Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.69M
2: EX-31.1 Certification of Samuel J. Mitchell HTML 25K
3: EX-31.2 Certification of Mary E. Meixelsperger HTML 25K
4: EX-32 Certification of Samuel J. Mitchell and Mary E. HTML 21K
Meixelsperger
10: R1 Cover Page HTML 71K
11: R2 Condensed Consolidated Statements of Comprehensive HTML 111K
Income
12: R3 Condensed Consolidated Balance Sheets HTML 143K
13: R4 Condensed Consolidated Balance Sheets HTML 36K
(Parenthetical)
14: R5 Condensed Consolidated Statements of Stockholders' HTML 93K
Deficit
15: R6 Condensed Consolidated Statements of Stockholders' HTML 21K
Deficit (Parenthetical)
16: R7 Condensed Consolidated Statements of Cash Flows HTML 97K
17: R8 Basis of Presentation and Significant Accounting HTML 25K
Policies
18: R9 Fair Value Measurements HTML 119K
19: R10 Acquisitions HTML 50K
20: R11 Goodwill and Other Intangibles HTML 31K
21: R12 Debt HTML 42K
22: R13 Income Taxes HTML 32K
23: R14 Employee Benefit Plans HTML 52K
24: R15 Litigation, Claims and Contingencies HTML 22K
25: R16 Earnings Per Share HTML 43K
26: R17 Reportable Segment Information HTML 132K
27: R18 Supplemental Financial Information HTML 62K
28: R19 Subsequent Events HTML 22K
29: R20 Basis of Presentation and Significant Accounting HTML 26K
Policies (Policies)
30: R21 Fair Value Measurements (Tables) HTML 119K
31: R22 Acquisitions and Divestitures (Tables) HTML 48K
32: R23 Goodwill and Other Intangibles (Tables) HTML 31K
33: R24 Debt (Tables) HTML 40K
34: R25 Income Taxes (Tables) HTML 29K
35: R26 Employee Benefit Plans (Tables) HTML 52K
36: R27 Earnings Per Share (Tables) HTML 42K
37: R28 Reportable Segment Information (Tables) HTML 130K
38: R29 Supplemental Financial Information (Tables) HTML 67K
39: R30 Basis of Presentation and Significant Accounting HTML 26K
Policies - Narrative (Details)
40: R31 Fair Value Measurements - Schedule of Assets and HTML 68K
Liabilities at Fair Value (Details)
41: R32 Fair Value Measurements - Narrative (Details) HTML 20K
42: R33 Fair Value Measurements - Fair Value of Debt HTML 38K
(Details)
43: R34 Acquisitions - Narrative (Details) HTML 30K
44: R35 Acquisitions - Schedule of Aggregate Cash HTML 79K
Consideration and Total Assets Acquired and
Liabilities Assumed (Details)
45: R36 Goodwill and Other Intangibles - Summary of HTML 34K
Goodwill by Segment (Details)
46: R37 Debt - Schedule of Short-Term Borrowings and Long HTML 78K
Term Debt (Details)
47: R38 Income Taxes - Schedule of Income Tax Expense and HTML 25K
Effective Tax Rate (Details)
48: R39 Employee Benefit Plans - Components of Pension and HTML 41K
Other Postretirement Benefit Income (Details)
49: R40 Earnings Per Share (Details) HTML 57K
50: R41 Reportable Segment Information - Sales and HTML 71K
Operating Income by Reportable Segment (Details)
51: R42 Reportable Segment Information - Disaggregation of HTML 43K
Revenues by Reportable Segments (Details)
52: R43 Reportable Segment Information - Disaggregation of HTML 53K
Revenues by Geographical Market (Details)
53: R44 Supplemental Financial Information - Cash, Cash HTML 28K
Equivalents and Restricted Cash (Details)
54: R45 Supplemental Financial Information - Summary of HTML 32K
Accounts Receivable (Details)
55: R46 Supplemental Financial Information - Narrative HTML 20K
(Details)
56: R47 Supplemental Financial Information - Inventory HTML 27K
(Details)
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(Exact name of registrant as specified in its charter)
iKentucky
i30-0939371
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i100 Valvoline Way
iLexington,
iKentuckyi40509
(Address of principal executive offices) (Zip Code)
Telephone Number (i859)
i357-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
iCommon stock, par value $0.01 per share
iVVV
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþNoo
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).iYesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes i☐ No þ
(In
millions, except per share amounts - unaudited)
June 30 2022
September 30 2021
Assets
Current assets
Cash and cash equivalents
$
i98
$
i230
Receivables,
net
i583
i496
Inventories,
net
i306
i258
Prepaid expenses and other current assets
i64
i53
Total
current assets
i1,051
i1,037
Noncurrent
assets
Property, plant and equipment, net
i874
i817
Operating
lease assets
i321
i307
Goodwill
and intangibles, net
i804
i775
Equity
method investments
i48
i47
Other
noncurrent assets
i250
i208
Total
noncurrent assets
i2,297
i2,154
Total
assets
$
i3,348
$
i3,191
Liabilities
and Stockholders’ Equity
Current liabilities
Current portion of long-term debt
$
i61
$
i17
Trade
and other payables
i265
i246
Accrued
expenses and other liabilities
i315
i306
Total
current liabilities
i641
i569
Noncurrent
liabilities
Long-term debt
i1,639
i1,677
Employee
benefit obligations
i229
i258
Operating
lease liabilities
i288
i274
Deferred
tax liabilities
i58
i26
Other
noncurrent liabilities
i267
i252
Total
noncurrent liabilities
i2,481
i2,487
Commitments
and contingencies
i
i
Stockholders’ equity
Preferred
stock, iino/
par value, ii40/ shares authorized; iiiino///
shares issued and outstanding
i—
i—
Common
stock, par value $ii0.01/ per share, ii400/
shares authorized; ii177/ and ii180/
shares issued and outstanding at June 30, 2022 and September 30, 2021, respectively
i2
i2
Paid-in
capital
i41
i35
Retained
earnings
i186
i90
Accumulated
other comprehensive (loss) income
(i3)
i8
Total
stockholders’ equity
i226
i135
Total
liabilities and stockholders’ equity
$
i3,348
$
i3,191
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 – iBASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
i
The
accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline Inc. (“Valvoline” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021. Certain prior period amounts disclosed herein have been reclassified to conform to the current presentation.
Use of estimates, risks and uncertainties
The preparation
of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for interim periods are not necessarily indicative of those to be expected for the entire year, particularly in light of the novel coronavirus ("COVID-19") global pandemic and its effects.
Valvoline is subject to continued risks and uncertainties as a result of the COVID-19 pandemic. The extent to which the evolving pandemic impacts the
Company's financial condition cannot be reasonably quantified or estimated and will depend on a number of factors including the ultimate magnitude and duration of the pandemic. The Company has substantially maintained its operations throughout the pandemic and continues to place additional emphasis on the safety and wellness of its employees and customers.
Recent accounting pronouncements
i
The
following accounting guidance relevant to Valvoline was either issued or adopted in the current year, or is expected to have a meaningful impact on Valvoline in future periods upon adoption. The Financial Accounting Standards Board ("FASB") issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on Valvoline’s condensed consolidated financial statements, and therefore, is not described below.
Issued but not yet adopted
In March 2020, the FASB issued guidance related to reference rate reform that simplifies the accounting for contract modifications and hedging arrangements as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference
rates to alternative reference rates. This guidance can be applied on a prospective basis through the end of December 2022 for qualifying modified arrangements. The Company has interest rate swap hedging arrangements and variable rate long-term debt for which existing payments are based on LIBOR tenors expected to cease in June 2023. As of June 30, 2022, i30% of Valvoline’s outstanding total long-term debt and interest rate
swap agreements with a total notional amount of $i275 million are under existing arrangements that mature following LIBOR cessation and do not contain fallback provisions to alternative reference rates. The Company expects to adopt this guidance to the extent there are qualifying contractual modifications prior to the end of calendar 2022 and does not expect application of this guidance to have a material impact on its condensed consolidated financial statements.
9
NOTE
2 - iFAIR VALUE MEASUREMENTS
i
The following tables set forth the
Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy:
There were iino/
material gains or losses recognized in earnings during the three and nine months ended June 30, 2022 or 2021 related to these assets and liabilities.
Long-term debt
Long-term debt is reported in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the disclosure above of financial assets and liabilities measured at fair value within the condensed consolidated financial statements on a recurring basis. The fair values of the Company's outstanding fixed rate senior notes shown below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy.
(a)Carrying
values shown are net of unamortized discounts and debt issuance costs.
Refer to Note 5 for details of these senior notes as well as Valvoline's other debt instruments that have variable interest rates with carrying amounts that approximate fair value.
NOTE 3 - iACQUISITIONS
The
Company acquired i31 service center stores in single and multi-store transactions along with the remaining ownership interest of an equity method investment for total consideration of $i54
million during the nine months ended June 30, 2022. These acquisitions expand Valvoline's retail presence in key North American markets, contribute to growing Retail Services to i1,690 system-wide service center stores, broaden the product portfolio of Global Products into batteries, and enhance distribution capabilities to installer channel customers.
During the nine months ended June 30, 2021, the
Company acquired i121 service center stores in single and multi-store transactions, including i44
former franchise locations converted to company-owned service center stores and i12 franchise-operated service center stores, for an aggregate purchase price of $i267
million.
11
The Company’s acquisitions are accounted for as business combinations. iA summary follows of the aggregate cash consideration paid and the total assets acquired
and liabilities assumed for the nine months ended June 30:
(In millions)
2022
2021
Cash
$
i2
$
i—
Receivables
i2
i—
Inventories
i1
i2
Other
current assets
i—
i1
Property,
plant and equipment (a)
i10
i93
Operating
lease assets
i10
i36
Goodwill
(b)
i42
i203
Intangible
assets (c)
i
i
Reacquired
franchise rights (d)
i1
i54
Other
i1
i3
Other
noncurrent assets
i1
i—
Other
current liabilities
(i4)
(i8)
Operating
lease liabilities
(i9)
(i33)
Other
noncurrent liabilities
(i3)
(i84)
Total
net assets acquired
$
i54
$
i267
Consideration
transferred, net of cash acquired
$
i50
$
i267
Fair
value of previously held equity interest
i2
i—
Cash
acquired
i2
i—
Total
consideration transferred
$
i54
$
i267
(a)Includes
$i3 million of finance lease assets in property, plant and equipment and finance lease liabilities of $i1 million and $i2 million
in other current and noncurrent liabilities, respectively, for leases acquired during the nine months ended June 30, 2022.
(b)Goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions.
(c)Intangible assets acquired during the nine months ended June 30, 2022 and 2021 have weighted average amortization periods of six and i10
years, respectively.
(d)Prior to the acquisition of former franchise service center stores, the Company licensed the right to operate franchised service centers, including the use of Valvoline's trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately eight and i10
years for the rights reacquired in fiscal 2022 and 2021, respectively. The effective settlement of these arrangements resulted in ino settlement gain or loss as the contractual terms were at market.
The fair values above are preliminary for up to one year from the date of acquisition as they may be subject to measurement period adjustments if new information is obtained about facts and circumstances that existed as of the acquisition date. The
Company does not currently expect any material changes to the preliminary purchase price allocations for acquisitions completed during the last twelve months.
12
NOTE 4 - iGOODWILL
i
The
following table summarizes changes in the carrying amount of goodwill by reportable segment and in total during the nine months ended June 30, 2022:
(a)Includes
acquisitions within the Retail Services reportable segment of i31 service center stores and the remaining ownership interest of a former joint venture in the Global Products reportable segment. Refer to Note 3 for additional details.
/
NOTE 5 - iDEBT
i
The following table summarizes Valvoline’s total debt as of:
(In
millions)
June 30 2022
September 30 2021
2031 Notes
$
i535
$
i535
2030
Notes
i600
i600
Term
Loan
i474
i475
Revolver
(a)
i—
i—
Trade
Receivables Facility (b)
i68
i59
China
Construction Facility (c)
i36
i39
China
Working Capital Facilities (d)
i—
i—
Debt
issuance costs and discounts
(i13)
(i14)
Total
debt
i1,700
i1,694
Current
portion of long-term debt
i61
i17
Long-term
debt
$
i1,639
$
i1,677
(a)As
of June 30, 2022, the total borrowing capacity remaining under the $i475 million revolving credit facility was $i471
million due to a reduction of $i4 million for letters of credit outstanding.
(b)The Trade Receivables Facility had $i107
million of borrowing capacity remaining and the wholly-owned financing subsidiary owned $i383 million of outstanding accounts receivable as of June 30, 2022.
(c)The remaining borrowing capacity under the China Construction Facility was approximately $i6
million as of June 30, 2022.
/
(d)Includes itwo credit facilities, a committed revolving credit facility for $i12
million that expires in the first quarter of fiscal 2023 and bears interest at the local prime rate, and an uncommitted credit facility with a revolving line of credit of up to $i22 million that expires in the third quarter of fiscal 2024 and bears interest at the local prime rate plus margin (collectively, the “China Working Capital Facilities”). The China Working Capital Facilities have ino
outstanding borrowings as of June 30, 2022.
As of June 30, 2022, Valvoline was in compliance with all covenants under its long-term borrowings.
NOTE 6 – iINCOME TAXES
Income tax provisions
for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual discrete items related specifically to interim periods. iThe following summarizes income tax expense and the effective tax rate in each interim period:
13
Three
months ended
Nine months ended
June 30
June 30
(In millions)
2022
2021
2022
2021
Income tax expense
$
i30
$
i31
$
i83
$
i83
Effective
tax rate percentage
ii23.3/
%
i24.2
%
i23.7
%
i24.8
%
The
decreases in the effective tax rate in the three and nine months ended June 30, 2022 were primarily attributed to favorable discrete tax benefits in the current year periods, which resulted in relatively flat income tax expense on higher pre-tax earnings.
NOTE 7 – iEMPLOYEE BENEFIT PLANS
i
The
following table summarizes the components of pension and other postretirement benefit income:
Pension benefits
Other postretirement benefits
(In
millions)
2022
2021
2022
2021
Three months ended June 30
Service cost
$
i—
$
i1
$
i—
$
i—
Interest
cost
i11
i10
i—
i1
Expected
return on plan assets
(i20)
(i22)
i—
i—
Amortization
of prior service credits
i—
i—
(i1)
(i3)
Net
periodic benefit income
$
(i9)
$
(i11)
$
(i1)
$
(i2)
Nine
months ended June 30
Service cost
$
i1
$
i2
$
i—
$
i—
Interest
cost
i33
i32
i1
i1
Expected
return on plan assets
(i60)
(i65)
i—
i—
Amortization
of prior service credit
i—
i—
(i2)
(i9)
Net
periodic benefit income
$
(i26)
$
(i31)
$
(i1)
$
(i8)
/
NOTE
8 – iLITIGATION, CLAIMS AND CONTINGENCIES
From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company establishes liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable. Where appropriate, the Company
has recorded liabilities with respect to these matters, which were not material for the periods presented as reflected in the condensed consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, Valvoline discloses matters when management believes a material loss is at least reasonably possible.
In all instances, management has assessed each matter based on current information available and made a judgment concerning its potential outcome, giving due consideration to the amount and nature of the claim and the probability of success. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable.
Although
the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not exceed the amounts reflected in the condensed consolidated financial statements, based on information available at this time, it is the opinion of management that such pending claims or proceedings will not have a material adverse effect on its condensed consolidated financial statements.
14
NOTE 9 - iEARNINGS
PER SHARE
i
The following table summarizes basic and diluted earnings per share:
Three
months ended
Nine months ended
June 30
June 30
(In millions, except per share amounts)
2022
2021
2022
2021
Numerator
Net
income
$
i99
$
i97
$
i267
$
i252
Denominator
Weighted
average common shares outstanding
i179
i182
i180
i183
Effect
of potentially dilutive securities
i1
i1
i1
i1
Weighted
average diluted shares outstanding
i180
i183
i181
i184
Earnings
per share
Basic
$
i0.55
$
i0.53
$
i1.48
$
i1.38
Diluted
$
i0.55
$
i0.53
$
i1.47
$
i1.37
/
NOTE
10 - iREPORTABLE SEGMENT INFORMATION
Valvoline manages its business through the following itwo
reportable segments:
•Retail Services - delivers automotive services to vehicle owners and fleets throughout the United States and Canada across a broad array of preventive maintenance services and capabilities performed through Valvoline’s retail network of company-operated and independent franchised service center stores, and independent Express Care stores that service vehicles with Valvoline products.
•Global Products- sells engine and automotive preventive maintenance products in more than i140
countries and territories to mass market and automotive parts retailers, installers, and commercial customers, including original equipment manufacturers (“OEM”), to service light- and heavy-duty vehicles and equipment.
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline defines as segment operating income adjusted for depreciation and amortization and certain key items impacting comparability.
Certain indirect expenses are recognized within each segment based on the
estimated utilization of indirect resources. Costs to support corporate functions and certain non-operational and corporate activity that is not directly attributable to a particular segment are not included in the segment operating results regularly utilized by the chief operating decision maker. This activity is separately delineated within Corporate to reconcile to consolidated results.
15
Segment financial results
i
The
following presents sales and adjusted EBITDA for each reportable segment:
Three months ended
Nine months ended
June
30
June 30
(in millions)
2022
2021
2022
2021
Sales
Retail Services
$
i384
$
i330
$
i1,080
$
i869
Global
Products
i573
i462
i1,621
i1,277
Consolidated
sales
$
i957
$
i792
$
i2,701
$
i2,146
Adjusted
EBITDA
Retail Services
$
i113
$
i112
$
i306
$
i277
Global
Products
i87
i81
i245
i255
Total
operating segments
i200
i193
i551
i532
Corporate
(i20)
(i20)
(i57)
(i53)
Consolidated
Adjusted EBITDA
i180
i173
i494
i479
Reconciliation
to income before income taxes:
Net interest and other financing expenses
(i19)
(i17)
(i54)
(i92)
Depreciation
and amortization
(i25)
(i24)
(i75)
(i68)
Key
items: (a)
Net pension and other postretirement plan income
i10
i14
i28
i41
Legacy
and separation-related expenses
(i11)
(i1)
(i20)
(i2)
LIFO
charge
(i8)
(i17)
(i17)
(i26)
Business
interruption recoveries (losses)
i2
i—
(i3)
i3
Information
technology transition costs
i—
i—
(i3)
i—
Income
before income taxes
$
i129
$
i128
$
i350
$
i335
(a)Key
items represent adjustments to U.S. GAAP results and consist of non-operational matters, including pension and other postretirement plan non-service income and remeasurement adjustments, legacy and separation-related activity, changes in the last-in, first-out ("LIFO") inventory reserve, and certain other corporate matters excluded from operating results that management believes impacts the comparability of operational results between periods.
/
16
Disaggregation of revenue
i
Sales
by primary customer channel for the Company’s reportable segments are summarized below:
Three months ended
Nine
months ended
June 30
June 30
(In millions)
2022
2021
2022
2021
Retail Services
Company
operations
$
i273
$
i234
$
i762
$
i616
Non-company
operations
i111
i96
i318
i253
Total
Retail Services
i384
i330
i1,080
i869
Global
Products
Do-It-Yourself
i219
i166
i584
i453
Installer
and other
i354
i296
i1,037
i824
Total
Global Products
i573
i462
i1,621
i1,277
Consolidated
sales
$
i957
$
i792
$
i2,701
$
i2,146
/
i
Sales
by reportable segment disaggregated by geographic market follows:
Retail
Services
Global Products
Total
(In millions)
2022
2021
2022
2021
2022
2021
Three months ended June 30
North
America (a)
$
i384
$
i330
$
i370
$
i278
$
i754
$
i608
Europe,
Middle East and Africa ("EMEA")
i—
i—
i58
i56
i58
i56
Asia
Pacific
i—
i—
i96
i96
i96
i96
Latin
America (a)
i—
i—
i49
i32
i49
i32
Totals
$
i384
$
i330
$
i573
$
i462
$
i957
$
i792
Nine
months ended June 30
North America (a)
$
i1,080
$
i869
$
i1,004
$
i755
$
i2,084
$
i1,624
EMEA
i—
i—
i192
i161
i192
i161
Asia
Pacific
i—
i—
i298
i267
i298
i267
Latin
America (a)
i—
i—
i127
i94
i127
i94
Totals
$
i1,080
$
i869
$
i1,621
$
i1,277
$
i2,701
$
i2,146
/
(a)Valvoline
includes the United States and Canada in its North America region. Mexico is included within the Latin America region.
NOTE 11 - iSUPPLEMENTAL FINANCIAL INFORMATION
Cash, cash equivalents and restricted cash
iThe
following provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Statements of Cash Flows to the Condensed Consolidated Balance Sheets:
17
(In millions)
June
30 2022
September 30 2021
June 30 2021
Cash and cash equivalents
$
i98
$
i230
$
i226
Restricted
cash (a)
i2
i1
i2
Total
cash, cash equivalents and restricted cash
$
i100
$
i231
$
i228
(a)Included
in Prepaid expenses and other current assets within the Condensed Consolidated Balance Sheets.
Accounts and other receivables
i
The following summarizes Valvoline’s accounts and other receivables in the Condensed Consolidated Balance Sheets as of:
(In
millions)
June 30 2022
September 30 2021
Trade
$
i576
$
i475
Other
i14
i16
Notes
receivable from franchisees (a)
i3
i10
Receivables,
gross
i593
i501
Allowance
for credit losses
(i10)
(i5)
Receivables,
net
$
i583
$
i496
(a)Notes
receivable from franchisees were primarily issued in fiscal 2020 to provide financial assistance in response to the COVID-19 pandemic. There were no material balances past due as of June 30, 2022.
Valvoline sold $i53 million of accounts receivable to a financial institution during the nine months ended June 30, 2022 and did not sell accounts receivable during
the nine months ended June 30, 2021.
/
Inventories
i
The following summarizes Valvoline’s inventories in the Condensed Consolidated Balance Sheets as of:
(In
millions)
June 30 2022
September 30 2021
Finished products
$
i311
$
i276
Raw
materials, supplies and work in process
i79
i49
Reserve
for LIFO cost valuation
(i84)
(i67)
Total
inventories, net
$
i306
$
i258
/
Revenue
recognition
i
The following disaggregates the Company’s sales by timing of recognition:
Three
months ended
Nine months ended
June 30
June 30
(In millions)
2022
2021
2022
2021
Sales at a point in time
$
i941
$
i779
$
i2,657
$
i2,110
Franchised
revenues transferred over time
i16
i13
$
i44
i36
Total
consolidated sales
$
i957
$
i792
$
i2,701
$
i2,146
/
18
NOTE
12 – iSUBSEQUENT EVENTS
Dividend declared
On July 20, 2022, the Board declared a quarterly cash dividend of $i0.125
per share of Valvoline common stock. The dividend is payable on September 15, 2022 to shareholders of record on August 31, 2022.
Strategic separation
On July 31, 2022, the Company entered into a definitive agreement to sell its Global Products business to Aramco for a cash purchase price of $i2.65 billion,
subject to customary adjustments with respect to working capital and net indebtedness. The transaction is subject to standard closing conditions, including regulatory approvals and is expected to close in late calendar year 2022 or early 2023. The Global Products reportable segment generated sales of approximately $i1.6 billion in fiscal 2022 to-date from its engine and automotive products sold in more than i140
countries and territories to retailers, installers, and commercial customers to service light- and heavy-duty vehicles and equipment. The Global Products business is expected to be classified as held for sale and will be reflected in Valvoline’s financial statements as discontinued operations beginning in the fourth quarter of fiscal 2022 until closing of the sale.
19
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, including estimates, projections, and statements related to the
Company’s business plans and operating results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Valvoline has identified some of these forward-looking statements with words such as “anticipates,”“believes,”“expects,”“estimates,”“is likely,”“predicts,”“projects,”“forecasts,”“may,”“will,”“should,” and “intends” and the negative of these words or other comparable terminology. These forward-looking statements are based on Valvoline’s current expectations, estimates, projections, and assumptions as of the date such statements are made and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the headings “Risk Factors,”“Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q and Valvoline’s most recently filed Annual Report on Form 10-K. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, unless required by law.
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as well as the condensed consolidated financial statements and the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q.
BUSINESS OVERVIEW AND PURPOSE
Valvoline Inc. is a global vehicle and engine care company that continuously powers the future of mobility through innovative services and products for electric, hybrid and internal combustion powertrains. Valvoline has consistently led the way innovating and reinventing its
services and products for changing technologies and customer needs throughout its 155-year history. Valvoline operates a fast-growing, best-in-class network of service center stores, which are well positioned to serve evolving vehicle maintenance needs with Valvoline's iconic products. In addition to its quick, easy and trusted quick lube oil change services and the legendary Valvoline-branded passenger car motor oils, Valvoline provides a wide array of lubricants, chemicals, fluids, and other complementary products and services, including leading the world's supply of battery fluids to electric vehicle manufacturers, with each solution tailored to help extend vehicle and engine range and efficiency.
Valvoline provides vehicle and engine care solutions to a range of customers, including end consumers, OEMs, mass market and automotive parts retailers, small to large installers, vehicle fleets, and distributors,
among others. Valvoline operates and franchises more than 1,600 service center locations and is the second and third largest chain in the United States (“U.S.”) and Canada, respectively, by number of stores. With sales in more than 140 countries and territories, Valvoline’s solutions are available for every engine and powertrain, including high-mileage and heavy-duty applications, and are offered at more than 80,000 locations worldwide.
20
BUSINESS STRATEGY
Valvoline is focused on the following key business and growth strategies in fiscal 2022:
•Executing the strategic separation
of Valvoline's two business segments, Retail Services and Global Products, to create sustainable value for the Company's stakeholders and best position the segments for continued long-term success by allowing Retail Services to continue its growth and focus on leveraging its world class service model and providing Global Products with the opportunity to focus and allocate capital to its own strategic priorities;
•Aggressively growing Retail Services through organic service center expansion, opportunistic acquisitions, and franchisee growth, while rapidly diversifying and expanding retail service offerings and capabilities through a quick, easy, and trusted customer experience delivered by hands-on experts;
•Accelerating
Global Products market share growth through continued development of and investment in key global emerging and high value markets by fully leveraging brand equity and product platforms to drive speed, efficiency, and value across the business and customer interactions, while increasing penetration of Valvoline’s full product portfolio;
•Expanding capabilities to serve future transport vehicles by continuing to develop relationships with electric vehicle OEMs and leveraging innovation in the delivery of future services and products in direct and adjacent markets; and
•Building a strong foundation enabled by data and technology to make Valvoline easy to do business with.
RECENT DEVELOPMENTS
Strategic
separation
On July 31, 2022, the Company entered into a definitive agreement to sell its Global Products business to Aramco for a cash purchase price of $2.65 billion, subject to customary adjustments with respect to working capital and net indebtedness. The transaction is subject to standard closing conditions, including regulatory approvals and is expected to close in late calendar year 2022 or early 2023. The Global Products reportable segment generated sales of approximately $1.6 billion in fiscal 2022 to-date from its engine and automotive products sold in more than 140 countries and territories to retailers, installers, and commercial customers to service light- and heavy-duty vehicles and equipment. The Global Products business is expected to be classified as held
for sale and will be reflected in Valvoline’s financial statements as discontinued operations beginning in the fourth quarter of fiscal 2022 until closing of the sale.
Once the transaction closes, Valvoline will retain the Valvoline brand for all retail services purposes globally, excluding China and certain countries in the Middle East and North Africa, while Aramco will own the Valvoline brand for all product uses globally. Based on this brand-sharing arrangement, there will be no licensing fees between the parties. In addition, Valvoline will procure motor oil and related products from the Global Products business through a long-term supply agreement that will be effective following the close of the transaction.
Estimated net proceeds of approximately $2.25 billion, after taxes and other expenses, are expected to be utilized to accelerate the
return of capital to shareholders through share repurchases with the remainder used for debt reduction and to invest in growth opportunities in Retail Services. Valvoline expects to redeem the 2030 Notes at par based on underlying asset sale covenants and repay certain other indebtedness specifically related to Global Products, including the Trade Receivables Facility. Valvoline anticipates enhancing its capital structure through targeting a 2.5 to 3.5 times adjusted EBITDA net leverage ratio to allow for both investment in the business as well as delivery of returns to shareholders through share repurchases.
21
COVID-19 update
Valvoline has substantially
maintained its operations, demonstrating growth and strong results, while managing through the effects of the COVID-19 global pandemic to-date. Valvoline’s global offices and locations have established protocols based on continuous monitoring of the circumstances and trend data surrounding the pandemic and follow government guidelines to make decisions regarding the safe operation of its offices and locations.
In late June 2022, Valvoline updated its protocols for its U.S. employees, easing its restrictions to more broadly allow travel for business, as well as access to its global headquarters in Lexington, Kentucky. Employees are encouraged to reconnect and collaborate on-site in locations and circumstances where protocols support in-person work, while the flexibility and convenience for employees to work remotely has been maintained in many locations.
During
the third quarter and year-to-date periods in fiscal 2022, China has experienced increased cases of COVID-19 that have led to reinstated restrictions, which have impacted operations and demand locally, in addition to the global supply chain. During April 2022, the Chinese government implemented strict control measures in response to the resurgence of COVID-19, which resulted in a temporary shut-down of Valvoline’s local operations. Limited operations were maintained during most of April 2022, and the local blending and packaging facility resumed operations by late April, near its full capacity, which was impacted by local supply chain constraints as a result of the restrictions. Recoveries were slow and uneven, though began to improve late in the third quarter of fiscal 2022, while management continues to closely monitor the impacts and circumstances.
Management is unable to reasonably quantify the impact
of COVID-19 on its current year results. The continually evolving COVID-19 pandemic remains uncertain and its future impact on Valvoline will depend on a number of factors, including among others, the duration and severity of the spread of COVID-19, emerging variants, vaccine and booster effectiveness, public acceptance of safety protocols, and government measures, including vaccine and mask mandates, among others. While the Company cannot predict the duration or the scale of the COVID-19 pandemic, or the effect it may continue to have on Valvoline's business, results of operations, or liquidity, management continuously monitors the situation, the sufficiency of its responses, and makes adjustments as needed. For more information, refer to Risk Factors included in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30,
2021.
THIRD FISCAL QUARTER 2022 OVERVIEW
The following were the significant events for the third fiscal quarter of 2022, each of which is discussed more fully in this Quarterly Report on Form 10-Q:
•Valvoline continued to deliver top-line growth illustrating the strength of Valvoline’s brand and operational performance in the current inflationary environment. Net income grew 2% to $99 million and diluted earnings per share increased 4% to $0.55 in the three months ended June 30, 2022 compared to the prior year period.
•Retail Services sales grew 16% over the prior year period driven by system-wide
same-store-sales ("SSS") growth of 9.9% and the addition of 121 net new stores to the system from the prior year. Operating income decreased 1% and adjusted EBITDA increased 1% over the prior year period. Top-line growth in the current quarter was impacted by higher product costs due to the inflationary environment, and sequential improvements form the prior quarter were largely due to pricing actions taken during the period.
•Global Products sales increased 24% compared to the prior year quarter driven by volume growth of 9% and the continued progress of price pass-through of raw material cost increases. Operating income improved 11% and adjusted EBITDA increased 7% from the prior year due to top-line growth that was moderated by inflationary cost pressures and price-cost lag.
•The
Company returned $60 million to its shareholders during the quarter through payment of a $0.125 per share cash dividend to deliver $22 million and repurchases of Valvoline common stock of $38 million.
22
Use of Non-GAAP Measures
To supplement the financial measures prepared in accordance with U.S. GAAP, certain items within this document are presented on an adjusted basis. These non-GAAP measures, presented both on a consolidated and reportable segment basis, have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, the financial statements presented in accordance with U.S.
GAAP. The financial results presented in accordance with U.S. GAAP and reconciliations of non-GAAP measures included within this Quarterly Report on Form 10-Q should be carefully evaluated.
The following are the non-GAAP measures management has included and how management defines them:
•EBITDA - defined as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;
•Adjusted EBITDA - defined as EBITDA adjusted for certain unusual, infrequent or non-operational activity not directly attributable to the underlying business, which management believes impacts
the comparability of operational results between periods ("key items," as further described below);
•Segment adjusted EBITDA - defined as segment operating income adjusted for depreciation and amortization, in addition to key items impacting comparability;
•Free cash flow -defined as cash flows from operating activities less capital expenditures and certain other adjustments as applicable; and
•Discretionary free cash flow - defined as cash flows from operating activities less maintenance capital expenditures and certain other adjustments
as applicable.
These measures are not prepared in accordance with U.S. GAAP and management believes the use of non-GAAP measures on a consolidated and reportable segment basis provides a useful supplemental presentation of Valvoline's operating performance, enables comparison of financial trends and results between periods where certain items may vary independent of business performance, and allows for transparency with respect to key metrics used by management in operating the business and measuring performance. The non-GAAP information used by management may not be comparable to similar measures disclosed by other companies, because of differing methods used in calculating such measures. For a reconciliation of the most comparable U.S. GAAP measures to the non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.
Management
believes EBITDA measures provide a meaningful supplemental presentation of Valvoline’s operating performance due to the depreciable assets associated with the nature of the Company’s operations and interest costs related to Valvoline’s capital structure. Adjusted EBITDA measures exclude the impact of key items, which consist of income or expenses associated with certain unusual, infrequent or non-operational activity not directly attributable to the underlying business that management believes impacts the comparability of operational results between periods. Adjusted EBITDA measures enable comparison of financial trends and results between periods where key items may vary independent of business performance. Key items are often related to legacy matters or market-driven events considered by management to be outside the comparable operational performance of the business.
Key
items may consist of adjustments related to: legacy businesses, including the separation from Valvoline's former parent company and associated impacts of related indemnities; significant acquisitions or divestitures; restructuring-related matters; and other matters that are non-operational or unusual in nature. Key items also include the following:
•Net pension and other postretirement plan expense/income - includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, current employees with frozen benefits).
These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual
23
basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and
are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA includes the costs of benefits provided to employees for current service, including pension and other postretirement service costs.
•Changes in the last-in, first-out ("LIFO") inventory reserve - charges or credits recognized in Cost of sales to value certain lubricant inventories at the lower of cost or market using the LIFO method. During inflationary or deflationary pricing environments, the application of LIFO can result in variability of the cost of sales recognized each period as the most recent costs are matched against current sales, while preceding costs are retained in
inventories. LIFO adjustments are determined based on published prices, which are difficult to predict and largely dependent on future events. The application of LIFO can impact comparability and enhance the lag period effects between changes in inventory costs and relating pricing adjustments.
Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows.
Management uses free cash flow and discretionary free cash flow as additional non-GAAP metrics of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an indication of the ongoing cash being generated that is ultimately available for both debt and equity
holders as well as other investment opportunities. Free cash flow includes the impact of capital expenditures, providing a supplemental view of cash generation. Discretionary free cash flow includes the impact of maintenance capital expenditures, which are routine uses of cash that are necessary to maintain the Company's operations and provides a supplemental view of cash flow generation to maintain operations before discretionary investments in growth. Free cash flow and discretionary free cash flow have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. The amount of mandatory versus discretionary expenditures can vary significantly between periods.
Key Business Measures
Valvoline
tracks its operating performance and manages its business using certain key measures, including system-wide, company-operated and franchised store counts and SSS, and lubricant volumes sold. Management believes these measures are useful to evaluating and understanding Valvoline’s operating performance and should be considered as supplements to, not substitutes for, Valvoline's sales and operating income, as determined in accordance with U.S. GAAP.
Sales in the Retail Services reportable segment are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store counts. SSS is defined as sales by U.S. Retail Services service center stores (company-operated, franchised
and the combination of these for system-wide SSS), with new stores including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize. Differences in SSS are calculated to determine the percentage change between comparative periods. Retail Services sales are limited to sales at company-operated stores, sales of lubricants and other products to independent franchisees and Express Care operators and royalties and other fees from franchised stores. Although Valvoline does not recognize store-level sales from franchised stores as revenue in its Condensed Consolidated Statements of Comprehensive Income, management believes system-wide and franchised SSS comparisons and store counts are useful to assess market position relative to competitors and overall store and segment operating performance.
Management
believes lubricant volumes sold in gallons by its consolidated subsidiaries is a useful measure in evaluating and understanding the operating performance of the Global Products segment. Volumes sold in other units of measure, including liters, are converted to gallons utilizing standard conversions.
24
RESULTS OF OPERATIONS
Consolidated review
The following summarizes the results of the
Company’s operations for the period ended June 30:
Three
months ended June 30
Nine months ended June 30
2022
2021
2022
2021
(In millions)
Amount
% of Sales
Amount
%
of Sales
Amount
% of Sales
Amount
% of Sales
Sales
$
957
100.0%
$
792
100.0%
$
2,701
100.0%
$
2,146
100.0%
Gross
profit
$
276
28.8%
$
259
32.7%
$
770
28.5%
$
734
34.2%
Net
operating expenses
$
138
14.4%
$
128
16.2%
$
394
14.6%
$
348
16.2%
Operating
income
$
138
14.4%
$
131
16.5%
$
376
13.9%
$
386
18.0%
Net
income
$
99
10.3%
$
97
12.2%
$
267
9.9%
$
252
11.7%
Sales
The
following provides a reconciliation of the increase in sales from the prior year:
The increases in sales were driven by benefits across both reportable segments, primarily driven by pricing actions taken to pass through cost increases along with volume growth from continued strong demand for Valvoline’s products and services. Retail Services increased sales were led by system-wide SSS growth as well as store expansion from unit additions and acquisitions. Global Products sales increased with top-line growth across its regions driven by pass-through pricing in addition to record volumes.
The changes to reportable segment sales
and the drivers thereof are discussed in further detail in the “Reportable Segment Review” section below.
Gross profit
The table below provides a reconciliation of the increase in gross profit from the prior year:
The
increases in gross profit were primarily driven by higher volumes within both reportable segments along with a modest increase due to favorable mix across geographies and products within Global Products. A reduction in the LIFO charge for the current year periods, as well as unit growth through acquisitions also provided benefits to gross profit. These benefits were partially offset by product and labor inflationary cost pressures, in addition to unfavorable currency exchange.
The declines in gross profit margin rates for the current year periods compared to the prior year were primarily the result of higher raw material costs and the dilutive impact from passing through cost increases. Management continues to closely monitor the raw material cost environment and make progress in passing through cost increases.
The changes
to reportable segment gross profit and the drivers thereof are discussed in further detail in the “Reportable Segment Review” section below.
Net operating expenses
The table below summarizes the components of net operating expenses for the period ended June 30:
Three
months ended June 30
Nine months ended June 30
2022
2021
2022
2021
(In millions)
Amount
% of Sales
Amount
% of Sales
Amount
%
of Sales
Amount
% of Sales
Selling, general and administrative expenses
$
138
14.4
%
$
136
17.2
%
$
410
15.2
%
$
382
17.8
%
Legacy
and separation-related expenses
11
1.1
%
1
0.1
%
20
0.7
%
2
0.1
%
Equity
and other income, net
(11)
(1.1)
%
(9)
(1.1)
%
(36)
(1.3)
%
(36)
(1.7)
%
Net
operating expenses
$
138
14.4
%
$
128
16.2
%
$
394
14.6
%
$
348
16.2
%
Expenses,
including travel, advertising and promotions, supporting growth led to increases in selling, general and administrative expenses of $2 million and $12 million for the three and nine months ended June 30, 2022, respectively, compared to the prior year periods. Additionally, expected credit losses on receivables due to the disruption of business in Russia and increased costs associated with information technology investments and transitions combined for $10 million of the year-over-year increases in selling, general and administrative expenses for the nine months ended June 30, 2022.
Legacy and separation-related expenses increased in the current year periods compared to the prior year primarily due to the costs incurred in planning the separation of the Retail Services
and Global Products segments. These costs include legal, tax and accounting, and other professional advisory and consulting fees, which the Company expects will continue to be incurred during the balance of fiscal 2022 and into fiscal 2023 as the businesses separate.
The increase in Equity and other income, net during the three months ended June 30, 2022 compared to the prior year was primarily driven by higher equity and royalty income attributable to the improved performance of the Company's unconsolidated joint ventures in India and Latin America that more than offset challenges in China due to COVID-19 lockdowns. Equity and other income, net was flat for the nine months ended June
30, 2022 compared to the prior year due to increased equity and royalty income that was offset by lower insurance recoveries in the current year.
Net pension and other postretirement plan income
Net pension and other postretirement plan income decreased $4 million and $13 million in the three and nine months ended June 30, 2022, respectively, compared to the prior year periods. This decline was due to lower expected returns on plan assets as a result of the shift in asset allocation of the U.S. qualified plans toward a higher
26
mix of fixed income securities, in addition to a reduction in the amortization
of prior service credits into income from certain other postretirement plan amendments that ceased amortization beginning in fiscal 2022.
Net interest and other financing expenses
Net interest and other financing expenses increased $2 million and decreased $38 million during the three and nine months ended June 30, 2022, respectively, compared to the prior year periods. The increase in the three months ended June 30, 2022 was primarily attributed to increased interest rates on variable-rate borrowings. Additionally, the decrease in the year-to-date period primarily related to prior year debt extinguishment costs
of $36 million, which included the redemption premium and write-off of unamortized debt issuance costs due to the redemption of the 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800 million.
Income tax expense
The following table summarizes income tax expense and the effective tax rate:
Three
months ended June 30
Nine months ended June 30
(In millions)
2022
2021
2022
2021
Income tax expense
$
30
$
31
$
83
$
83
Effective
tax rate percentage
23.3
%
24.2
%
23.7
%
24.8
%
The decreases in the effective tax rate in the current year periods compared to the prior year were primarily attributed to favorable discrete tax benefits in the current year periods, which resulted in relatively flat income tax expense on higher pre-tax earnings.
EBITDA and Adjusted EBITDA
The
following table reconciles net income to EBITDA and Adjusted EBITDA:
Three months ended June 30
Nine months ended June 30
(In millions)
2022
2021
2022
2021
Net
income
$
99
$
97
$
267
$
252
Income tax expense
30
31
83
83
Net
interest and other financing expenses
19
17
54
92
Depreciation and amortization
25
24
75
68
EBITDA
173
169
479
495
Net
pension and other postretirement plan income (a)
(10)
(14)
(28)
(41)
Legacy and separation-related expenses
11
1
20
2
LIFO
charge
8
17
17
26
Business interruption (recoveries) losses
(2)
—
3
(3)
Information
technology transition costs
—
—
3
—
Adjusted
EBITDA
$
180
$
173
$
494
$
479
(a)Net
pension and other postretirement plan income includes remeasurement gains and losses, when applicable, and recurring non-service pension and other postretirement net periodic income, which consists of interest cost, expected return on plan assets and amortization of prior service credits. Refer to Note 7 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for further details.
Adjusted EBITDA increased $7 million and $15 million for the three and nine months ended June 30, 2022, respectively, compared to the prior year periods. These improvements were driven by top-line expansion across both reportable segments, which was partially offset by increased costs due to inflationary pressures and increased operating expenses to support top-line growth.
27
Reportable
segment review
The Company manages its business through the following two reportable segments:
•Retail Services - delivers automotive services to vehicle owners and fleets throughout the United States and Canada across a broad array of preventive maintenance services and capabilities performed through Valvoline’s retail network of company-operated and independent franchised service center stores, and independent Express Care stores that service vehicles with Valvoline products.
•Global Products - sells engine and automotive preventive maintenance products
in more than 140 countries and territories to mass market and automotive part retailers, installers, and commercial customers, including OEMs, to service light- and heavy-duty vehicles and equipment.
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline defines as segment operating income adjusted for depreciation and amortization and certain key items impacting comparability.
Costs to support corporate functions and certain non-operational and corporate activity that is not
directly attributable to a particular segment are not included in the segment operating results regularly utilized by the chief operating decision maker. This activity is separately delineated within Corporate to reconcile to consolidated results.
Results of Valvoline’s reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies.
Retail Services
Management believes the number of company-operated and franchised service center stores as provided in the following tables is useful to assess
the operating performance of the Retail Services reportable segment.
System-wide
stores (a)
Third Quarter 2022
Second Quarter 2022
First Quarter 2022
Fourth Quarter 2021
Third Quarter 2021
Beginning of period
1,661
1,635
1,594
1,569
1,548
Opened
21
19
32
21
17
Acquired
9
9
12
7
5
Closed
(1)
(2)
(3)
(3)
(1)
End
of period
1,690
1,661
1,635
1,594
1,569
Number
of stores at end of period
Third Quarter 2022
Second Quarter 2022
First Quarter 2022
Fourth Quarter 2021
Third Quarter 2021
Company-operated
772
757
738
719
698
Franchised
918
904
897
875
871
(a)System-wide
store count includes franchised service center stores. Valvoline franchises are independent legal entities, and Valvoline does not consolidate the results of operations of its franchisees.
The year over year increase of 121 net system-wide stores was the result of 84 net openings and 37 acquired stores. New store openings were driven by 30 net company-operated service center store openings and 54 net new
28
franchisee store openings from expansion in key markets. In addition, 7 stores converted within the system from franchise to company-operated.
The following summarizes the results of the Retail Services reportable segment:
Three
months ended June 30
Increase (decrease)
Nine months ended June 30
Increase (decrease)
(In millions)
2022
2021
2022
2021
Financial information
Retail
Services segment sales
$
384
$
330
16
%
$
1,080
$
869
24
%
Operating
income (b)
$
96
$
97
(1)
%
$
254
$
233
9
%
Key items
—
—
—
—
Depreciation
and amortization
17
15
13
%
52
44
18
%
Adjusted EBITDA
$
113
$
112
1
%
$
306
$
277
10
%
Operating
margin (c)
25.0
%
29.4
%
(440)
bps
23.5
%
26.8
%
(330)
bps
Adjusted EBITDA margin (c)
29.4
%
33.9
%
(450)
bps
28.3
%
31.9
%
(360)
bps
Three
months ended June 30
Nine months ended June 30
2022
2021
2022
2021
Same-store sales growth
Company-operated (c)
7.1
%
36.1
%
12.5
%
20.4
%
Franchised
(a) (d)
12.1
%
43.9
%
17.6
%
22.5
%
System-wide (a) (d)
9.9
%
40.5
%
15.4
%
21.6
%
(a)Measure
includes Valvoline franchisees, which are independent legal entities. Valvoline does not consolidate the results of operations of its franchisees.
(b)Valvoline does not generally allocate activity below operating income to its operating segments; therefore, the table above reconciles operating income to adjusted EBITDA.
(c)Operating margin is calculated as operating income divided by sales, and adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales.
(d)Valvoline determines SSS growth as sales by U.S. Retail Services service center stores, with new stores, including franchise conversions, excluded from the metric until the completion of their first full fiscal year in operation.
Retail
Services sales increased 16% and 24% for the three months and nine months ended June 30, 2022, respectively, compared to the prior year periods. System-wide SSS growth was driven by higher average ticket from pricing actions, premiumization and non-oil change revenue, as well as increased transactions. The addition of 121 net new stores in the system through acquisitions and new service center store openings also contributed to sales growth from the prior year.
Operating income decreased 1% and adjusted EBITDA increased 1% for the three months ended June 30, 2022 compared to the prior year period. Profitability was impacted by continued inflationary product cost pressures largely offset by pricing actions taken during the quarter. Operating income and adjusted EBITDA increased 9% and 10%, respectively, in the
nine months ended June 30, 2022 compared to the prior year and was driven by strong top-line performance and the addition of new stores.
29
Global Products
The following table summarizes the results of the Global Products reportable segment:
Three
months ended June 30
Increase (decrease)
Nine months ended June 30
Increase (decrease)
(In millions)
2022
2021
2022
2021
Financial information
Sales
by geographic region
North America (a)
$
i370
$
i278
33
%
$
i1,004
$
i755
33
%
Europe,
Middle East and Africa ("EMEA")
i58
i56
4
%
i192
i161
19
%
Asia
Pacific
i96
i96
—
%
i298
i267
12
%
Latin
America (a)
i49
i32
53
%
i127
i94
35
%
Global
Products segment sales
$
i573
$
i462
24
%
$
1,621
$
i1,277
27
%
Operating
income (b)
$
80
$
72
11
%
$
224
$
233
(4)
%
Key items
—
—
—
—
Depreciation
and amortization
7
9
(22)
%
21
22
(5)
%
Adjusted EBITDA
$
87
$
81
7
%
$
245
$
255
(4)
%
Operating
margin (c)
14.0
%
15.6
%
(160)
bps
13.8
%
18.2
%
(440)
bps
Adjusted EBITDA margin (c)
15.2
%
17.5
%
(230)
bps
15.1
%
20.0
%
(490)
bps
Volume
information
Lubricant sales (gallons)
45.4
41.8
9
%
131.8
119.7
10
%
(a)
Valvoline
includes the United States and Canada in its North America region. Mexico is included within the Latin America region.
(b)
Valvoline does not generally allocate activity below operating income to its operating segments; therefore, the table above reconciles operating income to adjusted EBITDA.
(c)
Operating margin is calculated as operating income divided by sales, and adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales.
Global Products sales increased 24% and 27% in the three and nine months ended June 30, 2022, respectively, compared to the prior year periods, driven by strong top-line growth
from record volumes and continued progress on passing through raw materials cost increases in pricing. Volumes were up 9% and 10% for the three and nine months ended June 30, 2022, respectively, over the prior year periods, due to strong growth globally. The Company continued to gain share and meet customer demand, despite facing challenges from COVID-19, particularly in China, and geopolitical disruption in certain international markets.
Operating income improved 11% and adjusted EBITDA increased 7% during the three months ended June 30, 2022 compared to the prior year period as top-line growth more than offset increased costs due to the inflationary raw material cost environment. Operating income and adjusted EBITDA both
decreased 4% during the nine months ended June 30, 2022 compared to the prior year period as price-cost lag due to raw material cost increases more than offset sales growth. Cost increases are expected to pressure profitability in the fourth quarter of fiscal 2022, and Valvoline anticipates continued pricing pass through to recover these costs and maintain its margins over time.
30
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Overview
The
Company closely manages its liquidity and capital resources. Valvoline’s liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, acquisitions, share repurchases, and dividend payments are components of the Company’s cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities that support Valvoline’s business and growth strategies and returning capital to shareholders, while funding ongoing operations.
Cash
flows
Cash flows as reflected in the Condensed Consolidated Statements of Cash Flows are summarized as follows for the nine months ended June 30:
(In millions)
2022
2021
Cash, cash equivalents and restricted cash - beginning of period
$
231
$
761
Cash
provided by (used in):
Operating activities
191
296
Investing activities
(143)
(351)
Financing activities
(178)
(483)
Effect
of currency exchange rate changes on cash, cash equivalents and restricted cash
(1)
5
Decrease increase in cash, cash equivalents and restricted cash
(131)
(533)
Cash, cash equivalents and restricted cash - end of period
$
100
$
228
Operating
activities
The decrease in cash flows provided by operating activities of $105 million from the prior year was primarily due to the unfavorable increase in net working capital, largely attributed to growth in the Global Products business from raw material cost inflation that has driven higher investments in accounts receivable with customers that carry longer payment terms, in addition to increased inventories. In the current year, net working capital (current assets, excluding cash and cash equivalents, minus current liabilities, excluding long-term debt due within one year) increased $118 million compared to a $51 million increase in the prior year period.
Investing activities
The decrease in cash flows used in investing activities of $208 million from the prior year was primarily
due to lower current year acquisition activity of $217 million and less current year additions to property, plant, and equipment of $4 million, which was partially offset by repayments of franchisee COVID relief loans that were $5 million higher in the prior year.
Financing activities
The decrease in cash flows used in financing activities of $305 million from the prior year was primarily due to net repayments on borrowings that were $307 million less during the current year. During the prior year period, Valvoline completed the issuance of the 3.625% senior unsecured notes due 2031 with an aggregate principal amount of $535 million and utilized the net proceeds, together with cash and cash equivalents on hand, to redeem the 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800 million.
31
Free
cash flow
The following sets forth free cash flow and discretionary free cash flow and reconciles cash flows from operating activities to both measures. These free cash flow measures have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. Refer to the “Use of Non-GAAP Measures” section included above in this Item 2 for additional information regarding these non-GAAP measures.
Nine
months ended June 30
(In millions)
2022
2021
Cash flows provided by operating activities
$
191
$
296
Less: Maintenance capital expenditures
(24)
(21)
Discretionary
free cash flow
167
275
Less: Growth capital expenditures
(78)
(85)
Free cash flow
$
89
$
190
The decrease
in free cash flow over the prior year was driven by lower cash flows provided by operating activities, partially offset by reduced capital expenditures. Lower capital expenditures were primarily due to the growth investments in the prior year related to the blending and packaging plant in China that began production in fiscal 2021.
Based on the net working capital investments during the current year, the Company updated its fiscal 2022 forecasted free cash flow generation, which excludes cash outflows related to the disposition of Global Products, and is summarized as follows:
(In
millions)
Fiscal year
2022 Outlook
Total cash flows provided by operating activities
$
290
—
$
300
Adjustments:
Separation-related cash outflows
20
—
30
Additions
to property, plant and equipment
(160)
—
(180)
Forecasted free cash flow
$
140
—
$
160
Debt
Inclusive
of the interest rate swap agreements, approximately 87% of Valvoline's outstanding borrowings at June 30, 2022 had fixed interest rates, with the remainder bearing variable rates. Valvoline was in compliance with all covenants of its debt obligations as of June 30, 2022 and had a combined total of $578 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility. Credit facilities in place in China had approximately $40 million of combined borrowing capacity remaining, $34 million under the China Working Capital Facilities and $6 million under the China Construction Facility. Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional details regarding the Company’s debt instruments.
Dividend
payments and share repurchases
During the nine months ended June 30, 2022, the Company paid cash dividends of $0.375 per common share for $67 million and repurchased nearly 3.2 million shares of its common stock for $104 million pursuant to the May 2021 Board authorization to repurchase up to $300 million of common stock through September 30, 2024 (the “2021 Share Repurchase Authorization”).
On July 20, 2022, the Board declared a quarterly cash dividend of $0.125 per share of Valvoline common stock. The dividend is payable on September 15, 2022 to shareholders
of record on August 31, 2022. Additionally, the
32
Company repurchased shares of Valvoline common stock for $12 million during July 2022, leaving the Company with $158 million in aggregate share repurchase authority remaining under the 2021 Share Repurchase Authorization as of August 1, 2022.
Future declarations of quarterly dividends are subject to approval by the Board and may be adjusted as business needs or market conditions change, while the timing and amount of any future share repurchases will be based on the level of Valvoline's
liquidity, general business and market conditions and other factors, including alternative investment opportunities. As focus further shifts to the growth of Retail Services in connection with the sale of Global Products, Valvoline expects to discontinue the dividend and return value to shareholders through share repurchases.
Summary
As of June 30, 2022, cash and cash equivalents totaled $98 million, total debt was $1.7 billion, and total remaining borrowing capacity under the Company’s Revolver and Trade Receivables Facility was $578 million. Valvoline’s ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in the industry, and is subject
to the business and other risk factors described in Item 1A of Part I of the Annual Report on Form 10-K for the year ended September 30, 2021. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives.
Management believes that the Company has sufficient liquidity based on its current cash and cash equivalents position, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions, debt servicing obligations, tax-related and other material cash and operating requirements
for the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion and analysis of recently issued accounting pronouncements and the impacts on Valvoline, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
The Company’s critical accounting estimates are discussed in detail in Item 7
of Part II in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021. Management reassessed the critical accounting estimates as disclosed in the Annual Report on Form 10-K and determined there were no changes in the nine months ended June 30, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risks are discussed in detail in Item 7A of Part II in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
Management reassessed the quantitative and qualitative market risk disclosures as described in the Annual Report on Form 10-K and determined there were no material changes to market risks in the nine months ended June 30, 2022.
33
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Valvoline’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the assistance of management,
have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), and based upon such evaluation, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective. These controls are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated
to Valvoline’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no significant changes in Valvoline’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, Valvoline’s internal control over financial reporting.
34
PART II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. For a description of Valvoline's legal proceedings, refer to Note 8 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Information about the Company's risk factors is contained in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30,
2021. Except for the addition of the risk factors set forth below, there have been no material changes to the Company's risk factors previously disclosed.
Risks related to the pending sale of the Global Products business
The pending sale of the Global Products business is subject to various risks, uncertainties and conditions and may not be completed on the terms or timeline currently contemplated, if at all.
On July 31, 2022, Valvoline entered into a definitive agreement (the “Purchase Agreement”) to sell its Global Products business to Aramco (the “Buyer”) for $2.65 billion in cash, subject to certain customary adjustments as set
forth in the Purchase Agreement (the “Transaction”). The Purchase Agreement provides that completion of the Transaction is subject to the satisfaction of customary closing conditions, including, among other things, obtaining certain required regulatory and third party approvals. The Transaction is expected to close in late calendar year 2022 or early 2023. There can be no assurance regarding the ultimate timing of the Transaction or that the Transaction will be completed. Unanticipated developments could delay, prevent or otherwise adversely affect the Transaction, including but not limited to potential problems or delays in obtaining various regulatory approvals.
During the period leading to closing the Transaction, or whether or not the Transaction is completed, the ongoing businesses may be adversely affected, including as a result of one or more of the following:
•the
diversion of management’s attention from operating and growing the business as a result of the time and effort required to execute the Transaction;
•expenses incurred in connection with the Transaction, including the tax effects of the divestiture, in addition to legal, professional advisory and consulting fees to complete the sale and separation of the legal entities and business processes;
•challenges in separating the businesses, including separating the assets and liabilities, infrastructure and personnel, potentially resulting in delays and additional costs in achieving the completion of the Transaction;
•disruptions to and potential adverse impacts on relationships with suppliers, customers and others with whom Valvoline does business;
•challenges
in establishing the desired capital structure for the remaining Valvoline business, including challenges accessing the financial markets;
•uncertainty among key employees concerning their future with Valvoline or the Buyer, leading to potential distraction, as well as potential difficulty in attracting, retaining or motivating key employees during the pendency of the Transaction and following its completion;
•potential adverse impact on credit ratings; and
•potential negative reactions from the financial markets if Valvoline fails to complete the Transaction as currently expected.
Valvoline may be unable to achieve some or all of the strategic and financial benefits that it expects to achieve from the Transaction.
After
giving effect to estimated taxes and other expenses, Valvoline expects to receive net proceeds of approximately $2.25 billion. Valvoline expects to use the net proceeds to accelerate return of capital to shareholders
35
through share repurchases, with the remainder used for debt reduction and to invest in growth opportunities in Retail Services. In connection with the sale of Global Products, Valvoline expects to drive growth and shareholder value as a best-in-class, pure-play automotive retail service provider.
The anticipated operational, financial, strategic and other benefits may not be achieved upon completion of the Transaction and could have an adverse impact on Valvoline’s business, financial condition
and results of operations. The anticipated benefits are based on a number of assumptions, some of which may prove incorrect, and could be affected by a number of factors beyond Valvoline’s control, including, without limitation, general economic conditions, increased operating costs, regulatory developments and the other risks described in these risk factors and within Item IA of Part I of Valvoline’s Annual Report on Form 10-K for the year ended September 30, 2021.
Following the Transaction, Valvoline will be dependent on the Buyer for its lubricants and certain ancillary products and Valvoline’s results may be negatively affected if the Buyer is unable to provide these products.
In connection with the Transaction, the parties have agreed to enter into a supply agreement (the “Supply Agreement”).
Pursuant to the Supply Agreement, Valvoline will purchase substantially all lubricant and certain ancillary products for its stores from the Buyer. After the Transaction, Valvoline will be dependent on the Supply Agreement for these products. Any interruption, delay or failure in supply from the Buyer could have an adverse effect on Valvoline’s business, financial condition, results of operations, or cash flows.
Damage to Valvoline’s brand and reputation could have an adverse effect on its business.
In connection with the Transaction, the parties have agreed to enter into a brand agreement (the “Brand Agreement”). Pursuant to the Brand Agreement, Valvoline will retain ownership of the Valvoline brand for generally all retail services purposes, and the Buyer will own the brand for all product uses. The Buyer’s ability to use the brand may
increase the risk of damage to the brand, which could negatively impact Valvoline’s reputation and business.
The completion of the Transaction may adversely affect Valvoline’s business.
Valvoline is currently comprised of two business segments, Retail Services and Global Products. The Transaction will result in Valvoline being a smaller, less diversified company, potentially making it more vulnerable to changing market, regulatory and economic conditions. Specifically, following completion of the Transaction, Valvoline will be more concentrated geographically in North America and in serving the automotive aftermarket through company-operated, independent franchises, and independent Express Care stores that service vehicles with Valvoline products. In addition, Valvoline may be unable to obtain goods or services at prices or on terms that are as
favorable as those obtained by Valvoline prior to the Transaction, and Valvoline’s ability to absorb costs may be negatively impacted. Any of these factors could have an adverse effect on Valvoline’s business, financial condition, results of operations, or cash flows.
36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchases of the Company’s common stock during the three months ended
June 30, 2022 pursuant to the 2021 Share Repurchase Authorization were:
Monthly Period
Total number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs
Dollar value of shares that may yet be purchased under the plans or programs
(in millions)
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
™ Trademark, Valvoline or its subsidiaries, registered in various countries.
38
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
