VALVOLINE INC

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.

Continuing operations cash flows

Valvoline’s continuing operations cash flows as reflected in the Condensed Consolidated Statements of Cash Flows are summarized as follows for the three months ended December 31:

Operating activities

The decrease in cash flows provided by operating activities of $26.6 million from the prior year was due to unfavorable changes in net working capital, primarily driven by the timing of payments, which included higher current period spend for franchisee incentives and technology investments, in addition to the prior year receipt of a legacy-related settlement benefit which did not recur. These unfavorable changes were partially offset by higher cash earnings.

Investing activities

The decrease in cash flows used in investing activities of $220.7 million from the prior year was substantially driven by proceeds from the maturities of short-term investments of $230.0 million. This cash inflow was partially offset by a net outflow of $3.7 million for cash transferred in connection with selling a former Global Products business during the current year, in addition to loans extended to franchisees, net of repayments of $2.6 million and increased capital expenditures of $2.4 million.

Financing activities

The increase in cash flows used in financing activities of $197.2 million from the prior year was primarily due to returning $84.3 million more in cash to shareholders through share repurchases. This increased use of cash from the prior year was partially offset by a $136.5 million decrease in cash inflows from net borrowing activity, in addition to lower dividends paid of $21.8 million as the Company discontinued its dividend during the second quarter of fiscal 2023 following the sale of Global Products.

Continuing operations 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.

The decrease in free cash flow from continuing operations over the prior year was driven by lower cash flow provided by operating activities in addition to increased capital expenditures during the current period. The Company continues to focus the majority of its capital spend toward growth, which is expected to drive a high return on invested capital. The increase in capital expenditures over the prior year period was driven by higher maintenance capital, primarily attributed to timing of the completion of the related projects and spend.

Discontinued operations cash flows

The cash flows of the discontinued operation are reflected in the Condensed Consolidated Statements of Cash Flows and are summarized below for the three months ended December 31:

The declines in cash flows used in operating and investing and those provided from financing activities of the discontinued operation were due to the completion of the sale of Global Products in March 2023, where prior year cash flows were from conducting business within the former Global Products segment and the current year cash flows generally relate to the completion of the separation of the business processes and systems. During the prior year period, cash flows used in operating activities of the discontinued operation were largely driven by operating in an unfavorable working capital environment, in addition to transaction costs to support the sale of the Global Products business. Prior year discontinued operations cash flows used in investing activities were related to capital expenditures, largely maintenance capital, and financing activities cash inflows were primarily due to net proceeds from borrowings, which were subsequently required to be repaid in connection with the sale.

Debt

Inclusive of the interest rate swap agreements, approximately 82% of Valvoline's outstanding borrowings at December 31, 2023 had fixed interest rates, with the remainder bearing variable rates. As of December 31, 2023, Valvoline was in compliance with all covenants of its debt obligations and had borrowing capacity remaining of $471.6 million under its Revolver.

The indenture for the 2030 Senior Notes contains an asset sale covenant that requires Valvoline to make an offer to holders to purchase the 2030 Senior Notes at par, plus any accrued and unpaid interest with any Excess Proceeds from an Asset Sale, each as defined in the indenture. Valvoline currently expects that the sale of Global Products will require the Company to offer to repurchase all of the 2030 Senior Notes during the second quarter of fiscal 2024, absent an amendment to the indenture or other transaction related to these Senior Notes.

Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional details regarding the Company’s debt instruments.

Share repurchases

During the three months ended December 31, 2023, the Company repurchased 5.4 million shares of its common stock for $171.1 million. As of December 31, 2023, $40.4 million remained available for repurchase under the 2022 Share Repurchase Authorization.

The share repurchase authorization is part of a broader capital allocation framework to deliver value to shareholders by first driving growth in the business, organically and through acquisitions and franchise development, and then returning excess cash to shareholders through share repurchases. The Company anticipates repurchasing shares of its common stock up to the full amount remaining under the authorization from the Board of Directors for the Company to repurchase up to $1.6 billion of its common stock announced on November 15, 2022 (the “2022 Share Repurchase Authorization”) during fiscal 2024, subject to market conditions.

Summary

Valvoline’s continuing operations had cash and cash equivalents of $420.7 million, short-term investments of $119.7 million, total debt of $1,580.6 million, and total remaining borrowing capacity of $471.6 million as of December 31, 2023. Valvoline’s ability to continue 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 fiscal year ended September 30, 2023.

Management believes that the Company has sufficient liquidity based on its current cash, cash equivalents and short-term investments position, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions; debt servicing obligations, including the expected offer to repurchase the 2030 Senior Notes; tax-related and other material cash and operating requirements for the next twelve months.