Valvoline Inc 10-Q for FY2020 Q1

Valvoline Inc (VVV)

10-Q 2020-02-04 For: 2019-12-31

Added on April 11, 2026

About this 10-Q

Valvoline Inc filed this 10-Q on February 4, 2020, covering the quarter ended December 31, 2019 (FY2020 Q1).

Headline figures

Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $607M; up 9.0% from $557M a year earlier
Net income: $73M; up 37.7% from net income of $53M a year earlier
Diluted EPS: $0.39; up 39.3% from $0.28 a year earlier

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Kentucky			30-0939371
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐


			Page
PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Comprehensive Income			3

Condensed Consolidated Balance Sheets			4

Condensed Consolidated Statements of Stockholders’ Deficit			5

Condensed Consolidated Statements of Cash Flows			6

Notes to Condensed Consolidated Financial Statements			7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			43

ITEM 4. CONTROLS AND PROCEDURES			44

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			45

ITEM 1A. RISK FACTORS			45

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			45

ITEM 6. EXHIBITS			46

SIGNATURE			47


	Three months ended December 31
(In millions, except per share data - unaudited)	2019		2018
Sales	$	607	$	557
Cost of sales	396		374
Gross profit	211		183

Selling, general and administrative expenses	117		105
Net legacy and separation-related income	(1)		—
Equity and other income, net	(9)		(9)
Operating income	104		87
Net pension and other postretirement plan income	(9)		(2)
Net interest and other financing expenses	16		17

Income before income taxes	97		72
Income tax expense	24		19
Net income	$	73	$	53

NET INCOME PER SHARE
Basic	$	0.39	$	0.28
Diluted	$	0.39	$	0.28

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	189		188
Diluted	189		189

COMPREHENSIVE INCOME
Net income	$	73	$	53
Other comprehensive income (loss), net of tax
Currency translation adjustments	8		(4)
Amortization of pension and other postretirement plan prior service credit	(2)		(2)
Other comprehensive income (loss)	6		(6)
Comprehensive income	$	79	$	47


(In millions, except per share amounts - unaudited)	December 31 2019		September 30 2019
Assets
Current assets
Cash and cash equivalents	$	162	$	159
Accounts receivable, net	395		401
Inventories, net	194		194
Prepaid expenses and other current assets	43		43
Total current assets	794		797
Noncurrent assets
Property, plant and equipment, net	479		498
Operating lease assets	253		—
Goodwill and intangibles, net	507		504
Equity method investments	39		34
Deferred income taxes	116		123
Other noncurrent assets	109		108
Total noncurrent assets	1,503		1,267
Total assets	$	2,297	$	2,064

Liabilities and Stockholders’ Deficit
Current liabilities

Current portion of long-term debt	$	22	$	15
Trade and other payables	153		171
Accrued expenses and other liabilities	246		237
Total current liabilities	421		423
Noncurrent liabilities
Long-term debt	1,320		1,327
Employee benefit obligations	376		387

Operating lease liabilities	224		—
Other noncurrent liabilities	152		185
Total noncurrent liabilities	2,072		1,899
Commitments and contingencies
Stockholders’ deficit
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding	—		—
Common stock, par value $0.01 per share, 400 shares authorized; 188 shares issued and outstanding at December 31, 2019 and September 30, 2019	2		2
Paid-in capital	16		13
Retained deficit	(231)		(284)


Accumulated other comprehensive income	17		11
Total stockholders’ deficit	(196)		(258)
Total liabilities and stockholders’ deficit	$	2,297	$	2,064


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	Three months ended December 31, 2019
								Accumulated other comprehensive income
(In millions, except per share amounts)	Common stock					Paid-in capital				Retained deficit
(Unaudited)	Shares	Amount											Totals
Balance at September 30, 2019	188	$	2	$	13	$	(284)	$	11		$	(258)
Net income	—	—		—		73		—			73
Dividends paid, $0.113 per common share	—	—		—		(21)		—			(21)
Stock-based compensation, net of issuances	—	—		3		—		—			3

Cumulative effect of adoption of new leasing standard, net of tax	—	—		—		1		—			1
Currency translation adjustments	—	—		—		—		8			8
Amortization of pension and other postretirement prior service credits in income, net of tax	—	—		—		—		(2)			(2)
Balance at December 31, 2019	188	$	2	$	16	$	(231)	$	17		$	(196)


	Three months ended December 31, 2018
								Accumulated other comprehensive income
(In millions, except per share amounts)	Common stock					Paid-in capital				Retained deficit
(Unaudited)	Shares	Amount											Totals
Balance at September 30, 2018	188	$	2	$	7	$	(399)	$	32		$	(358)
Net income	—	—		—		53		—			53
Dividends paid, $0.106 per common share	—	—		—		(20)		—			(20)
Stock-based compensation, net of issuances	—	—		1		—		—			1


Cumulative effect of adoption of new revenue standard, net of tax	—	—		—		(13)		—			(13)
Currency translation adjustments	—	—		—		—		(4)			(4)
Amortization of pension and other postretirement prior service credits in income, net of tax	—	—		—		—		(2)			(2)
Balance at December 31, 2018	188	$	2	$	8	$	(379)	$	26		$	(343)


	Three months ended December 31
(In millions - unaudited)	2019		2018
Cash flows from operating activities
Net income	$	73	$	53
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization	16		14


Equity income from unconsolidated affiliates, net of distributions	(2)		—


Pension contributions	(4)		(2)

Stock-based compensation expense	4		3
Other, net	2		—
Change in assets and liabilities
Accounts receivable	7		43
Inventories	4		(13)
Payables and accrued liabilities	(47)		(19)
Other assets and liabilities	6		6
Total cash provided by operating activities	59		85
Cash flows from investing activities
Additions to property, plant and equipment	(28)		(27)
Acquisitions, net of cash acquired	(6)		(30)


Other investing activities, net	(1)		1
Total cash used in investing activities	(35)		(56)
Cash flows from financing activities

Proceeds from borrowings	—		100
Repayments on borrowings	—		(101)


Cash dividends paid	(21)		(20)
Other financing activities	(2)		(4)
Total cash used in financing activities	(23)		(25)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash	3		(1)
Increase in cash, cash equivalents, and restricted cash	4		3
Cash, cash equivalents, and restricted cash - beginning of period	159		96
Cash, cash equivalents, and restricted cash - end of period	$	163	$	99


Index to Notes to Condensed Consolidated Financial Statements			Page

Note 1 - Basis of Presentation and Significant Accounting Policies			8
Note 2 - Leasing			9
Note 3 - Fair Value Measurements			13
Note 4 - Acquisitions and Divestitures			14
Note 5 - Intangible Assets			15
Note 6 - Restructuring Activities			15
Note 7 - Debt			16
Note 8 - Income Taxes			17
Note 9 - Employee Benefit Plans			17
Note 1 0 - Litigation, Claims and Contingencies			17
Note 1 1 - Earnings Per Share			18
Note 1 2 - Reportable Segment Information			18
Note 13 - Supplemental Financial Information			20
Note 1 4 - Guarantor Financial Information			22
Note 1 5 - Subsequent Events			28


(In millions)	Three months ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases^(a)	$	10
Operating cash flows from finance leases	$	1
Financing cash flow from finance leases	$	—
Lease assets obtained in exchange for lease obligations:
Operating leases	$	15
Finance leases	$	—


(In millions)	Operating leases		Capital leases and financing obligations
2020	$	36	$	6
2021	32		7
2022	29		7
2023	27		7
2024	23		7
Thereafter	120		50
Total future lease payments ^(a)	$	267	84
Imputed interest			29
Present value of lease liabilities			$	55


Weighted average remaining lease term (in years):
Operating leases	10.0
Finance leases	10.7
Weighted average discount rate:
Operating leases	4.13	%
Finance leases	11.57	%


(In millions)	Fair Value Hierarchy	December 31 2019		September 30 2019
Cash and cash equivalents
Money market funds	Level 1	$	1	$	—
Time deposits	Level 2	62		59
Prepaid expenses and other current assets
Currency derivatives ^(a)	Level 2	1		—

Other noncurrent assets
Non-qualified trust funds	Level 1	20		20
Total assets at fair value		$	84	$	79

Accrued expenses and other liabilities
Currency derivatives ^(a)	Level 2	$	1	$	—
Total liabilities at fair value		$	1	$	—


	Three months ended
	December 31
(In millions)	2019		2018
Quick Lubes
Company-owned operations	$	142	$	124
Non-company owned operations	76		65
Total Quick Lubes	218		189

Core North America
Retail	137		116
Installer and other	111		116
Total Core North America	248		232

International	141		136

Consolidated sales	$	607	$	557


(In millions)	December 31 2019		September 30 2019
Finished products	$	197	$	203
Raw materials, supplies and work in process	37		32
Reserve for LIFO cost valuation	(40)		(41)

Total inventories, net	$	194	$	194


	December 31, 2019										September 30, 2019
(In millions)	Fair value		Carrying value		Unamortized discount and issuance costs		Fair value		Carrying value		Unamortized discount and issuance costs
2024 Notes	$	389	$	371	$	(4)	$	390	$	371	$	(4)
2025 Notes	416		396		(4)		407		395		(5)
Total	$	805	$	767	$	(8)	$	797	$	766	$	(9)


(In millions)	Employee Termination Benefits
Balance at September 30, 2019	$	9
Expenses recognized during the period	1
Payments	(2)

Balance at December 31, 2019	$	8


(In millions)	December 31 2019		September 30 2019
2025 Notes	$	400	$	400
2024 Notes	375		375
Term Loan	575		575


Other ^(a)	(8)		(8)
Total debt	$	1,342	$	1,342

Current portion of long-term debt	22		15
Long-term debt	$	1,320	$	1,327


					Other postretirement benefits
	Pension benefits
(In millions)	2019		2018		2019		2018
Three months ended December 31
Service cost	$	1	$	—	$	—	$	—
Interest cost	16		20		—		1
Expected return on plan assets	(22)		(20)		—		—
Amortization of prior service credit	—		—		(3)		(3)

Net periodic benefit income	$	(5)	$	—	$	(3)	$	(2)


	Three months ended
	December 31
(In millions, except per share data)	2019		2018
Numerator
Net income	$	73	$	53
Denominator

Weighted average common shares outstanding	189		188
Effect of potentially dilutive securities ^(a)	—		1
Weighted average diluted shares outstanding	189		189

Earnings per share
Basic	$	0.39	$	0.28
Diluted	$	0.39	$	0.28


Condensed Consolidating Statements of Comprehensive Income
For the three months ended December 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Sales	$	—	$	480	$	140	$	(13)	$	607
Cost of sales	—		309		100		(13)		396
Gross profit	—		171		40		—		211

Selling, general and administrative expenses	4		88		25		—		117
Net legacy and separation-related income	(1)		—		—		—		(1)
Equity and other (income) expenses, net	—		(13)		4		—		(9)
Operating (loss) income	(3)		96		11		—		104
Net pension and other postretirement plan income	—		(9)		—		—		(9)
Net interest and other financing expenses	15		1		—		—		16

(Loss) income before income taxes	(18)		104		11		—		97
Income tax (benefit) expense	(6)		27		3		—		24
Equity in net income of subsidiaries	(85)		(8)		—		93		—
Net income	$	73	$	85	$	8	$	(93)	$	73

Total comprehensive income	$	79	$	89	$	15	$	(104)	$	79


Condensed Consolidating Balance Sheets
As of December 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	62	$	100	$	—	$	162
Accounts receivable, net	—		245		300		(150)		395
Inventories, net	—		108		86		—		194
Prepaid expenses and other current assets	1		32		10		—		43
Total current assets	1		447		496		(150)		794
Noncurrent assets
Property, plant and equipment, net	—		407		72		—		479
Operating lease assets	—		211		42		—		253
Goodwill and intangibles, net	—		425		82		—		507
Equity method investments	—		39		—		—		39
Investment in subsidiaries	1,247		523		—		(1,770)		—
Deferred income taxes	55		47		14		—		116
Other noncurrent assets	3		97		9		—		109
Total noncurrent assets	1,305		1,749		219		(1,770)		1,503
Total assets	$	1,306	$	2,196	$	715	$	(1,920)	$	2,297

Liabilities and Stockholders’ Deficit
Current liabilities

Current portion of long-term debt	$	22	$	—	$	—	$	—	$	22
Trade and other payables	109		96		98		(150)		153
Accrued expenses and other liabilities	18		182		46		—		246
Total current liabilities	149		278		144		(150)		421
Noncurrent liabilities
Long-term debt	1,319		1		—		—		1,320
Employee benefit obligations	—		359		17		—		376
Operating lease liabilities	—		195		29		—		224
Other noncurrent liabilities	34		116		2		—		152
Total noncurrent liabilities	1,353		671		48		—		2,072
Commitments and contingencies
Stockholders’ (deficit) equity	(196)		1,247		523		(1,770)		(196)
Total liabilities and stockholders’ deficit / equity	$	1,306	$	2,196	$	715	$	(1,920)	$	2,297


Condensed Consolidating Balance Sheets
As of September 30, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	59	$	100	$	—	$	159
Accounts receivable, net	—		181		338		(118)		401
Inventories, net	—		110		84		—		194
Prepaid expenses and other current assets	—		35		8		—		43
Total current assets	—		385		530		(118)		797
Noncurrent assets
Property, plant and equipment, net	—		431		67		—		498
Goodwill and intangibles, net	—		423		81		—		504
Equity method investments	—		34		—		—		34
Investment in subsidiaries	1,157		546		—		(1,703)		—
Deferred income taxes	48		61		14		—		123
Other noncurrent assets	3		96		9		—		108
Total noncurrent assets	1,208		1,591		171		(1,703)		1,267
Total assets	$	1,208	$	1,976	$	701	$	(1,821)	$	2,064

Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt	$	15	$	—	$	—	$	—	$	15
Trade and other payables	80		127		82		(118)		171
Accrued expenses and other liabilities	9		175		53		—		237
Total current liabilities	104		302		135		(118)		423
Noncurrent liabilities
Long-term debt	1,326		1		—		—		1,327
Employee benefit obligations	—		369		18		—		387

Other noncurrent liabilities	36		147		2		—		185
Total noncurrent liabilities	1,362		517		20		—		1,899
Commitments and contingencies
Stockholders’ (deficit) equity	(258)		1,157		546		(1,703)		(258)
Total liabilities and stockholders’ deficit / equity	$	1,208	$	1,976	$	701	$	(1,821)	$	2,064


Condensed Consolidating Statements of Cash Flows
For the three months ended December 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Cash flows provided by operating activities	$	23	$	31	$	5	$	—	$	59
Cash flows from investing activities
Additions to property, plant and equipment	—		(21)		(7)		—		(28)

Acquisitions, net of cash acquired	—		(6)		—		—		(6)

Other investing activities, net	—		(1)		—		—		(1)

Cash flows used in investing activities	—		(28)		(7)		—		(35)
Cash flows from financing activities





Cash dividends paid	(21)		—		—		—		(21)
Other financing activities	(2)		—		—		—		(2)

Cash flows used in financing activities	(23)		—		—		—		(23)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash	—		—		3		—		3
Increase in cash, cash equivalents, and restricted cash	—		3		1		—		4
Cash, cash equivalents, and restricted cash - beginning of year	—		59		100		—		159
Cash, cash equivalents, and restricted cash - end of period	$	—	$	62	$	101	$	—	$	163


Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations			Page

Business Overview			29
Results of Operations - Consolidated Review			33
Results of Operations - Reportable Segment Review			36
Financial Position, Liquidity and Capital Resources			40
New Accounting Pronouncements			43
Critical Accounting Policies and Estimates			43


	Year over year change
(In millions)	Three months ended December 31, 2019
Mix and price	$	30

Volume	18

Currency exchange	(2)
Acquisitions	4
Change in sales	$	50


		Company-owned
		First Quarter 2020		Fourth Quarter 2019		Third Quarter 2019		Second Quarter 2019		First Quarter 2019
Beginning of period			519		501		483		471		462
	Opened	2		12		4		7		5
	Acquired	7		6		13		5		—
	Net conversions between company-owned and franchised	(4)		—		1		—		4
	Closed	—		—		—		—		—
End of period			524		519		501		483		471

			Franchised^(a)
		First Quarter 2020		Fourth Quarter 2019		Third Quarter 2019		Second Quarter 2019		First Quarter 2019
Beginning of period			866		851		844		830		780
	Opened	13		15		11		15		24
	Acquired	—		—		—		—		31
	Net conversions between company-owned and franchised	4		—		(1)		—		(4)
	Closed	—		—		(3)		(1)		(1)
End of period			883		866		851		844		830

Total stores			1,407		1,385		1,352		1,327		1,301









31.1*			Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*			Certification of Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**			Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, and Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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	VALVOLINE INC.
	(Registrant)

February 4, 2020	By:	/s/ Mary E. Meixelsperger
		Mary E. Meixelsperger
		Chief Financial Officer


1.			I have reviewed this Quarterly Report on Form 10-Q of Valvoline Inc.;


2.			Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.			Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.			The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.			Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.			Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.			Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.			Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


a.			All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.			Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.