Valvoline(VVV) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents Valvoline Inc.'s unaudited condensed consolidated financial statements for the quarter ended March 31, 2022, including income, balance, equity, and cash flow statements with notes Condensed Consolidated Statements of Comprehensive Income Consolidated Income Statement Highlights (Unaudited) | Metric (In millions) | Three months ended Mar 31, 2022 | Three months ended Mar 31, 2021 | Six months ended Mar 31, 2022 | Six months ended Mar 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Sales | $886 | $701 | $1,744 | $1,354 | | Gross Profit | $250 | $247 | $494 | $475 | | Operating Income | $117 | $131 | $238 | $255 | | Net Income | $81 | $68 | $168 | $155 | | Diluted EPS | $0.45 | $0.37 | $0.93 | $0.84 | Condensed Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Metric (In millions) | March 31, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,016 | $1,037 | | Total Assets | $3,248 | $3,191 | | Total Current Liabilities | $585 | $569 | | Long-term Debt | $1,648 | $1,677 | | Total Liabilities | $3,048 | $3,056 | | Total Stockholders' Equity | $200 | $135 | Condensed Consolidated Statements of Stockholders' Equity (Deficit) - For the six months ended March 31, 2022, total stockholders' equity increased from $135 million to $200 million, driven by net income of $168 million, offset by dividends paid ($45 million) and common stock repurchases ($66 million)[13] Condensed Consolidated Statements of Cash Flows Consolidated Cash Flow Highlights (Unaudited) | Metric (In millions) | Six months ended Mar 31, 2022 | Six months ended Mar 31, 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $96 | $190 | | Cash used in Investing Activities | $(84) | $(276) | | Cash used in Financing Activities | $(124) | $(431) | | Decrease in Cash | $(111) | $(513) | | Cash at End of Period | $120 | $248 | Notes to Condensed Consolidated Financial Statements - Valvoline announced its intention on October 12, 2021, to pursue a separation of its Retail Services and Global Products segments, pending final Board approval with no established timetable[21] - During the six months ended March 31, 2022, the Company acquired 21 service center stores for an aggregate purchase price of $23 million, adding $20 million to goodwill[31][34][38] - As of March 31, 2022, total debt was approximately $1.7 billion, with $471 million of borrowing capacity remaining under its revolving credit facility, and the company was in compliance with all debt covenants[39][41] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q2 2022 financial performance, highlighting strong sales growth driven by pricing and volume, offset by margin pressure from cost inflation and supply chain issues, alongside the ongoing segment separation plan Business Overview - Valvoline is pursuing a strategic separation of its Retail Services and Global Products segments to enhance focus on their distinct customer bases and strategies[66] - Key business strategies for fiscal 2022 include executing the segment separation, aggressively growing Retail Services, accelerating Global Products' market share, expanding capabilities for future transport vehicles, and building a strong data and technology foundation[69] - In Q2 2022, net income grew 19% to $81 million and diluted EPS grew 22% to $0.45, driven by strong top-line results, with Retail Services sales growing 23% and Global Products sales growing 29%[72] Results of Operations - Consolidated Review Year-over-Year Sales Change Drivers (In millions) | Driver | Three months ended Mar 31, 2022 | Six months ended Mar 31, 2022 | | :--- | :--- | :--- | | Volume and mix | $67 | $171 | | Price | $113 | $203 | | Currency exchange | $(9) | $(9) | | Acquisitions | $14 | $25 | | Total Change in Sales | $185 | $390 | Year-over-Year Gross Profit Change Drivers (In millions) | Driver | Three months ended Mar 31, 2022 | Six months ended Mar 31, 2022 | | :--- | :--- | :--- | | Volume and mix | $32 | $82 | | Price and cost | $(30) | $(63) | | Total Change in Gross Profit | $3 | $19 | - Gross profit margin declined from 35.2% to 28.2% for the quarter year-over-year, primarily due to higher raw material costs, supply chain challenges, and the dilutive impact of passing through cost increases[82][87] - Net interest and financing expenses decreased significantly, primarily due to $36 million in debt extinguishment costs recognized in the prior-year period that did not recur[15][94] Results of Operations - Reportable Segment Review Retail Services Segment Performance (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales (in millions) | $350 | $285 | 23% | | Adjusted EBITDA (in millions) | $95 | $95 | 0% | | Adjusted EBITDA Margin | 27.1% | 33.3% | (620) bps | | System-wide SSS Growth | 13.1% | 20.2% | N/A | - Retail Services' profitability was impacted by wage inflation, labor inefficiencies, and higher product costs from supply chain constraints, with the company implementing incremental pricing actions to address these pressures[109] Global Products Segment Performance (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales (in millions) | $536 | $416 | 29% | | Adjusted EBITDA (in millions) | $81 | $80 | 1% | | Adjusted EBITDA Margin | 15.1% | 19.2% | (410) bps | | Lubricant Volume (gallons) | 43.3 | 39.9 | 9% | - Global Products sales growth of 29% outpaced volume growth of 9%, reflecting successful price pass-through of raw material cost increases, though profitability was moderated by the inflationary cost environment and supply chain challenges[112][113] Financial Position, Liquidity and Capital Resources - Cash from operating activities decreased to $96 million for the six months ended March 31, 2022, down from $190 million in the prior year, primarily due to an unfavorable increase in net working capital from higher accounts receivable[115][116] Free Cash Flow (Six months ended March 31) | Metric (In millions) | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $96 | $190 | | Less: Growth capital expenditures | $(51) | $(59) | | Less: Maintenance capital expenditures | $(16) | $(15) | | Free Cash Flow | $29 | $116 | - During the six months ended March 31, 2022, the company returned $111 million to shareholders through $45 million in dividends and $66 million in share repurchases[123] - As of March 31, 2022, the company had $118 million in cash and $587 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility[122][126] Quantitative and Qualitative Disclosures About Market Risk The company states that there were no material changes to its market risks during the six months ended March 31, 2022, from those disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2021 - Management reassessed quantitative and qualitative market risk disclosures and determined there were no material changes in the six months ended March 31, 2022[130] Controls and Procedures Valvoline's CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no significant changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the evaluation date, the company's disclosure controls and procedures were effective[131] - No significant changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2022[132] PART II – OTHER INFORMATION Legal Proceedings The company is party to various lawsuits and claims arising in the ordinary course of business, with management believing pending claims will not materially adversely affect its financial statements - Valvoline is party to lawsuits, claims, and other legal proceedings that arise in the ordinary course of business, with further details referenced in Note 8 of the financial statements[135] Risk Factors There were no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021 - No material changes were reported from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended September 30, 2021[136] [Unregistered Sales of Equity Securities and Use of Proceeds](index=38&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECU RITIES%20AND%20USE%20OF%20PROCEEDS) This section details the company's repurchase of its common stock during the three months ended March 31, 2022, where Valvoline repurchased approximately 1.08 million shares for a total of $35 million Share Repurchase Activity (Q2 2022) | Monthly Period | Total Shares Purchased | Average Price Paid | Dollar Value (in millions) | | :--- | :--- | :--- | :--- | | January 2022 | 295,790 | $34.70 | $10.3 | | February 2022 | 322,781 | $32.79 | $10.6 | | March 2022 | 458,815 | $30.65 | $14.1 | | Total | 1,077,386 | $32.40 | $35.0 | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and XBRL data files - Lists exhibits filed with the report, including Sarbanes-Oxley Act certifications for the CEO and CFO, and XBRL interactive data files[139]