Valvoline Inc. — Form 10-Q Summary
Reporting period: First fiscal quarter of 2022, the three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020, unless otherwise noted. Valvoline operates Retail Services and Global Products.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Sales | $858 million | $653 million |
| Gross profit / margin | $244 million / 28.4% | $228 million / 34.9% |
| Operating income / margin | $121 million / 14.1% | $124 million / 19.0% |
| Net income | $87 million | $87 million |
| Diluted EPS | $0.48 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $156 million | $149 million |
| Cash from operating activities | $32 million | $79 million |
| Free cash flow (non-GAAP) | $(3) million | $44 million |
Sales rose 31.4%, driven by volume and mix, pricing, and acquisitions. Gross profit increased modestly, but margin contracted as raw-material inflation, price-cost lag, and supply-chain costs outweighed favorable volume and mix. The effective tax rate was 23.0%, compared with 25.6%.
Segments and material changes
- Retail Services: Sales increased 36% to $346 million; adjusted EBITDA rose 40% to $98 million. System-wide same-store sales grew 24.7%, and the network ended the quarter at 1,635 stores. Operating and adjusted EBITDA margins improved to 23.4% and 28.3%, respectively.
- Global Products: Sales increased 28% to $512 million, with lubricant volume up 13% to 43.1 million gallons. Adjusted EBITDA fell 18% to $77 million; adjusted EBITDA margin declined to 15.0% from 23.6%, reflecting price-cost lag and supply-chain disruptions.
- Consolidated net income was unchanged year over year; diluted EPS increased 2%. Consolidated adjusted EBITDA increased 5%.
- Operating cash flow declined primarily because of working-capital needs, including higher receivables. Investing outflow was much lower than in the prior-year period, which included substantially greater acquisition spending.
Liquidity, debt and capital allocation
At December 31, 2021, cash and cash equivalents were $152 million and total debt was $1.694 billion. The company reported approximately $586–$587 million of remaining capacity under its revolver and Trade Receivables Facility, plus approximately $28 million under China credit facilities. About 87% of borrowings, including interest-rate swaps, carried fixed rates; Valvoline was in compliance with debt covenants. Management said available cash, operating cash generation and financing were sufficient for expected requirements over the next 12 months.
Quarterly dividends paid totaled $23 million ($0.125 per share); share repurchases totaled $31 million, or about 905,000 shares. The board declared another $0.125-per-share dividend for payment in March 2022. Fiscal 2022 free cash flow guidance was $260–$300 million.
Outlook, risks and notable items
- Valvoline is pursuing a separation of Retail Services and Global Products. Alternatives remain under evaluation, board approval is required, and no completion timetable was established. Incremental fiscal 2022 planning costs are expected but cannot yet be reasonably estimated.
- Management cited ongoing raw-material inflation, delayed price recovery, supply-chain and logistics costs, and uncertainty from COVID-19 and emerging variants. The company said the pandemic’s current and future effects could not be reasonably quantified.
- Ordinary-course legal claims were disclosed; recorded liabilities were not material, and management did not expect pending matters to have a material adverse effect based on information then available.
- The company acquired 12 service centers for $14 million during the quarter. Disclosure controls were assessed as effective; no material changes in internal control or material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track whether pricing catches up with raw-material and supply-chain cost inflation, particularly in Global Products, and whether margins recover.
- Compare operating cash flow and working-capital changes with management’s $260–$300 million fiscal 2022 free-cash-flow outlook.
- Verify the separation’s board approvals, structure, timetable, costs and potential effects on capital allocation.
- Monitor debt, available borrowing capacity, covenant compliance, and continued dividends and repurchases.
- Assess whether Retail Services same-store sales and store growth remain strong and whether Global Products volume growth translates into improved profitability.