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, and share repurchases 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 Consolidated Statements of Cash Flows are summarized as follows for the years ended September 30:

Operating activities

The decrease in cash flows provided by operating activities of $70.1 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.

Investing activities

The increase in cash flows from investing activities of $714.0 million from the prior year was substantially driven by net proceeds from investments of $346.5 million during the current year in comparison to the net purchase of investments of $360.4 million during the prior year. The Company invested a substantial portion of the 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. In addition, the Company received proceeds, net of cash disposed of, of $71.5 million primarily as a result of completing two refranchising transactions in the current year. These year-over-year changes in cash flows from investing activities were partially offset by increased capital expenditures of $43.9 million and an increase in acquisition activity of $16.4 million in the current year to support store growth.

Financing activities

The decrease in cash flows used in financing activities of $819.2 million from the prior year was principally driven by year over year reductions in share repurchases partially offset by higher net payments on borrowings. In the prior year, the Company completed the Equity Tender Offer to repurchase 27.0 million shares of its common stock for $1.024 billion coupled with other share repurchases of $500.6 million, which utilized a substantial portion of the net proceeds from the sale of Global Products to return cash to shareholders. In the current year, share repurchases of $226.8 million drove lower uses of cash year-over-year of $1.298 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 flows used in financing activities were partially offset by higher net payments on borrowings of $498.9 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 asset sale covenant of the governing indenture. These net payments on borrowings 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 table sets forth free cash flow and discretionary free cash flow from continuing operations and reconciles cash flows from operating activities to both measures. As previously noted, free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. Refer to “Use of Non-GAAP Measures” within this Item 7 for additional information regarding this non-GAAP measure.

The decrease in free cash flow from continuing operations over the prior year was driven primarily by lower cash flows provided by operating activities in the current year as described above. 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 attributable to the discontinued operation are reflected in the Consolidated Statements of Cash Flows and are summarized below for the years ended September 30:

The decrease in operating cash flows provided by discontinued operations was largely due to prior year tax payments of $300.8 million relating to the gain on sale of discontinued operations, in addition to payments of separation-related costs attributed to the sale of the Global Products business, including the success fee which coincided with the close of the Transaction on March 1, 2023. In addition, unfavorable changes in net working capital during the pre-close period in the prior year 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

The following table summarizes Valvoline’s continuing operations debt as of September 30:

Approximately 49% of Valvoline's outstanding borrowings as of September 30, 2024 had fixed rates, with the remainder bearing variable interest rates. As of September 30, 2024, Valvoline was in compliance with all covenants of its debt obligations and had borrowing capacity remaining of $346.8 million. Refer to Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional details regarding the Company’s debt instruments.

On April 16, 2024, Valvoline completed the Debt Tender Offer with 99.7% of the outstanding principal amount tendered by the holders of the 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 purchase of the 2030 Notes at par, plus accrued and unpaid interest, and cancelled the 2030 Notes accepted for purchase. The Company elected to repurchase 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. In connection with the completion of the Debt Tender Offer, Valvoline recognized a loss on extinguishment of the 2030 Notes of $5.1 million within Net interest and other financing expenses in the Consolidated Statements of Comprehensive Income during the year ended September 30, 2024, comprised of the write-off of related unamortized debt issuance costs and discounts.

Material cash requirements and other commitments

The Company's material cash requirements for the continuing operations include the following contractual obligations and commitments as of September 30, 2024:

(a)Includes interest expense on both variable and fixed rate debt, assuming no prepayments. Variable interest rates have been assumed to remain constant through payment at the rates that existed as of September 30, 2024.

(b)Includes projected benefit payments through fiscal 2034 for Valvoline’s unfunded benefit plans. Excludes benefit payments from pension plan trust funds.

The Company guaranteed future lease commitments related to certain facilities in connection with the sale and disposal of certain retail stores and the Global Products business. Valvoline is obligated to perform if the buyers of the divested businesses default on the leases under the guarantees, which extend through 2037. The undiscounted maximum potential future payments under the guarantees were $32.8 million as of September 30, 2024. The Company has not recorded a liability for these guarantees as the likelihood of making future payments is considered remote.

Fiscal 2025 capital expenditures

Valvoline is currently forecasting approximately $230 million to $250 million of capital expenditures for fiscal 2025, funded primarily from operating cash flows.

Pension and other postretirement plan obligations

The Company makes cash and non-cash contributions and benefit payments for its pension and other postretirement plans. During fiscal 2024, the Company made $16.6 million in benefit payments for its non-qualified pension and other postretirement plans, consisting of $8.3 million of cash payments and $8.3 million of non-cash payments. Based on current data and assumptions, the Company does not anticipate the need to satisfy any minimum funding requirements to its qualified pension plans for at least the next 5 years. Refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information regarding the Company's U.S. pension and other postretirement plans.

Share repurchases

During the year ended September 30, 2024, the Company repurchased 6.7 million shares of its common stock for a principal amount of $226.7 million, which completed the November 2022 Board authorization to repurchase up to $1.6 billion of its common stock (the “2022 Share Repurchase Authorization”). During July 2024, the Board approved a share repurchase authorization of $400.0 million (the “2024 Share Repurchase Authorization”), which has no expiration date. As of September 30, 2024, $384.8 million remained available for repurchase under the 2024 Share Repurchase Authorization. Additionally, the Company repurchased 0.2 million shares for an aggregate amount of $9.8 million from October 1, 2024 through November 19, 2024 pursuant to the 2024 Share Repurchase Authorization, leaving $375.0 million in aggregate repurchase authority remaining as of November 19, 2024.

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’s continuing operations had cash and cash equivalents of $68.3 million, total debt of $1.1 billion, and total remaining borrowing capacity of $346.8 million as of September 30, 2024. Valvoline’s ability 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 this Annual Report on Form 10-K.

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.