Valvoline Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and results
Valvoline markets automotive and engine-maintenance products and operates and franchises quick-lube service centers. Its reporting segments are Quick Lubes, Core North America and International.
- Sales: $557, up 2% from $545. The increase reflected $17 of pricing and a $15 revenue-recognition adoption effect, partly offset by $15 lower volume, $6 of unfavorable currency and other factors. Lubricant gallons sold declined 4% to 42.0 million.
- Profitability: Gross profit was $183, down 6%; gross margin fell to 32.9% from 35.8%. Operating income was $87, compared with $88. Net income was $53, or $0.28 diluted EPS, versus a $10 net loss, or $(0.05) per share.
- Adjusted EBITDA: $101 versus $108. This non-GAAP measure excludes specified items, including pension and postretirement income.
- Cash flow: Operating cash flow was $85 versus $20; capital expenditures were $27, producing reported free cash flow of $58 versus $6. Operating cash flow benefited from working-capital timing and $28 of receivables sold.
- Liquidity: Cash was $99, including approximately $76 held by non-U.S. subsidiaries. Working capital was $318, down from $344 at September 30, 2018. Liquid assets were 113% of current liabilities, versus 123% at fiscal year-end.
- Debt: Total debt was $1,321, approximately unchanged from $1,322 at September 30. About 58% of borrowings had fixed rates. Remaining borrowing capacity was $289; the company reported compliance with debt covenants.
Segment performance and changes
- Quick Lubes: Sales rose 23% to $189 and operating income increased to $38 from $35. Combined same-store sales grew 9.8%. The quarter added 59 net stores, including 31 acquired Canadian franchise stores; total system stores reached 1,301.
- Core North America: Sales fell 8% to $232 and operating income declined to $31 from $43. Management cited weaker retail-channel branded volumes, competitive pressure and consumer price sensitivity. Segment lubricant gallons declined to 21.7 million from 23.8 million.
- International: Sales decreased 3% to $136 and operating income was $18 versus $19. Lower volume and unfavorable foreign exchange were partly offset by pricing, premium mix, lower costs and a free-trade-zone subsidy.
- Reported consolidated sales include a $15 benefit from adopting the new revenue-recognition standard. Under prior guidance, quarterly sales would have been $542 and net income $52; adoption also reduced opening retained earnings by $13, net of tax.
- The prior-year quarter included $9 of legacy and separation-related expenses and approximately $68 of tax-reform-related tax expense. The effective tax rate was 26.4% this quarter versus 111.9% a year ago, so the net-income comparison was significantly affected by prior-period tax items.
Outlook, commentary and risks
- No numerical fiscal 2019 earnings or revenue guidance is stated in the supplied filing text. Management’s stated priorities include Quick Lubes growth, investment in emerging markets, strengthening distribution and product penetration, developing electric-vehicle capabilities, and investment in talent and technology.
- On February 6, 2019, Valvoline announced a restructuring program targeting annualized pretax savings of approximately $40–$50, with modest benefits expected in fiscal 2019 and most savings beginning in fiscal 2020. A voluntary separation program is expected to result in $12–$17 of pretax expense.
- The board declared a quarterly dividend of $0.106 per share, payable March 15, 2019. Future dividends remain subject to board approval and business conditions.
- Management said current liquidity should cover expected operating needs, debt service, taxes and benefit contributions for the next 12 months, but noted that insufficient cash generation or failure to comply with credit terms could require additional financing.
- Key operating exposures discussed include competition and weak retail lubricant demand in North America, raw-material cost pass-through and margin dilution, foreign-exchange movements, and slower economies in some emerging markets. Ordinary-course legal matters were not considered likely to have a material adverse effect; some claims were not accrued because losses were not probable or reasonably estimable.
- Adoption of the lease accounting standard is expected to materially increase balance-sheet assets and liabilities when effective in fiscal 2020; the company had not yet quantified the impact.
Investor verification checklist
- Assess underlying sales and earnings trends after separating the $15 revenue-recognition effect and the prior-year tax-reform charge.
- Track Core North America retail volumes, competitive promotions, gross margins and the effectiveness of pricing.
- Check whether Quick Lubes same-store growth, acquisitions and new-store expansion translate into durable segment earnings and cash generation.
- Review the quality of operating cash flow, including working-capital timing and receivables sales, alongside capital spending and free-cash-flow definition.
- Monitor debt, variable-rate exposure, receivables-facility availability, covenant compliance and liquidity, including cash held overseas.
- Verify restructuring charges, timing and realization of the announced $40–$50 annualized savings, and the effect on operations.