Valvoline Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. This is an annual report, not a quarterly filing. Valvoline operates Retail Services and Global Products, serving vehicle maintenance customers through a North American service-center network and product sales in more than 140 countries.
Financial results
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Sales | $2.981 billion | $2.353 billion | +26.7% |
| Gross profit / margin | $980 million / 32.9% | $863 million / 36.7% | Profit +13.6%; margin down 3.8 percentage points |
| Operating income / margin | $528 million / 17.7% | $485 million / 20.6% | +8.9% |
| Net income | $420 million | $317 million | +32.5% |
| Diluted EPS | $2.29 | $1.69 | +36% |
| Adjusted EBITDA (non-GAAP) | $634 million | $495 million | +28% |
| Operating cash flow | $404 million | $372 million | +$32 million |
| Free cash flow (non-GAAP) | $260 million | $221 million | +$39 million |
Sales growth reflected volume and mix (+$330 million), pricing (+$187 million), acquisitions (+$72 million) and currency (+$39 million). Profit growth benefited from stronger volumes, service-center acquisitions and product mix, but rising input costs, price-cost lag and unfavorable LIFO adjustments compressed gross margin.
Segments and material changes
- Retail Services: Sales were $1.221 billion, up 38%; operating income was $321 million, up 54%; adjusted EBITDA was $382 million, up 55%. System-wide same-store sales rose 21.2%, and the network grew to 1,594 stores, including 719 company-operated stores.
- Global Products: Sales were $1.760 billion, up 20%; operating income was $298 million, up 5%; adjusted EBITDA was $327 million, up 6%. Lubricant volume increased 16% to 160.9 million gallons. Margin pressure from input-cost inflation and lagging price increases partly offset volume and mix gains.
- During fiscal 2021, Valvoline realigned reporting into these two segments. On October 12, 2021, it announced it was pursuing a separation of the businesses; alternatives remain under review, with no timetable established.
- Valvoline acquired 134 service-center stores for $282 million. It issued $535 million of 3.625% notes due 2031 and used the proceeds and cash to redeem $800 million of 4.375% notes due 2025.
Cash, debt and liquidity
- Cash and cash equivalents were $230 million at year-end; total debt was $1.694 billion, versus $1.962 billion a year earlier. About 87% of borrowings, including swaps, had fixed rates.
- Remaining borrowing capacity under the revolver and receivables facility was $586 million. The company reported compliance with debt covenants and management considered liquidity sufficient for the next 12 months.
- Capital expenditures were $144 million. Investing cash outflow was $400 million, mainly reflecting service-center acquisitions. Financing cash outflow was $536 million, including $127 million of repurchases and $91 million of dividends.
- The company repurchased approximately 5 million shares during the year. Year-end contractual obligations included $1.708 billion of long-term debt, $445 million of interest payments and $637 million of operating and finance lease payments.
Outlook, risks and unusual items
- Management forecast FY2022 free cash flow of $260–$300 million and capital expenditures of approximately $180–$200 million.
- Management expected price-cost lag and supply-chain bottlenecks to pressure margins in the first half of FY2022, while it pursued additional pricing actions to recover higher input costs.
- COVID-19 recovery supported stronger demand in FY2021, but the company cited continuing uncertainty from pandemic developments, supply constraints, labor shortages and uneven international recovery.
- Other key risks include raw-material price volatility and supplier concentration, competition and private-label growth, customer concentration, recruiting and retaining store employees, execution of the proposed separation, acquisition integration, and changes in vehicle technology and maintenance needs.
- Net income included a $72 million pension and postretirement remeasurement gain. Debt redemption and related extinguishment costs affected financing expense; management’s adjusted EBITDA excludes specified items and is non-GAAP.
- Ordinary-course legal matters were not considered material by management; no pending matter was assessed as having a material loss that was at least reasonably possible. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether price increases catch up with raw-material inflation and restore margins after the anticipated first-half FY2022 lag.
- Whether management achieves its FY2022 free-cash-flow and capital-expenditure forecasts amid store expansion and supply constraints.
- The structure, costs, timing and expected benefits of the proposed Retail Services and Global Products separation; no completion timetable was disclosed.
- Debt maturities, covenant headroom and liquidity needs, including acquisition spending, shareholder returns and pension obligations.
- The sustainability of Retail Services’ exceptional same-store sales growth and Global Products’ volume recovery, particularly as pandemic comparisons normalize.
- Exposure to major Global Products retail customers: five DIY customers represented 28% of segment sales and 43% of trade receivables; one represented about 11% of segment sales.