VALVOLINE INC. The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year endedSeptember 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 inthe United States ("U.S.") andCanada , 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. 18 --------------------------------------------------------------------------------
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 OnOctober 12, 2021 , Valvoline announced its intention to pursue a separation of its two reportable segments, Retail Services and Global Products. Valvoline is making progress and evaluating alternatives to accomplish the separation of these two strong businesses. Consummation of the separation will be subject to final approval by Valvoline's Board, and no timetable has currently been established for completion of the separation. Valvoline's results this quarter highlight the independent strengths of both of its reportable segments, and separation is expected to enable the two businesses to enhance focus on their distinct customer bases, strategies for continued growth, and operational needs.
COVID-19 update
Valvoline has been able to substantially maintain its operations, demonstrating growth and strong results, while managing through the effects of the COVID-19 global pandemic. 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 mandates, implemented at the local and federal levels designed to slow and contain the spread of COVID-19, 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 endedSeptember 30, 2021 .
FIRST FISCAL QUARTER 2022 OVERVIEW
The following were the significant events for the first fiscal quarter of 2022, each of which is discussed more fully in this Quarterly Report on Form 10-Q:
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•Valvoline reported net income of $87 million and diluted earnings per share of
$0.48 in the three months ended December 31, 2021 . Net income was flat compared
to the prior year period and diluted EPS grew 2%.
•Retail Services sales increased 36% over the prior year driven by system-wide
same-store-sales ("SSS") growth of 24.7% and the addition of 102 net new stores
to the system from the prior year. Operating income and adjusted EBITDA
increased 45% and 40%, respectively, over the prior year primarily due to strong
top-line growth and margin expansion.
•Global Products sales grew 28% over the prior year primarily attributable to
expanded distribution in North America and higher volumes in China and EMEA.
Operating income and adjusted EBITDA decreased 20% and 18%, respectively, from
the prior year primarily due to transitory supply chain costs and lingering
price-cost lag that compared to modestly favorable price-cost lag in the prior
year.
•The Company returned $54 million to its shareholders through payment of a cash
dividend of $0.125 per share during the quarter and repurchasing approximately
1 million shares of Valvoline common stock.
Use of Non-GAAP Measures
To supplement the financial measures prepared in accordance withU.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 withU.S. GAAP. The financial results presented in accordance withU.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 withU.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 comparableU.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 20 -------------------------------------------------------------------------------- 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 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 withU.S. GAAP. 21 -------------------------------------------------------------------------------- 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 byU.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.
RESULTS OF OPERATIONS Consolidated review The following summarizes the results of the Company's operations for the three months endedDecember 31 : 2021 2020 Variance (In millions) Amount % of Sales Amount % of Sales Amount % Sales$ 858 100.0 %$ 653 100.0 %$ 205 31.4 % Gross profit$ 244 28.4 %$ 228 34.9 %$ 16 7.0 % Net operating expenses$ 123 14.3 %$ 104 15.9 %$ 19 18.3 % Operating income$ 121 14.1 %$ 124 19.0 %$ (3) (2.4) % Net income$ 87 10.1 %$ 87 13.3 % $ - - % Sales The following provides a reconciliation of the increase in sales from the prior year: Year-over-year change (In millions) Three months ended December 31, 2021 Volume and mix $ 104 Price 90 Acquisitions 11 Change in sales $ 205 Volumes grew across the business and product mix improved, leading to top-line expansion, as demand for Valvoline's products and services remains robust and market share gains benefited both segments. Additionally, the Company made ongoing progress in the price pass-through of raw material cost increases, which further drove higher sales. Retail Services sales were 36% higher led by SSS that increased nearly 25% across the system, in addition to growth from unit additions and acquisitions. Global Products sales increased 28% with 13% volume growth and top-line expansion across all regions.
The changes to reportable segment sales and the drivers thereof are discussed in further detail in the "Reportable Segment Review" section below.
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--------------------------------------------------------------------------------Gross profit
The table below provides a reconciliation of the increase in gross profit from
the prior year:
Year-over-year change
(In millions) Three months ended December 31, 2021
Volume and mix $ 50
Change in LIFO reserve (2)
Price and cost (33)
Acquisitions 1
Change in gross profit $ 16
The increase in gross profit was primarily driven by higher volumes and mix
improvements in both segments, partially offset by the lag in passing through
raw material cost increases, transitory supply chain inefficiencies that
included higher logistics and manufacturing costs, and to a lesser degree, the
negative impact of LIFO adjustments in the rising cost environment. Acquisitions
contributed a muted benefit to gross profit due to new store ramp up costs.
The declines in gross profit margin rates were primarily the result of higher
raw material costs, supply chain challenges, and the dilutive impact from
passing through cost increases, which more than offset mix improvements.
Management continues to closely monitor the raw material cost environment and
make progress in passing through the cost increases that began in fiscal 2021.
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
three months ended
2021 2020 Variance
(In millions) Amount % of Sales Amount % of Sales Amount %
Selling, general and administrative expenses $ 135 15.7 % $ 117 17.9 % $ 18 15.4 %
Legacy and separation-related expenses 3 0.3 % 1 0.1 % $ 2 200.0 %
Equity and other income, net (15) (1.7) % (14) (2.1) % (1) 7.1 %
Net operating expenses $ 123 14.3 % $ 104 15.9 % $ 19 18.3 %
Selling, general and administrative expenses increased primarily related to investments made to support future growth, including advertising and promotion, information technology, and acquisition-related costs.
Legacy and separation-related expenses increased primarily due to to costs
incurred in the current year in planning for the separation of the Retail
Services and Global Products segments. The Company expects to incur incremental
costs during fiscal 2022 associated with planning for the proposed separation,
including legal, tax and accounting, and other professional advisory and
consulting fees. These costs cannot currently reasonably be estimated given the
uncertainties in the manner and timing of separation.
The increase in Equity and other income, net was primarily driven by income for
research lab testing, which was partially offset by lower insurance recoveries
in the current year.
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--------------------------------------------------------------------------------Net pension and other postretirement plan income
Net pension and other postretirement plan income decreased$4 million from the prior year. This decline was due to lower expected returns on plan assets as a result of the shift in asset allocation of theU.S. qualified plans toward a higher 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 decreased
Income tax expense
The following table summarizes income tax expense and the effective tax rate:
Three months ended December 31
(In millions) 2021 2020
Income tax expense $ 26 $ 30
Effective tax rate percentage 23.0 % 25.6 %
The decreases in the effective tax rate and income tax expense were principally driven by discrete benefits in the current year compared to unfavorable discrete impacts in the prior year. EBITDA and Adjusted EBITDA
The following table reconciles net income to EBITDA and Adjusted EBITDA:
Three months ended December 31
(In millions) 2021 2020
Net income $ 87 $ 87
Income tax expense 26 30
Net interest and other financing expenses 17 20
Depreciation and amortization 25 21
EBITDA 155 158
Net pension and other postretirement plan income (a) (9) (13)
Legacy and separation-related expenses 3 1
LIFO charge 6 4
Information technology transition costs 1 -
Business interruption recovery - (1)
Adjusted EBITDA $ 156 $ 149
(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 6
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 improved $7 million from the prior year driven by strong
top-line growth across both segments from higher volumes and ongoing progress in
passing through raw material cost increases. Top-line growth and profit
expansion in Retail Services were partially offset by price-cost lag and supply
chain inefficiencies, in addition to increased operating expenses.
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--------------------------------------------------------------------------------Reportable segment review The Company manages its business through the following two reportable segments:
•Retail Services - services the passenger car and light truck quick lube market inthe United States andCanada with a broad array of preventive maintenance services and capabilities performed through Valvoline's retail network of company-operated and independent franchised service center stores, in addition to independent Express Care stores that service vehicles with Valvoline products. •Global Products - sells engine and automotive preventive maintenance products in more than 140 countries to 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)
Fourth Quarter
First Quarter 2022 2021 Third Quarter 2021 Second Quarter 2021 First Quarter 2021
Beginning of period 1,594 1,569 1,548 1,533 1,462
Opened 32 21 17 13 18
Acquired 12 7 5 3 54
Closed (3) (3) (1) (1) (1)
End of period 1,635 1,594 1,569 1,548 1,533
Number of stores at end of period
Fourth Quarter
First Quarter 2022 2021 Third Quarter 2021 Second Quarter 2021 First Quarter 2021
Company-owned 738 719 698 673 663
Franchised 897 875 871 875 870
(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 change of 102 net new company-operated and franchised stores
was the result of 75 net openings and 27 acquired stores. Organic service center
store growth was driven by 25 net company-operated
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--------------------------------------------------------------------------------service center store openings and 50 net new franchisee store openings from expansion in key markets. In addition, 23 net stores converted within the system from franchise to company-operated.
The following summarizes the results of the Retail Services reportable segment:
Three months ended
December 31
(In millions) 2021 2020 Favorable (Unfavorable)
Financial information
Retail Services segment sales $ 346 $ 254 36 %
Operating income (b) $ 81 $ 56 45 %
Key items - -
Depreciation and amortization 17 14 21 %
Adjusted EBITDA $ 98 $ 70 40 %
Operating margin (c) 23.4 % 22.0 % 140 bps
Adjusted EBITDA margin (c) 28.3 % 27.6 % 70 bps
Three months ended
December 31
2021 2020
Same-store sales growth
Company-operated (c) 22.1 % 6.1 %
Franchised (a) (d) 26.8 % 6.0 %
System-wide (a) (d) 24.7 % 6.0 %
(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 36% for the first quarter compared to the prior
year primarily due to strong SSS performance and unit additions. System-wide SSS
grew 24.7% compared to the prior year led by increased transactions where
leveraging data analytics capabilities drove customer base expansion. Solid
contributions from growth in average ticket were largely due to pricing and
premiumization that further contributed to system-wide SSS performance and
highlighted in-store service delivery. The addition of 102 net new stores to the
system through acquisitions and new service center store openings also
contributed to sales growth from the prior year.
Operating income and adjusted EBITDA increased from the prior year outpacing
sales growth and driving margin expansion. This growth was driven by the strong
top-line performance and improved leverage from mature stores that have been
open greater than three years and combined to more than offset the ramp up costs
of new stores and challenges of the raw material cost environment.
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--------------------------------------------------------------------------------Global Products
The following table summarizes the results of the Global Products reportable
segment:
Three months ended
December 31
(In millions) 2021 2020 Favorable (Unfavorable)
Financial information
Sales by geographic region
North America (a) $ 304 $ 235 29 %
Europe, Middle East and Africa ("EMEA") 67 51 31 %
Asia Pacific 104 83 25 %
Latin America (a) 37 30 23 %
Global Products segment sales $ 512 $ 399 28 %
Operating income (b) $ 70 $ 88 (20) %
Key items - -
Depreciation and amortization 7 6 17 %
Adjusted EBITDA $ 77 $ 94 (18) %
Operating margin (c) 13.7 % 22.1 % (840) bps
Adjusted EBITDA margin (c) 15.0 % 23.6 % (860) bps
Volume information
Lubricant sales (gallons) 43.1 38.0 13 %
(a) Valvoline includes
is included within the
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 from the prior year due to growth across all regions. The ongoing progress in price pass-through of raw material cost increases drove sales growth that outpaced volumes, which were up 13% from the prior year. Volume increases were led by expanded distribution inNorth America and growth inAsia Pacific , notablyChina , in addition to higher volumes in EMEA. Favorable mix further contributed to the increase in sales over the prior year as a result of higher branded and premium product mix. Operating income and adjusted EBITDA decreased primarily related to price-cost lag due to raw material cost increases and supply chain disruptions that were partially offset by higher volumes and product mix benefits. Valvoline expects to continue to passing through pricing to recover raw material cost increases.
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
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--------------------------------------------------------------------------------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 three months ended
(In millions) 2021 2020 Cash, cash equivalents and restricted cash - beginning of period$ 231 $ 761 Cash provided by (used in): Operating activities 32 79 Investing activities (46) (245) Financing activities (63) (73)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash
- 6
Decrease increase in cash, cash equivalents and restricted cash
(77) (233)
Cash, cash equivalents and restricted cash - end of period
Operating activities The decrease in cash flows provided by operating activities of$47 million from the prior year was primarily due to a timing-related unfavorable increase in net working capital, largely attributed to growth in accounts receivable from top-line expansion. In the current year period, net working capital (current assets, excluding cash and cash equivalents, minus current liabilities, excluding long-term debt due within one year) increased$85 million compared to a$35 million increase in the prior year.
Investing activities
The decrease in cash flows used in investing activities of$199 million was primarily due to lower current year acquisition activity of$204 million , which was partially offset by repayments of franchisee COVID relief loans that were$6 million higher in the prior year.
Financing activities
The decrease in cash flows used in financing activities of$10 million was primarily due to$27 million of lower share repurchases in the current year, which were partially offset by net proceeds from borrowings that were$12 million higher in the prior year. Lower share repurchases were the result of shifting to a consistent share buyback strategy in the second half of fiscal 2021, and higher net proceeds from borrowings in the prior year largely related to the China Construction Facility as the blending and packaging plant began production inDecember 2020 .
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.
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Three months ended
December 31
(In millions) 2021 2020
Cash flows provided by operating activities $ 32 $ 79
Less: Maintenance capital expenditures (6) (5)
Discretionary free cash flow 26 74
Less: Growth capital expenditures (29) (30)
Free cash flow $ (3) $ 44 The decrease in free cash flow over the prior year was driven by lower cash
flows provided by operating activities as maintenance and growth capital
expenditures were relatively flat. Management continues to expect strong free
cash flow generation in fiscal 2022 of
Debt
Inclusive of the interest rate swap agreements, approximately 87% of Valvoline's outstanding borrowings atDecember 31, 2021 had fixed interest rates, with the remainder bearing variable rates. Valvoline was in compliance with all covenants of its debt obligations as ofDecember 31, 2021 and had a combined total of$587 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility. Credit facilities in place inChina had approximately$28 million of combined borrowing capacity remaining,$24 million under theChina Working Capital Facility and$4 million under the China Construction Facility. Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for additional details regarding the Company's debt instruments.
Dividend payments and share repurchases
During the three months endedDecember 31, 2021 , the Company paid cash dividends of$0.125 per common share for$23 million and repurchased nearly 1 million shares of its common stock for$31 million pursuant to theMay 2021 Board authorization to repurchase up to$300 million of common stock throughSeptember 30, 2024 (the "2021 Share Repurchase Authorization"). OnJanuary 24, 2022 , the Board declared a quarterly cash dividend of$0.125 per share of Valvoline common stock. The dividend is payable onMarch 15, 2022 to shareholders of record onFebruary 28, 2022 . Additionally, the Company repurchased shares of Valvoline common stock for$10 million duringJanuary 2022 , leaving the Company with$232 million in aggregate share repurchase authority remaining under the 2021 Share Repurchase Authorization as ofFebruary 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.
Summary
As ofDecember 31, 2021 , cash and cash equivalents totaled$152 million , total debt was$1.7 billion , and total remaining borrowing capacity under the Company's Revolver and Trade Receivables Facility was$586 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 endedSeptember 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
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--------------------------------------------------------------------------------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 endedSeptember 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 three months endedDecember 31, 2021 .
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