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. 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 OnJuly 31, 2022 , the Company entered into a definitive agreement to sell its Global Products business toAramco 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, excludingChina and certain countries in theMiddle East andNorth Africa , whileAramco 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 lateJune 2022 , Valvoline updated its protocols for itsU.S. employees, easing its restrictions to more broadly allow travel for business, as well as access to its global headquarters inLexington, 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. DuringApril 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 ofApril 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 endedSeptember 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 endedJune 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
22
--------------------------------------------------------------------------------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 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 withU.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 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.
24
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Consolidated review
The following summarizes the results of the Company's operations for the period endedJune 30 : Three months endedJune 30
Nine months ended
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:
Year-over-year changes
Three months ended Nine months ended
(In millions) June 30, 2022 June 30, 2022
Volume and mix $ 44 $ 215
Price 123 326
Currency exchange (13) (22)
Acquisitions 11 36
Change in sales $ 165 $ 555
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:
Year-over-year changes
Three months ended Nine months ended
(In millions) June 30, 2022 June 30, 2022
Volume and mix $ 20 $ 102
Change in LIFO reserve 9 9
Price and cost (11) (74)
Currency exchange (3) (5)
Acquisitions 2 4
Change in gross profit $ 17 $ 36
25-------------------------------------------------------------------------------- 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
Three months ended June 30 Nine months ended
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
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 endedJune 30, 2022 , respectively, compared to the prior year periods. The increase in the three months endedJune 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 Nine months ended
June 30 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
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 throughoutthe United States andCanada 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)
Second Quarter
Third Quarter 2022 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
Second Quarter
Third Quarter 2022 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 Nine months ended
June 30 Increase June 30 Increase
(In millions) 2022 2021 (decrease) 2022 2021 (decrease)
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 Nine months ended
June 30 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 Nine months ended
June 30 June 30
(In millions) 2022 2021 Increase (decrease) 2022 2021 Increase (decrease)
Financial information
Sales by geographic region
North America (a) $ 370 $ 278 33 % $ 1,004 $ 755 33 %Europe ,Middle East and Africa ("EMEA") 58 56 4 % 192 161 19 % Asia Pacific 96 96 - % 298 267 12 % Latin America (a) 49 32 53 % 127 94 35 % Global Products segment sales$ 573 $ 462
24 %$ 1,621 $ 1,277 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
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 24% and 27% in the three and nine months endedJune 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 endedJune 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 inChina , and geopolitical disruption in certain international markets. Operating income improved 11% and adjusted EBITDA increased 7% during the three months endedJune 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 endedJune 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
(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
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
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:
Fiscal year
(In millions) 2022Outlook
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 endedJune 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 theMay 2021 Board authorization to repurchase up to$300 million of common stock throughSeptember 30, 2024 (the "2021 Share Repurchase Authorization"). OnJuly 20, 2022 , the Board declared a quarterly cash dividend of$0.125 per share of Valvoline common stock. The dividend is payable onSeptember 15, 2022 to shareholders of record onAugust 31, 2022 . Additionally, the 32 --------------------------------------------------------------------------------
Company repurchased shares of Valvoline common stock for
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 ofJune 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 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 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 nine months endedJune 30, 2022 .
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