Valvoline(VVV) - 2024 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides Valvoline's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls assessment Item 1. Financial Statements This section presents Valvoline's unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2024. It includes the statements of comprehensive income, balance sheets, cash flows, and stockholders' equity, along with accompanying notes. A key event highlighted is the sale of the Global Products business in the prior fiscal year, with its results now reported as discontinued operations Condensed Consolidated Statements of Comprehensive Income This statement details Valvoline's revenues, expenses, and net income for the three and nine months ended June 30, 2024, highlighting key financial performance indicators Q3 & YTD FY2024 vs FY2023 Income Statement Highlights | Indicator (In millions, except per share) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $421.4 | $376.2 | $1,183.5 | $1,053.5 | | Gross Profit | $167.5 | $150.7 | $448.5 | $396.2 | | Operating Income | $93.4 | $86.5 | $232.6 | $177.0 | | Income from Continuing Operations | $48.2 | $64.5 | $125.4 | $124.4 | | Net Income | $45.9 | $61.6 | $119.2 | $1,370.8 | | Diluted EPS (Continuing Operations) | $0.37 | $0.40 | $0.96 | $0.73 | | Diluted EPS (Total) | $0.35 | $0.38 | $0.91 | $8.04 | Condensed Consolidated Balance Sheets This statement presents Valvoline's financial position, including assets, liabilities, and equity, as of June 30, 2024, and September 30, 2023 Balance Sheet Summary (as of June 30, 2024) | Indicator (In millions) | June 30, 2024 | Sept 30, 2023 | | :--- | :--- | :--- | | Total Current Assets | $256.4 | $936.7 | | Cash and cash equivalents | $65.7 | $409.1 | | Total Assets | $2,375.6 | $2,889.9 | | Total Current Liabilities | $351.4 | $362.3 | | Long-term Debt | $1,125.7 | $1,562.3 | | Total Liabilities | $2,269.1 | $2,686.7 | | Total Stockholders' Equity | $106.5 | $203.2 | Condensed Consolidated Statements of Cash Flows This statement summarizes Valvoline's cash inflows and outflows from operating, investing, and financing activities for the nine months ended June 30, 2024 and 2023 Cash Flow Summary (Nine Months Ended June 30) | Cash Flow Activity (In millions) | 2024 | 2023 | | :--- | :--- | :--- | | Operating Cash Flows (Continuing) | $170.0 | $249.9 | | Investing Cash Flows (Continuing) | $161.4 | $(594.9) | | Financing Cash Flows (Continuing) | $(672.4) | $(1,427.4) | | (Decrease) increase in cash | $(347.1) | $442.8 | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies and events. Key disclosures include the financial impact of the discontinued Global Products business sale, business acquisitions of 21 service centers, a debt tender offer for the 2030 Notes, and subsequent events such as further acquisitions and a new share repurchase authorization - The sale of the Global Products business was completed on March 1, 2023. The prior year's nine-month results included a pre-tax gain on sale of $1.572 billion, which is reflected in discontinued operations[15][20] - During the nine months ended June 30, 2024, the company acquired 21 service center stores in various transactions for an aggregate purchase price of $28.2 million[31][33] - In April 2024, Valvoline completed a tender offer to purchase and redeem its outstanding $600.0 million 4.250% senior notes due 2030, resulting in a $5.1 million loss on extinguishment[38] - Subsequent to the quarter end, in July 2024, the company sold 17 company-owned stores to a franchisee, acquired 12 additional stores for $18.7 million, and the Board authorized a new $400.0 million share repurchase program[52][53][54] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance as a pure-play automotive retail services provider. For Q3 2024, net revenues grew 12% driven by 6.5% system-wide same-store sales growth and new store additions. However, income from continuing operations fell 25% due to higher interest expenses. The discussion covers operational results, liquidity, capital allocation strategies including share repurchases and debt management, and the impact of investments in growth Business Strategy and Q3 2024 Overview This section outlines Valvoline's strategic focus on core business growth, retail footprint expansion, and new service capabilities, alongside a summary of Q3 2024 financial performance - The company's strategy focuses on three key areas: - Driving the full potential of the core business - Aggressively growing the retail footprint through both company-operated and franchisee stores - Developing new service capabilities for fleet managers and the evolving car parc[60] Q3 FY2024 Performance Highlights | Metric | Performance | Key Drivers | | :--- | :--- | :--- | | Net Revenues Growth | +12% YoY | 6.5% SSS growth and 157 net new stores | | Income from Continuing Operations | -25% YoY to $48.2M | Higher interest expense from non-recurring income on invested proceeds and costs from debt repurchase | | Adjusted EBITDA Growth | +12% YoY | Top-line growth from higher ticket and non-oil change service penetration | Results of Operations This section provides a detailed analysis of Valvoline's net revenues, expenses, and profitability for the third quarter and year-to-date periods, highlighting key operational drivers Key Business Metrics (Q3 FY2024 vs Q3 FY2023) | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | System-wide store sales | $808.5M | $719.6M | | Company-operated SSS growth | 6.7% | 12.1% | | Franchised SSS growth | 6.4% | 12.8% | | System-wide SSS growth | 6.5% | 12.5% | | Total system-wide stores | 1,961 | 1,804 | - Net revenues for Q3 2024 increased by $45.2 million (12.0%) YoY, primarily driven by increased ticket from non-oil change service penetration, premiumization, and net pricing benefits[77] - SG&A expenses rose by $11.6 million in Q3 and $29.8 million YTD, reflecting investments in growth and stand-alone IT platforms following the sale of Global Products[82] - Net interest and other financing expenses increased by $29.4 million in Q3, largely due to a $23.0 million reduction in interest income as proceeds from the Global Products sale were used or matured[86] Financial Position, Liquidity and Capital Resources This section discusses Valvoline's financial health, including cash flow, debt management, and capital allocation strategies, as of June 30, 2024 Continuing Operations Cash Flows (Nine Months Ended June 30) | Cash Flow Activity (In millions) | 2024 | 2023 | | :--- | :--- | :--- | | Operating activities | $170.0 | $249.9 | | Investing activities | $161.4 | $(594.9) | | Financing activities | $(672.4) | $(1,427.4) | - The decrease in operating cash flow was primarily driven by changes in net working capital, including the non-recurrence of benefits from establishing a supply agreement post-Global Products sale and increased receivables following a new ERP system implementation[95] - During the nine months ended June 30, 2024, the company repurchased 6.3 million shares for $211.5 million, completing its 2022 authorization. A new $400.0 million authorization was approved in July 2024[108] - As of June 30, 2024, Valvoline had $65.7 million in cash, $1,149.5 million in total debt, and $296.8 million of remaining borrowing capacity under its revolver[109] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports that there have been no material changes to its market risks from those disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - Management reassessed market risk disclosures and determined there were no material changes in the nine months ended June 30, 2024[112] Item 4. Controls and Procedures Valvoline's management concluded that its disclosure controls and procedures were not effective as of June 30, 2024. This is due to a material weakness in internal control over financial reporting that arose from the implementation of a new ERP system in January 2024, which impacted IT general controls. The company has implemented a remedial plan and expects it to be completed by the end of the fiscal year - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of June 30, 2024[114] - A material weakness was identified related to the January 2024 implementation of a new ERP system, affecting IT general controls such as system design, segregation of duties, and change management[118] - Management has executed a remedial plan to address the deficiencies, which is expected to be completed during the annual assessment of internal controls for the fiscal year-end[120][121] PART II – OTHER INFORMATION This section addresses Valvoline's legal proceedings, updated risk factors, equity security sales, and required exhibits Item 1. Legal Proceedings The company is involved in various lawsuits and claims that arise in the ordinary course of business. Management has assessed these matters and believes they will not have a material adverse effect on the company's financial statements - Valvoline is party to lawsuits, claims, and other legal proceedings arising in the ordinary course of business, which are not expected to have a material adverse effect on its financial statements[124] Item 1A. Risk Factors This section introduces a new risk factor related to the company's recently implemented ERP system. The implementation has adversely impacted internal controls and working capital and poses ongoing risks if remedial efforts are not effective. These risks include potential disruptions to operations, loss of information, and challenges in issuing timely and accurate financial results - A new risk factor was added concerning the recently implemented ERP system, which has adversely impacted Valvoline's internal controls and working capital[125] - The ERP implementation led to a material weakness in internal control and disruptions in processing invoices and billings to customers, exposing the company to risks of information loss and operational disruption[127] - Failure to timely and effectively remediate issues with the new ERP system could result in unexpected costs, diversion of management's attention, and difficulty in maintaining effective internal controls[128] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered sales of equity securities or use of proceeds occurred during the reporting period - None[129] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, which include certifications from the CEO and CFO as required by the Sarbanes-Oxley Act of 2002, and various XBRL data files for interactive data reporting - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[131]