Valvoline Inc. — Q3 FY2019 Form 10-Q
Business context and period. Valvoline markets automotive maintenance products and operates and franchises quick-lube service centers. This unaudited report covers the quarter and nine months ended June 30, 2019; comparisons are with the same 2018 periods. Fiscal Q3 is the quarter ended June 30.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales | $613 million, up 6% from $577 million | $1.761 billion, up 4% from $1.691 billion |
| Gross profit / margin | $207 million / 33.8%, versus $201 million / 34.8% | $593 million / 33.7%, versus $603 million / 35.7% |
| Operating income / margin | $102 million / 16.6%, unchanged in dollars from 2018 | $285 million / 16.2%, versus $290 million / 17.1% |
| Net income | $65 million, versus $64 million | $181 million, versus $121 million |
| Diluted EPS | $0.34, versus $0.33 | $0.96, versus $0.61 |
| Adjusted EBITDA (non-GAAP) | $126 million, versus $115 million | $349 million, versus $345 million |
Q3 sales growth reflected pricing, favorable mix, Quick Lubes growth and a $10 million reported revenue-recognition impact; currency reduced sales by $8 million. Nine-month sales also included a $34 million revenue-recognition impact and were offset by $25 million of unfavorable currency effects. Under prior revenue guidance, reported Q3 sales would have been $603 million and net income $66 million; nine-month sales would have been $1.727 billion and net income $183 million.
Q3 gross profit increased $6 million, but nine-month gross profit fell $10 million. Reported gross margin contracted in both periods, reflecting revenue-recognition-related reclassifications, facility interruption costs and the margin effect of passing through raw-material cost increases. Nine-month net income rose substantially while operating income declined, principally because the prior-year period included significant tax-reform-related tax expense. Effective tax rates were 23.5% for Q3 and 23.6% for nine months, compared with 34.0% and 56.0%, respectively, in 2018.
Segments and operating trends
- Quick Lubes: Q3 sales rose 26% to $211 million and operating income rose to $48 million from $38 million. Combined same-store sales grew 9.7%; the system had 1,352 stores at quarter-end. Growth reflected more transactions, higher average tickets, store additions and acquisitions.
- Core North America: Q3 sales declined 2% to $260 million and operating income fell to $38 million from $41 million. Retail competition and lower installer volumes weighed on performance, although management reported sequential improvement from Q2.
- International: Q3 sales declined 3% to $142 million; operating income was $20 million, unchanged. Currency headwinds and weaker Latin American and certain Asia-Pacific markets offset EMEA growth.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $214 million, versus $181 million; capital expenditures were $73 million, versus $51 million. Company-defined free cash flow was $141 million, versus $130 million.
- At June 30, cash, cash equivalents and restricted cash totaled $137 million, including $11 million restricted primarily for an acquisition. Total debt was $1.341 billion; the balance sheet reported $1.334 billion of long-term debt and $7 million current debt.
- Available borrowing capacity was $641 million, including $466 million under the revolving credit facility and the full $175 million trade-receivables facility. The company reported compliance with debt covenants. Approximately 58% of borrowings had fixed rates.
- Working capital was $396 million, versus $344 million at September 30, 2018; liquid assets were 133% of current liabilities, versus 123%. Cash dividends paid in the nine-month period were $60 million. No program share repurchases were reported during the quarter.
Outlook, risks and unusual items
- Management expects restructuring and cost-savings actions to generate $40 million to $50 million in annualized pretax savings, with modest benefits beginning late FY2019 and full savings expected by the end of FY2020. It expects a further $3 million to $5 million of restructuring expenses, primarily in Q4 FY2019. The filing cautions that savings are estimates and may not be achieved; implementation may disrupt operations.
- A nearby third-party petrochemical-terminal fire temporarily shut the company’s second-largest domestic blending facility. The facility reopened in late April with no damage reported. Business-interruption expenses were $5 million for Q3 and $6 million year to date; management was pursuing insurance recovery and did not expect material additional Q4 costs.
- On April 12, 2019, Valvoline amended its credit agreement, extending maturity to 2024, lowering interest rates and increasing revolver capacity. Management stated it expected available liquidity to meet obligations for the next 12 months.
- Four acquisitions totaling approximately $18 million were completed from July 1 through July 31, 2019, including three quick-lube stores and an Eastern European lubricant producer. A $0.106-per-share quarterly dividend was declared July 18, payable September 16.
- Adoption of the new lease standard was planned for October 1, 2019. The company expected a material balance-sheet impact from recognizing operating-lease assets and liabilities, but could not yet estimate the amount; it did not anticipate a material impact on income or cash-flow statements.
- Ordinary-course lawsuits and claims were disclosed; management considered recorded accruals adequate and did not expect pending matters to have a material adverse effect. The filing reported no material change in market risks.
Important facts for investors to verify
- Whether Quick Lubes’ strong same-store growth and store expansion continue, and whether Core North America stabilizes amid retail and installer-channel pressures.
- How much reported sales and earnings trends reflect the new revenue-recognition standard versus underlying demand and operations.
- Progress toward the $40 million to $50 million savings target, associated costs, and any execution or employee-transition effects.
- Debt, interest-rate exposure, covenant headroom and liquidity after the credit-agreement refinancing and subsequent acquisitions.
- Insurance-recovery outcome and any further operational or financial effects from the blending-facility interruption.
- The quantified balance-sheet effect of lease-standard adoption and the realized impact of subsequent acquisitions.