. The system added 77 net stores, reaching 1,462. Segment operating income declined to $169 million from $178 million, reflecting lower transactions and higher labor and other costs.
- Core North America: Sales decreased 5% to $945 million, but operating income increased 33% to $202 million on favorable mix, lower raw-material costs and cost savings.
- International: Sales declined 9% to $525 million and operating income fell to $73 million from $85 million, primarily due to pandemic-related volume weakness, especially in Latin America, and unfavorable currency effects.
- Operating cash flow increased to $372 million; capital expenditures rose to $151 million, including investment in new stores and the China plant. Free cash flow was $221 million.
Outlook, commentary and risks
- Management described the full-year COVID-19 earnings impact as immaterial and unfavorable, with the greatest disruption in the third quarter. Miles-driven trends improved through year-end but remained below pre-pandemic levels. The duration and severity of future effects were not reasonably estimable; the filing provides no numerical earnings or revenue guidance.
- Management said available liquidity was sufficient for operating needs, debt service, pension contributions and contractual commitments over the next 12 months. Pandemic precautions included raising cash through borrowing, suspending repurchases temporarily, limiting certain expenses and deferring some capital spending. The company continued strategic investment.
- Valvoline’s growth strategy emphasizes Quick Lubes expansion, product and channel strength in North America, international growth, and products and services for electric vehicles. The China blending and packaging plant was expected to begin production by calendar year-end 2020 and supply substantially all lubricant volume for China by fiscal 2021 year-end.
- Key risks include dependence on major retail customers and distributors, private-label competition and pricing pressure, volatile raw-material costs and supplier concentration, COVID-19 and reduced vehicle use, execution and acquisition risks, franchisee health, foreign-exchange exposure, cybersecurity, and substantial debt.
- Pension and other postretirement plans were underfunded by $328 million; U.S. qualified pension plans alone were estimated to be underfunded by $158 million. Potential additional funding needs depend on investment returns, discount rates and other assumptions.
- Tax indemnification obligations to former parent Ashland were $34 million at year-end. Management warned that certain tax examinations or a challenge to the intended tax-free treatment of the separation could result in materially greater obligations. Ordinary-course legal claims were not considered likely to have a material adverse effect.
Unusual items and subsequent events
- FY2020 results included a $22 million pension and postretirement remeasurement gain, compared with a $69 million loss in FY2019, and a $19 million loss on extinguishment of debt.
- A $30 million valuation allowance was recorded for certain legacy tax attributes, with an offsetting reduction in the estimated Ashland indemnity obligation and no net earnings impact. Fourth-quarter results also included legacy-related income, compensated-absence benefits and a business-interruption recovery.
- During FY2020, Valvoline paid $84 million in dividends and repurchased approximately 3 million shares for $60 million. After year-end, the board authorized up to $100 million in repurchases through September 30, 2021 and declared a $0.125-per-share quarterly dividend.
- From October 1 through November 17, 2020, the company acquired 54 service centers for $162 million. The filing reported no material legal contingencies and received an unqualified audit opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether post-pandemic recovery in vehicle miles driven, lubricant volumes and installer demand continues, and how it affects segment margins.
- Whether Quick Lubes same-store sales growth, new-store economics and franchisee financial health support continued expansion.
- Debt levels, cash deployment, refinancing capacity and compliance with credit-facility covenants as borrowings mature.
- Assumptions behind pension funding needs and the potential range of Ashland-related tax indemnification exposure.
- China plant start-up timing, utilization and costs, and the company’s progress in developing offerings for electric vehicles.