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 six months ended March 31:

Operating activities

The decrease in cash flows provided by operating activities of $81.4 million from the prior year was primarily driven by changes in net working capital. Unfavorable changes in payables and accruals of approximately $60 million were due to the establishment of the supply agreement and other separation-related matters with Global Products in the prior year. Additionally, a lengthened collection cycle during the current year due to billing delays in connection with the implementation of a new enterprise resource planning (“ERP”) system contributed approximately $25 million to the growth in working capital.

Investing activities

The decrease in cash flows used in investing activities of $326.9 million from the prior year was substantially driven by proceeds from the maturities of short-term investments of $350.0 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 $5.2 million, an increase in acquisition activity of $2.4 million, and increased capital expenditures of $7.8 million to support investments in store growth.

Financing activities

The decrease in cash flows used in financing activities of $41.8 million from the prior year was primarily due to returning $45.2 million less in cash to shareholders through share repurchases from utilizing the remaining authorization under the 2022 Share Repurchase Authorization during the second quarter of fiscal 2024 in addition to a $23.7 million decrease in cash inflows from net borrowing activity. This decreased use of cash from the prior year was partially offset by 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 increase in maintenance capital expenditures over the prior year period was driven by facility and equipment expenditures due to the growing store count. In addition, the higher growth capital expenditures over the prior year period primarily relate to new store construction. The Company continues to focus the majority of its capital spend toward growth, which is expected to drive a high return on invested capital.

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 six months ended March 31:

The declines in cash flows used in operating and financing activities and those provided from investing 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 trade and other payables activity 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 provided by investing activities were due to the cash consideration received, net of cash transferred to Global Products entities, at the close of the sale of Global Products of $2.6 billion. The decrease in cash flows used in financing activities of discontinued operations was due to net repayments on borrowings during the prior year period, driven by the extinguishment of the $175 million Trade Receivables Facility.

Debt

Inclusive of the interest rate swap agreements, approximately 83% of Valvoline's outstanding borrowings at March 31, 2024 had fixed interest rates, with the remainder bearing variable rates. As of March 31, 2024, Valvoline was in compliance with all covenants of its debt obligations and had borrowing capacity remaining of $471.8 million under its Revolver, which was reduced to $296.8 million from borrowing $175.0 million to facilitate the purchase of the 2030 Notes in April 2024.

On March 14, 2024, the Company commenced the Tender Offer to purchase its outstanding 2030 Notes. The Tender Offer was made to comply with the requirements of the asset sale covenant under the indenture governing the 2030 Notes in connection with the sale of Global Products.

On April 16, 2024, Valvoline completed the Tender Offer with 99.7% of the outstanding principal amount tendered by the holders of the 2030 Notes. The Company used cash and cash equivalents on hand, in addition to borrowing $175.0 million on the Revolver to facilitate the $598.3 million purchase of the 2030 Notes at par, plus accrued and unpaid interest, and cancelled the 2030 Notes accepted for purchase. The Company elected to redeem the remaining balance outstanding of $1.7 million on April 29, 2024 pursuant to the terms and conditions of the indenture governing the 2030 Notes. Valvoline expects to recognize a loss on extinguishment of the 2030 Notes of $5.1 million during the third quarter of fiscal 2024 due to the write-off of unamortized debt issuance costs and discounts. The 2030 Notes are reported in Current portion of long-term debt within the Condensed Consolidated Balance Sheet as of March 31, 2024.

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 six months ended March 31, 2024, the Company repurchased 6.3 million shares of its common stock for $211.5 million utilizing the remaining authorization available 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”). As of March 31, 2024, the Company repurchased the full amount of its common stock under the 2022 Share Repurchase Authorization and no other share repurchase authorizations have been approved.

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.

Summary

As of March 31, 2024, Valvoline had cash and cash equivalents of $494.5 million, total debt of $1,575.1 million, and total remaining borrowing capacity of $471.8 million, which decreased to $296.8 million subsequent to borrowing $175.0 million on the Revolver to facilitate the purchase of the 2030 Notes in April 2024. 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 II of this Quarterly Report on Form 10-Q and 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, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions; debt servicing obligations, including the purchase of the 2030 Notes in connection with the Tender Offer; tax-related and other material cash and operating requirements for the next twelve months.