Business context and reporting period
Valvoline Inc. filed this Form 10-K for the fiscal year ended September 30, 2019. The company markets automotive and engine-maintenance products globally and operates company-owned and franchised quick-lube services. Its three reportable segments are Quick Lubes, Core North America and International.
Financial and operating performance
Unless noted, figures are in millions of dollars. Fiscal 2019 compared with fiscal 2018:
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $2,390 | $2,285 |
| Gross profit | $810 | $806 |
| Gross margin | 33.9% | 35.3% |
| Operating income | $398 | $395 |
| Operating margin | 16.7% | 17.3% |
| Net income | $208 | $166 |
| Diluted EPS | $1.10 | $0.84 |
| Adjusted EBITDA (non-GAAP) | $478 | $466 |
| Operating cash flow | $325 | $320 |
| Free cash flow (non-GAAP) | $217 | $227 |
Sales grew 4.6%, while lubricant volume fell 2% to 178.4 million gallons. Reported sales included a $50 million benefit from adopting new revenue-recognition guidance; on the prior-guidance basis, FY2019 sales were $2,340 million. Reported net income benefited from lower taxes versus FY2018, which included a substantial tax-reform charge. FY2019 included a $69 million pension and postretirement remeasurement loss; adjusted EBITDA excludes this and other specified items.
Segment results: Quick Lubes sales were $822 million and operating income $178 million (up from $660 million and $153 million); Core North America sales were $994 million and operating income $152 million (down from $1,035 million and $172 million); International sales were $574 million and operating income $85 million (versus $590 million and $84 million). Quick Lubes system-wide same-store sales rose 10.1%, a record and the 13th consecutive annual increase. The system added 143 net stores, ending the year with 1,385.
Cash, debt and liquidity
At September 30, 2019, cash and cash equivalents were $159 million; total debt was $1.342 billion, compared with $1.322 billion a year earlier. The company reported $634 million of remaining borrowing capacity and stated it was in compliance with debt covenants. Working capital was $389 million, versus $344 million. Approximately 57% of borrowings carried fixed rates. The April 2019 credit-agreement amendment extended maturity to 2024, lowered rates and expanded revolving capacity.
Capital expenditures were $108 million. Management expects FY2020 capital expenditures of $160 million to $170 million, including $40 million to $50 million for the China blending and packaging plant. FY2019 dividends totaled $80 million ($0.424 per share); a quarterly dividend of $0.113 per share was declared after year-end.
Changes, outlook, risks and unusual items
- Quick Lubes growth and acquisitions more than offset declines in Core North America and currency-affected International sales. Core North America faced lower branded retail volumes and weaker installer volumes at certain accounts.
- A temporary shutdown of the Texas blending facility following a fire at a nearby third-party terminal caused $6 million of incremental FY2019 costs. The facility reopened in April; management did not expect further incremental costs and was pursuing insurance recoveries.
- A restructuring program incurred $14 million of FY2019 expenses. Management expected annualized pretax savings of $40 million to $50 million, with full savings by the end of FY2020; some savings may be reinvested. Approximately $1 million of additional restructuring expense was expected in FY2020 Q1.
- Key risks include concentrated retail customers (five retailers represented 46% of Core North America sales), private-label competition, raw-material cost volatility and supply concentration, franchisee and acquisition execution, foreign exchange and trade risks, cybersecurity, and changing vehicle technologies and maintenance patterns.
- Pension and other postretirement obligations were underfunded by $399 million. The company recorded a $69 million remeasurement loss, primarily reflecting lower discount rates. It expected approximately $14 million of FY2020 contributions to non-qualified and non-U.S. pension plans and none to the U.S. qualified plan.
- Valvoline reported a $66 million liability for tax indemnities owed to Ashland. Additional amounts could arise from audits or if the separation’s intended tax treatment were challenged. Management said pending litigation was not expected to materially affect the consolidated financial statements; actual outcomes remain uncertain.
- Beginning October 1, 2019, lease-accounting adoption was expected to add $220 million to $235 million of lease assets and $210 million to $225 million of lease liabilities, with no material expected impact on earnings or debt-covenant compliance.
Important facts for investors to verify
- How much of sales growth and segment performance reflects underlying demand versus the $50 million revenue-recognition effect, acquisitions, pricing and mix.
- Whether Core North America branded retail volumes and margins stabilize, and whether Quick Lubes same-store growth and new-store returns continue.
- Progress toward the restructuring savings target and FY2020 capital-spending outlook, including China plant timing and costs.
- Debt reduction, refinancing needs, interest-rate exposure and continued covenant headroom; assess free cash flow alongside mandatory debt and pension obligations.
- Potential changes in the $399 million pension deficit and $66 million Ashland tax-indemnity liability, plus any insurance recoveries or material legal developments.
- The filing reports unqualified auditor opinions on the financial statements and internal controls; review subsequent filings for changes to these assessments or outlook assumptions.