Valvoline Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; comparable period is the three months ended December 31, 2016. Valvoline produces and sells automotive and engine maintenance products and operates quick-lube services across three segments: Core North America, Quick Lubes and International.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales | $545 million | $489 million | Up 11% |
| Gross profit / margin | $195 million / 35.8% | $185 million / 37.8% | Profit up $10 million; margin down 2.0 points |
| Operating income | $88 million | $94 million | Down $6 million |
| Net income (loss) | $(10) million; $(0.05) per diluted share | $72 million; $0.35 per diluted share | Declined to a loss |
| Adjusted EBITDA | $108 million | $109 million | Down $1 million |
| Operating cash flow | $20 million | $88 million | Down $68 million |
| Capital expenditures / free cash flow | $14 million / $6 million | $9 million / $79 million | Free cash flow down $73 million |
Sales growth reflected pricing (+$20 million), volume (+$10 million), product mix (+$6 million), currency (+$7 million) and acquisitions (+$13 million). Lubricant gallons sold increased 2% to 43.8 million. Gross margin pressure reflected higher raw-material, packaging and supply-chain costs, including costs attributed to 2017 hurricanes. Higher planned SG&A investment also weighed on operating performance.
Segments
- Core North America: Sales $251 million, up 6%; operating income $43 million versus $51 million. Margin declined amid raw-material and packaging costs and lower volume.
- Quick Lubes: Sales $154 million, up 21%; operating income $35 million versus $29 million. Growth included $13 million from acquisitions, higher volume and pricing. Combined same-store sales growth was 7.9%.
- International: Sales $140 million, up 12%; operating income $19 million versus $20 million. Foreign exchange, volume and pricing lifted sales, while higher costs and mix reduced margin.
Financial position and liquidity
- At December 31, 2017, cash was $115 million, down from $201 million at September 30, 2017; approximately $96 million was held by non-U.S. subsidiaries.
- Total debt was $1.166 billion, compared with $1.124 billion at September 30, 2017. Debt included $400 million of 2025 notes, $375 million of 2024 notes, $281 million of term loans and $120 million under the trade receivables facility.
- Available borrowing capacity was $439 million under the revolver and $39 million under the receivables facility. The company reported compliance with debt covenants.
- Current assets were $735 million and current liabilities $368 million. Stockholders’ deficit was $194 million.
- Operating cash flow fell largely because of working-capital timing and prior-year cash receipts and settlements involving Ashland. Investing cash use included the $60 million acquisition; financing cash use included $39 million of share repurchases and $15 million of dividends.
Material changes, outlook and risks
- Tax reform: The quarter included approximately $68 million of income-tax expense related to U.S. tax legislation, primarily a $67 million remeasurement of deferred tax assets; an additional $4 million was recorded for deemed repatriation, partly offset by tax benefits. Tax-related Ashland indemnity adjustments added $7 million of pretax expense. These provisional charges drove the quarterly net loss despite positive pretax income.
- Management expects a net benefit from tax reform over time, but estimates are provisional. It projected a fiscal 2018 effective tax rate of 44%–45%, including the quarter’s charges, and 25%–26% for fiscal 2019. The statutory federal rate is expected to be 21% beginning in fiscal 2019; state-tax and other impacts remain uncertain.
- Fiscal 2018 capital expenditures were forecast at approximately $80 million–$90 million. Management said current cash, operating cash generation and financing were sufficient for the next 12 months’ operating needs, debt service, pension contributions and other commitments.
- The company expected fiscal 2018 pension contributions of approximately $14 million, of which $3 million had been made in the quarter.
- Valvoline acquired 56 franchise quick-lube locations for $60 million and purchased the remaining 30% interest in its Thailand subsidiary for approximately $16 million.
- The receivables facility was extended to November 2020 and its maximum capacity increased to $175 million. Borrowings under it rose by $45 million during the quarter.
- After quarter-end, the board declared a $0.0745-per-share dividend and authorized up to $300 million of additional repurchases through September 30, 2020. More than 1 million shares were repurchased for $29 million from January 1 through February 6, 2018.
- Ordinary-course litigation reserves were not material, and management did not identify pending litigation expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors or market risks.
Investor verification points
- Assess whether underlying operating trends support growth: consolidated revenue rose, but operating income and gross margin declined; segment performance was mixed.
- Separate the one-time tax-reform charges from recurring earnings and monitor updates to provisional tax estimates, state-tax effects and Ashland indemnity obligations.
- Review the causes and sustainability of lower operating cash flow and free cash flow, including working-capital movements and ongoing investment needs.
- Track leverage, interest costs, receivables-facility availability and covenant headroom alongside the expanded buyback authorization and dividend commitments.
- Evaluate acquisition integration and returns from the 56 acquired stores, and monitor raw-material, packaging and supply-chain cost pressures.