Valvoline Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. The filing’s FY2023 results reflect continuing retail services operations; Global Products is reported as discontinued operations following its sale to Aramco on March 1, 2023. Dollar figures are U.S. dollars.
Business context and financial results
Valvoline operates and franchises automotive preventive-maintenance locations, principally in the U.S. and Canada. At year-end, its system included 1,852 stores, including 876 company-operated locations. The business recorded its 17th consecutive year of system-wide same-store sales growth.
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net revenues, continuing operations | $1,443.5 million | $1,236.1 million | +16.8% |
| Gross profit / margin | $544.5 million / 37.7% | $476.4 million / 38.5% | +14.3%; margin down 80 bps |
| Operating income / margin | $247.2 million / 17.1% | $220.3 million / 17.8% | +12.2%; margin down 70 bps |
| Income from continuing operations | $199.4 million | $109.4 million | +82.3% |
| Adjusted EBITDA and margin | $380.0 million / 26.3% | $315.7 million / 25.8% | +20.4%; margin up 50 bps |
| Continuing-operations operating cash flow | $353.0 million | $134.4 million | Up $218.6 million |
| Continuing-operations free cash flow | $172.5 million | $2.4 million | Up $170.1 million |
System-wide same-store sales grew 11.9% (versus 13.7% in FY2022); system-wide store sales were $2.762 billion, up 17.0%, and the store count increased 8.0%, with 137 net new stores. These system-wide sales include independent franchisees and are not Valvoline’s reported revenue. Adjusted EBITDA and free cash flow are non-GAAP measures.
Reported net income was $1.420 billion, versus $424.3 million in FY2022. The increase largely reflects the $1.572 billion pre-tax gain on the Global Products sale, reported in discontinued operations; it should not be read as a comparable increase in ongoing retail earnings. Diluted EPS was $8.73, including $7.50 from discontinued operations, while diluted EPS from continuing operations was $1.23. FY2023 fourth-quarter continuing-operations income was $75.0 million and adjusted EBITDA was $109.2 million.
Material changes, liquidity and capital allocation
- Global Products was sold for a stated cash purchase price of $2.650 billion; the company reported $2.383 billion of net proceeds. Valvoline repaid the Trade Receivables Facility and amounts then outstanding under its revolver.
- At September 30, 2023, continuing operations had $409.1 million of cash and cash equivalents, $347.5 million of short-term investments, $1.586 billion of debt and $471.6 million of available revolver capacity. About 82% of borrowings were fixed-rate, including swaps; the company reported compliance with debt covenants.
- FY2023 continuing-operations investing cash outflow was $577.2 million and financing cash outflow was $1.566 billion. The company repurchased 41.8 million shares for $1.519 billion and paid $21.8 million in dividends. Its dividend was discontinued after the first quarter of FY2023; management said it did not anticipate cash dividends for the foreseeable future.
- Management forecast FY2024 capital expenditures of approximately $185 million to $215 million, primarily funded from operating cash flow, and expected to use the remaining share-repurchase authorization in early FY2024, subject to market conditions. The 2030 Notes’ asset-sale covenant was expected to require an offer to repurchase those notes in FY2024’s second quarter, absent an amendment or other transaction.
Management commentary, risks and unusual items
Management attributed revenue and adjusted EBITDA growth to higher transactions, pricing and average ticket, greater non-oil-change service penetration, premiumization, acquisitions and store growth. Margin pressure reflected product and store costs, labor, depreciation and the pass-through of cost increases. Operating cash flow benefited from higher cash earnings and favorable working-capital timing, partly offset by higher interest and tax payments.
Key risks include dependence on Global Products for substantially all lubricant and certain ancillary product supply under a long-term agreement; execution and integration of store growth and acquisitions; franchisee performance and financing; competition, labor availability and costs, inflation and supply disruption; changing vehicle technology, including EV adoption; cybersecurity and privacy; environmental and regulatory obligations; and substantial debt. Pension and other postretirement obligations were underfunded by $139.4 million at year-end. Management stated that liquidity was sufficient for expected needs over the next 12 months. Ordinary-course legal matters were not considered reasonably likely to cause a material loss based on information available.
Notable non-recurring or judgment-sensitive items include a $41.6 million pension remeasurement gain, a $29.0 million tax benefit from releasing valuation allowances on legacy tax attributes, and a $25.7 million expense for an increased indemnity obligation to Ashland under the amended Tax Matters Agreement. The Global Products sale generated $424.3 million of related income-tax expense. The financial statements received an unqualified audit opinion; the auditor identified pension obligations and sale-related tax accounting as critical audit matters.
Important facts for investors to verify
- How much ongoing retail earnings and cash flow are sustainable after separating the Global Products sale gain, pension effects, tax benefits and other adjustments from recurring results.
- Whether FY2024 store growth, same-store sales, margins and the $185–$215 million capital-spending plan are achieved, and how much growth requires acquisitions versus new development and franchising.
- The terms and funding impact of the expected 2030 Notes repurchase offer, debt service and any further share repurchases.
- Continuity, pricing and quality under the Global Products supply agreement, and the costs or exposure associated with transition services, brand-sharing arrangements and Ashland tax indemnities.
- The filing provides no numerical FY2024 revenue or earnings guidance; verify any subsequent outlook separately.