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 nine months ended June 30:

Operating activities

The decrease in cash flows provided by operating activities of $79.9 million from the prior year was primarily driven by changes in net working capital. Net working capital in the prior year period benefited approximately $70 million from the establishment of the supply agreement,which includes a full conversion cycle of related outstanding payables, in addition to other separation-related accruals in connection with the sale of Global Products. Additionally, increased receivables contributed $11.0 million to the growth in net working capital, most of which is attributed to a lengthened collection cycle that improved from the prior quarter and continues to normalize following billing delays in connection with the implementation of a new enterprise resource planning (“ERP”) system in the current year.

Investing activities

The increase in cash flows provided by investing activities of $756.3 million from the prior year was substantially driven by net proceeds from the maturities of short-term investments of $348.0 million during the current year in comparison to the purchase of investments of $440.4 million during the prior year. The Company invested a substantial portion of the remaining net proceeds from the sale of Global Products in short-term investments in the prior year, which completely matured in the second quarter of fiscal 2024 to support the repurchase of the 2030 Notes that took place in April 2024 discussed in financing activities below. These year-over-year changes in cash flows from investments were partially offset by increased capital expenditures of $27.1 million in the current year to support store growth.

From July 1, 2024 through August 7, 2024, Valvoline acquired 12 service center stores for an aggregate purchase price of $18.7 million. These acquisitions provide an opportunity to expand Valvoline’s store locations in key markets and contribute to regional scale from company-owned service center store growth.

Financing activities

Cash flows used in financing activities decreased $755.0 million from the prior year attributed to changes driven by or related to the sale of Global Products in the prior year. The largest reduction of cash flows used in financing activities were share repurchases, primarily impacted by the execution of the tender offer in the prior year to repurchase 27.0 million shares for $1.024 billion (the “Equity Tender Offer”), which utilized a substantial portion of the net proceeds from the sale of Global Products to return cash to shareholders. Coupled with other share repurchases outside of the Equity Tender Offer in the prior year of $371.3 million and $212.2 million in the current year to complete the November 2022 Board authorization to repurchase up to $1.6 billion of its common stock (the “2022 Share Repurchase Authorization”), share repurchase activity drove lower uses of cash year-over-year of $1.183 billion. Further contributing to lower uses of cash for financing activities were prior year dividend payments of $21.8 million that did not recur as the Company discontinued its dividend during the second quarter of fiscal 2023 following the sale of Global Products.

These decreases in cash uses were partially offset by higher net payments on borrowings of $448.7 million. Higher net payments in the current year were driven by the Debt Tender Offer, which utilized cash and cash equivalents and borrowings of $175.0 million on the Revolver to facilitate the repurchase of the $600.0 million 2030 Notes in accordance with the the asset sale covenant of the governing indenture. Finally, higher payments on borrowings were also attributed to quarterly repayments on the Term Loan in the current year compared to net inflows in the prior year associated with the modification of the Senior Credit Agreement in connection with closing 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 primarily by growth in working capital described above and higher tax and interest payments in the current year that more than offset growth in cash earnings. These changes, in addition to higher capital expenditures resulted in lower free cash flow from the prior year. New store construction primarily drove increased capital expenditures during the current year, as 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 nine months ended June 30:

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 due to the first estimated tax payment of $225.5 million relating to the gain on sale of discontinued operations, along with payments of separation-related costs attributed to the sale of the Global Products business. In addition, unfavorable changes in net working capital during the pre-close period contributed to the use of cash flows that were primarily due to trade and other payables activity in the cost inflationary environment and growth in accounts receivable from increased sales. Prior year discontinued operations cash flows provided by investing activities were due to the cash consideration received, net of cash transferred, at the close of the sale of Global Products of $2.6 billion. The prior year cash flows used in financing activities were due to net repayments on borrowings driven by the extinguishment of the $175 million Trade Receivables Facility.

Debt

Inclusive of the interest rate swap agreements, approximately 61% of Valvoline's outstanding borrowings at June 30, 2024 had fixed interest rates, with the remainder bearing variable rates. As of June 30, 2024, Valvoline was in compliance with all covenants of its debt obligations and had borrowing capacity remaining of $296.8 million under its Revolver.

On April 16, 2024, Valvoline completed the Debt Tender Offer to purchase its outstanding 2030 Notes. The Debt 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 and Valvoline’s use of the related net proceeds. 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, or 99.7% of the outstanding principal amount, 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. During the three and nine months ended June 30, 2024, Valvoline recognized a loss on extinguishment of $5.1 million on the 2030 Notes due to the write-off of unamortized debt issuance costs and discounts.

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 nine months ended June 30, 2024, the Company repurchased 6.3 million shares of its common stock for $211.5 million, utilizing the remaining 2022 Share Repurchase Authorization. During July 2024, the Board approved a share repurchase authorization of $400.0 million, which has no expiration date.

The timing and amount of any repurchases of common stock will be solely at the discretion of the Company and is subject to general business and market conditions, as well as other factors. The share repurchase authorization is part of a broader capital allocation framework to deliver value to shareholders by first, driving profitable growth in the business, organically and through acquisitions and franchise development; second, to remain within a ratings agency target adjusted EBITDA net leverage ratio of 2.5 to 3.5 times; and third, to continue returning excess capital to shareholders.

Summary

Valvoline had cash and cash equivalents of $65.7 million, total debt of $1,149.5 million, and total remaining borrowing capacity of $296.8 million as of June 30, 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 pension and other postretirement plan, debt servicing, tax-related and other material cash and operating requirements for the next twelve months.