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Valvoline Inc. Reports Fourth-Quarter and Fiscal Year 2023 Results

Delivers 17th year of consecutive system-wide same-store sales growth and 8 percent increase to store count

Full-year highlights

  • Sales from continuing operations of $1.4 billion grew 17%, while system-wide same-store sales (SSS) increased 11.9% -- the 17th consecutive year of system-wide SSS growth

  • Reported income from continuing operations of $199 million grew 82% and earnings per diluted share (EPS) of $1.23 increased 102%

  • Continuing operations adjusted EBITDA of $380 million increased 20% and adjusted EPS of $1.18 increased 62%

  • Returned $1.5 billion in cash to shareholders via share repurchases

Fourth-quarter summary

  • Sales from continuing operations of $390 million grew 16%, while system-wide SSS increased 10.0%

  • Reported income from continuing operations of $75 million grew 505% and EPS of $0.53 increased 657%

  • Continuing operations adjusted EBITDA of $109 million increased 25% and adjusted EPS of $0.39 increased 86%

  • Net store additions total 48 (26 franchised and 22 company-operated) bringing total system-wide additions for the year to 137 and total store count to 1,852

LEXINGTON, Ky., Nov. 9, 2023 /PRNewswire/ -- Valvoline Inc. (NYSE: VVV), the quick, easy, trusted leader in preventive automotive maintenance, today reported financial results for its fourth fiscal quarter ended September 30, 2023. All comparisons in this press release are made to the same prior-year periods unless otherwise noted.

Valvoline Inc. (PRNewsfoto/Valvoline Inc.)
Valvoline Inc. (PRNewsfoto/Valvoline Inc.)

"Fiscal year 2023 was a transformational year for Valvoline as it was our first year as a pure-play retail business," said Lori Flees, President & CEO. "Our system-wide store sales grew nearly 20% to $2.8 billion driven by an 11.9% increase in system-wide same-store sales."

"On top of delivering strong top and bottom-line growth for the year, we completed the sale of Global Products, returned $1.5 billion to shareholders through share repurchases and completed a leadership transition," continued Flees. "With our transition to a pure-play retail services provider complete, we believe we are well positioned for long-term shareholder value creation by growing our core business, adding to the network and expanding services for an evolving car parc."

Continuing Operations - Operating Results

(In millions, except store counts)

Q4 results

YoY growth



FY results

YoY growth

Net revenues

$          390.0

16 %



$       1,443.5

17 %

Operating income

$            70.2

4 %



$          247.2

12 %

Income from continuing operations (a)

$            75.0

505 %



$          199.4

82 %

EPS (a)

$            0.53

657 %



$            1.23

102 %

Adjusted EPS (b)

$            0.39

86 %



$            1.18

62 %

Adjusted EBITDA (b)

$          109.2

25 %



$          380.0

20 %

System-wide store sales (b)

$          738.3

15 %



$       2,761.8

17 %


Q4 results

Quarter
change



FY results

YoY

change

System-wide stores (b)

1,852

+48



1,852

+137

Company-operated stores

876

+22



876

+86

Franchised stores (b)

976

+26



976

+51


Q4 - YoY growth



FY - YoY growth

System-wide SSS (b)

10.0 %



11.9 %



(a)

Includes the effects of certain unusual, infrequent or non-operational activity not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods ("key items"). These key items are delineated within Table 6 - Non-GAAP Reconciliation - Income from Continuing Operations and Diluted Earnings per Share.

(b)

Refer to Key Business Measures, Use of Non-GAAP Measures, Table 4 - Retail Stores Operating Information, Table 6 - Non-GAAP Reconciliation - Income from Continuing Operations and Diluted Earnings per Share, and Table 7 - Non-GAAP Reconciliation - Adjusted Net Revenues and EBITDA from Continuing Operations for management's definitions of the metrics presented above and reconciliation to the corresponding GAAP measures, where applicable.

Balance Sheet and Cash Flow

  • Cash, cash equivalents and short-term investments balance of $757 million; total debt of $1.6 billion

  • Full-year operating cash flow from continuing operations of $353 million and free cash flow of $173 million

  • Returned $1.5 billion in cash to shareholders in fiscal 2023 via share repurchases with $212 million remaining on the existing share repurchase authorization at year end

  • Included in net interest expense is income of $11 million and $44 million earned during the quarter and fiscal year, respectively, on invested net proceeds from the sale of Global Products

Outlook
"I want to thank our talented team of over 10,000 and our strong franchise partners for the hard work that delivered these results in fiscal 2023" said Flees. "We continue to deliver best-in-class performance relative to high-growth retail peers."

Flees continued, "As we enter fiscal 2024, we expect to deliver results in line with our long-term growth algorithm, with top line sales of $1.6 - $1.7 billion and adjusted EBITDA of $420 - $460 million. We anticipate system-wide same store sales growth of 6-9%. In addition, we plan to add 140-170 stores to the network, with 55-70 coming from franchisees."

Information regarding the Company's outlook for fiscal 2024 is provided in the table below:


Outlook

System-wide SSS growth

6

9 %

System-wide store additions

140

170

Net revenues

$1.6

$1.7 billion

Adjusted EBITDA

$420

$460 million

Capital expenditures

$185

$215 million

Adjusted EPS

$1.40

$1.65

Valvoline's outlook for adjusted EBITDA and adjusted EPS are non-GAAP financial measures that are expected to be impacted by items affecting comparability. Valvoline is unable to reconcile these forward-looking non-GAAP financial measures to the comparable GAAP measures estimated for fiscal 2024 without unreasonable efforts, as the Company is currently unable to predict with a reasonable degree of certainty the type and extent of certain items that would be expected to impact these GAAP measures in fiscal 2024 but would not impact non-GAAP adjusted results.

Conference Call Webcast
Valvoline will host a live audio webcast of its fiscal fourth quarter 2023 conference call today, November 9, 2023, at 9 a.m. ET. The webcast and supporting materials will be accessible through Valvoline's website at http://investors.valvoline.com. Following the live event, an archived version of the webcast and supporting materials will be available.

Key Business Measures
Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-operated and franchised store counts and SSS; and system-wide store sales. Management believes these measures are useful to evaluating and understanding Valvoline's operating performance and should be considered as supplements to, not substitutes for, Valvoline's net revenues and operating income, as determined in accordance with U.S. GAAP.

Net revenues are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store counts. SSS is defined as net revenues by U.S. stores (company-operated, franchised and the combination of these for system-wide SSS), with new stores, including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize.

Net revenues are limited to sales at company-operated stores, in addition to royalties and other fees from independent franchised and Express Care stores. Although Valvoline does not recognize store-level sales from franchised stores as net revenues in its Statements of Consolidated Income, management believes system-wide and franchised SSS comparisons, store counts, and total system-wide store sales are useful to assess market position relative to competitors and overall store and operating performance.

Use of Non-GAAP Measures
The following non-GAAP measures are included herein: Adjusted net revenues; EBITDA, adjusted EBITDA, and adjusted EBITDA margin; adjusted net income and adjusted diluted earnings per share; and free cash flow and discretionary free cash flow. Refer to the tables herein for management's definition of each non-GAAP measure and reconciliation to the most comparable U.S. GAAP measure.

Non-GAAP measures include adjustments from results based on U.S. GAAP that management believes enables comparison of certain financial trends and results between periods and provides a useful supplemental presentation of Valvoline's operating performance that allows for transparency with respect to key metrics used by management in operating the business and measuring performance. These non-GAAP measures have limitations as analytical tools and should not be considered in isolation from, an alternative to, or more meaningful than, the financial results presented in accordance with U.S. GAAP. The financial results presented in accordance with U.S. GAAP and the reconciliations of non-GAAP measures should be carefully evaluated. The manner used to compute the non-GAAP information used by management may differ from the methods used by other companies and may not be comparable.

Refer to the Appendix at the end of this release for descriptions of the adjustments that depart from the computations in accordance with U.S. GAAP.

About Valvoline Inc.
Valvoline Inc. (NYSE: VVV), is the quick, easy, trusted leader in automotive preventive maintenance. Valvoline Inc. is creating shareholder value by driving the full potential in our core business, accelerating network growth and innovating to meet the needs of the evolving car parc. With more than 1,850 service centers throughout North America, Valvoline Inc. and our franchise partners keep customers moving with our 4.6 out of 5 star* rated service that includes 15-minute stay-in-your-car oil changes; battery, bulb and wiper replacements; tire rotations; and other manufacturer recommended maintenance services. In fiscal year 2023, Valvoline's network delivered approximately 27 million services to generate $1.4 billion in revenue from $2.8 billion in system-wide store sales, marking 17 years of consecutive system-wide same-store sales growth. At Valvoline Inc., it all starts with our people, including our more than 10,000 team members and strong, long-standing franchise partners. We are proud to be a ten-time winner of the BEST Award

for training excellence and a top-rated franchisor in our category by Entrepreneur and Franchise Times. To learn more, or to find a service center near you, visit vioc.com

Forward-Looking Statements
Certain statements herein, other than statements of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, benefits and synergies of the sale of Global Products; future opportunities for the remaining stand-alone retail business; and any other statements regarding Valvoline's future operations, financial or operating results, capital allocation, debt leverage ratio, anticipated business levels, dividend policy, anticipated growth, market opportunities, strategies, competition, and other expectations and targets for future periods. Valvoline has identified some of these forward-looking statements with words such as "anticipates," "believes," "expects," "estimates," "is likely," "predicts," "projects," "forecasts," "may," "will," "should," and "intends," and the negative of these words or other comparable terminology. These forward-looking statements are based on Valvoline's current expectations, estimates, projections, and assumptions as of the date such statements are made and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. Additional information regarding these risks and uncertainties are described in the Company's filings with the Securities and Exchange Commission (the "SEC"), including in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures about Market Risk" sections of Valvoline's most recently filed periodic reports on Forms 10-K and 10-Q, which are available on Valvoline's website at http://investors.valvoline.com/sec-filings or on the SEC's website at http://www.sec.gov. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, unless required by law.

TM Trademark, Valvoline Inc., or its subsidiaries, registered in various countries
SM Service mark, Valvoline Inc., or its subsidiaries, registered in various countries
*   Based on a survey of more than 900,000 Valvoline Instant Oil Change℠ customers annually

FOR FURTHER INFORMATION

Investor Inquiries
Elizabeth B. Russell
+1 (859) 357-3155
IR@valvoline.com

Media Inquiries
media@valvoline.com 

Valvoline Inc. and Consolidated Subsidiaries








Table 1

Statements of Consolidated Income









(In millions, except per share amounts - preliminary and unaudited)

















Three months ended

September 30


Year ended



September 30


2023


2022


2023


2022

Net revenues


$     390.0


$     335.4


$   1,443.5


$   1,236.1

Cost of sales


241.7


206.3


899.0


759.7

Gross profit


148.3


129.1


544.5


476.4

Selling, general and administrative expenses


70.3


62.1


264.5


244.7

Net legacy and separation-related expenses


2.0


1.6


32.8


20.5

Other loss (income), net


5.8


(1.8)



(9.1)

Operating income


70.2


67.2


247.2


220.3

Net pension and other postretirement plan (income) expenses


(38.6)


34.6


(27.6)


6.9

Net interest and other financing expenses


10.9


18.1


38.3


69.3

Income before income taxes


97.9


14.5


236.5


144.1

Income tax expense


22.9


2.1


37.1


34.7

Income from continuing operations


75.0


12.4


199.4


109.4

(Loss) income from discontinued operations, net of tax


(29.8)


145.3


1,216.6


314.9

Net income


$       45.2


$     157.7


$   1,416.0


$     424.3











Net earnings per share









Basic earnings (loss) per share









Continuing operations


$       0.54


$       0.07


$       1.23


$       0.61

Discontinued operations


(0.21)


0.82


7.53


1.76

Basic earnings per share


$       0.33


$       0.89


$       8.76


$       2.37











Diluted earnings (loss) per share









Continuing operations


$       0.53


$       0.07


$       1.23


$       0.61

Discontinued operations


(0.21)


0.81


7.48


1.74

Diluted earnings per share


$       0.32


$       0.88


$       8.71


$       2.35











Weighted average common shares outstanding







Basic


138.2


177.4


161.6


179.1

Diluted


139.2


178.6


162.6


180.4

 

Valvoline Inc. and Consolidated Subsidiaries




Table 2

Condensed Consolidated Balance Sheets





(In millions - preliminary and unaudited)















September 30


September 30


2023


2022

Assets






Current assets






Cash and cash equivalents


$           409.1


$             23.4



Receivables, net


81.3


66.1



Inventories, net


33.3


29.4



Prepaid expenses and other current assets


65.5


38.0



Short-term investments


347.5




Current assets held for sale



1,464.2


Total current assets


936.7


1,621.1










Noncurrent assets






Property, plant and equipment, net


818.3


668.6



Operating lease assets


266.5


248.1



Goodwill and intangibles, net


680.6


663.1



Other noncurrent assets


187.8


215.9


Total assets


$        2,889.9


$        3,416.8









Liabilities and Stockholders' Equity






Current liabilities






Current portion of long-term debt


$             23.8


$           162.5



Trade and other payables


118.7


45.0



Accrued expenses and other liabilities


215.9


172.6



Current liabilities held for sale


3.9


539.3


Total current liabilities


362.3


919.4









Noncurrent liabilities






Long-term debt


1,562.3


1,525.1



Employee benefit obligations


168.0


199.4



Operating lease liabilities


247.3


229.2



Other noncurrent liabilities


350.5


237.1


Total noncurrent liabilities


2,328.1


2,190.8









Stockholders' equity

199.5


306.6









Total liabilities and stockholders' equity


$        2,889.9


$        3,416.8

 

Valvoline Inc. and Consolidated Subsidiaries




Table 3

Condensed Consolidated Statements of Cash Flows



(In millions - preliminary and unaudited)














Year ended


September 30


2023


2022

Cash flows from operating activities






Net income


$        1,416.0


$           424.3


Adjustments to reconcile net income to cash flows from operating activities:







Income from discontinued operations


(1,216.6)


(314.9)



Depreciation and amortization


88.8


71.4



Deferred income taxes


33.6


18.0



(Gain) loss on pension and other postretirement plan remeasurements


(41.6)


43.9



Stock-based compensation expense


12.2


14.4



Other, net


11.9


4.2


Change in operating assets and liabilities


48.7


(126.9)


Operating cash flows from continuing operations


353.0


134.4


Operating cash flows from discontinued operations


(393.8)


149.8


Total cash (used in) provided by operating activities


(40.8)


284.2

Cash flows from investing activities






Additions to property, plant and equipment


(180.5)


(132.0)


Acquisitions of businesses, net of cash acquired


(36.3)


(50.7)


Purchases of investments


(440.4)



Proceeds from maturities of short-term investments


80.0



Other investing activities, net



11.8


Investing cash flows from continuing operations


(577.2)


(170.9)


Investing cash flows from discontinued operations


2,620.9


(36.7)


Total cash provided by (used in) investing activities


2,043.7


(207.6)

Cash flows from financing activities






Proceeds from borrowings, net of issuance costs


921.0


23.0


Repayments on borrowings


(920.9)


(38.1)


Repurchases of common stock


(1,524.8)


(142.6)


Cash dividends paid


(21.8)


(89.2)


Other financing activities


(19.0)


(16.0)


Financing cash flows from continuing operations


(1,565.5)


(262.9)


Financing cash flows from discontinued operations


(108.1)


44.0


Total cash used in financing activities


(1,673.6)


(218.9)


Effect of currency exchange rate changes on cash, cash equivalents and restricted cash


(0.1)


(5.2)

Increase (decrease) in cash, cash equivalents and restricted cash


329.2


(147.5)

Cash, cash equivalents and restricted cash - beginning of period


83.9


231.4

Cash, cash equivalents and restricted cash - end of period


$           413.1


$             83.9

 

Valvoline Inc. and Consolidated Subsidiaries








Table 4

Retail Stores Operating Information









(Preliminary and unaudited)


















Three months ended

September 30


Year ended



September 30


2023


2022


2023


2022

Sales information










System-wide store sales - in millions (a)


$    738.3


$    641.9


$ 2,761.8


$ 2,360.2

Year-over-year growth (a)


15.0 %


15.7 %


17.0 %


19.8 %











Same-store sales growth (b)









Company-operated


9.1 %


8.5 %


11.9 %


11.4 %

Franchised (a)


10.8 %


9.8 %


11.9 %


15.5 %

System-wide (a)


10.0 %


9.2 %


11.9 %


13.7 %

 




Number of stores at end of period




Fourth Quarter

2023


Third Quarter

2023


Second Quarter

2023


First Quarter

2023


Fourth Quarter

2022















Company-operated


876


854


832


813


790


Franchised (a)


976


950


949


933


925
















September 30

2023


2022

System-wide store count (a)








1,852


1,715


Year-over-year growth (a)








8.0 %


7.6 %















(a)

Measures include Valvoline franchisees, which are independent legal entities. Valvoline does not consolidate the results of operations of its franchisees.

(b)

Valvoline determines SSS growth as sales by U.S. stores, with new stores, including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation.

 

Valvoline Inc. and Consolidated Subsidiaries








Table 5

System-wide Retail Stores










(Preliminary and unaudited)





















Company-operated




Fourth Quarter

2023


Third Quarter

2023


Second Quarter

2023


First Quarter

2023


Fourth Quarter

2022

Beginning of period


854


832


813


790


772


Opened


14


12


13


17


12


Acquired


8


8


6


5


3


Net conversions between company-operated and franchised



2



2


3


Closed





(1)


End of period


876


854


832


813


790
















Franchised (a)




Fourth Quarter

2023


Third Quarter

2023


Second Quarter

2023


First Quarter

2023


Fourth Quarter

2022

Beginning of period


950


949


933


925


918


Opened


26


3


16


11


10


Acquired







Net conversions between company-operated and franchised



(2)



(2)


(3)


Closed





(1)


End of period


976


950


949


933


925













Total system-wide stores (a)


1,852


1,804


1,781


1,746


1,715




(a)

Measures include Valvoline franchisees, which are independent legal entities. Valvoline does not consolidate the results of operations of its franchisees.

 

Valvoline Inc. and Consolidated Subsidiaries








Table 6


Non-GAAP Reconciliation - Income from Continuing Operations and Diluted Earnings per Share

(In millions, except per share amounts - preliminary and unaudited)




















Three months ended

September 30


Year ended






September 30





2023


2022


2023


2022


Reported income from continuing operations


$       75.0


$       12.4


$     199.4


$     109.4


Adjustments:











Net pension and other postretirement plan (income) expense (a)


(38.6)


34.6


(27.6)


6.9



Net legacy and separation-related expenses


2.0


1.6


32.8


20.5



Information technology transition costs


1.2



3.0


2.6



Suspended operations


7.6


(0.6)


7.1


0.9



Investment and divestiture-related costs


0.1



1.1




Debt extinguishment and modification costs


0.1



1.1




Total adjustments, pre-tax


(27.6)


35.6


17.5


30.9



Income tax expense (benefit) of adjustments


6.2


(10.3)


(25.6)


(8.5)



Total adjustments, after tax


(21.4)


25.3


(8.1)


22.4


Adjusted income from continuing operations (b)(c)


$       53.6


$       37.7


$     191.3


$     131.8












Reported diluted earnings per share from continuing operations


$       0.53


$       0.07


$       1.23


$       0.61


Adjusted diluted earnings per share from continuing operations (c)(d)


$       0.39


$       0.21


$       1.18


$       0.73













Weighted average diluted common shares outstanding


139.2


178.6


162.6


180.4





(a)

Includes remeasurement adjustments recorded in the fourth quarter, which resulted in a gain of $41.6 million and a loss of $43.9 million in fiscal 2023 and 2022, respectively.

(b)

Adjusted income from continuing operations is defined as income from continuing operations adjusted for the effects of key items.

(c)

Represents a non-GAAP measure. Refer to "Use of Non-GAAP Measures" and the Appendix for additional details.

(d)

Adjusted diluted earnings per share from continuing operations is defined as diluted earnings per share calculated using adjusted income from continuing operations.

 

Valvoline Inc. and Consolidated Subsidiaries








Table 7

Non-GAAP Reconciliation - Adjusted Net Revenues and EBITDA from Continuing Operations

(In millions - preliminary and unaudited)




















Three months ended

September 30


Year ended



September 30


2023


2022


2023


2022

Reported net revenues

$  390.0


$  335.4


$ 1,443.5


$ 1,236.1

Key items:









Suspended operations



(0.2)


(0.2)


(11.6)

Adjusted net revenues (a) (b)

$  390.0


$  335.2


$ 1,443.3


$ 1,224.5










Income from continuing operations


$    75.0


$    12.4


$  199.4


$  109.4

Add:









Income tax expense


22.9


2.1


37.1


34.7

Net interest and other financing expenses


10.9


18.1


38.3


69.3

Depreciation and amortization


28.1


19.3


88.8


71.4

EBITDA from continuing operations (b) (c)


136.9


51.9


363.6


284.8

Key items:









Net pension and other postretirement plan (income) expense


(38.6)


34.6


(27.6)


6.9

Net legacy and separation-related expenses


2.0


1.6


32.8


20.5

Information technology transition costs


1.2



3.0


2.6

Suspended operations


7.6


(0.6)


7.1


0.9

Investment and divestiture-related costs


0.1



1.1


Key items - subtotal


(27.7)


35.6


16.4


30.9

Adjusted EBITDA from continuing operations (b) (c)


$  109.2


$    87.5


$  380.0


$  315.7










Net profit margin (d)

19.2 %


3.7 %


13.8 %


8.9 %

Adjusted EBITDA margin (b) (e)

28.0 %


26.1 %


26.3 %


25.8 %












(a)

Adjusted net revenues are reported net revenues adjusted for key items.

(b)

Represents a non-GAAP measure. Refer to "Use of Non-GAAP Measures" and the Appendix for additional details.

(c)

EBITDA from continuing operations is defined as income from continuing operations, plus income tax expense, net interest and other financing expenses, and depreciation and amortization attributable to continuing operations. Adjusted EBITDA from continuing operations is EBITDA adjusted for key items attributable to continuing operations.

(d)

Net profit margin is defined as reported income from continuing operations divided by reported net revenues.

(e)

Adjusted EBITDA margin is defined as Adjusted EBITDA from continuing operations divided by adjusted net revenues.

 

Valvoline Inc. and Consolidated Subsidiaries




Table 8

Non-GAAP Reconciliation - Free Cash Flows from Continuing Operations



(In millions - preliminary and unaudited)










Free cash flow (a)


Year ended


September 30


2023


2022

Total cash flows provided by operating activities from continuing operations


$         353.0


$         134.4

Adjustments:





Additions to property, plant and equipment from continuing operations


(180.5)


(132.0)

Free cash flow from continuing operations (b)


$         172.5


$             2.4






Discretionary free cash flow (c)


Year ended


September 30


2023


2022

Total cash flows provided by operating activities from continuing operations


$         353.0


$         134.4

Adjustments:





Maintenance additions to property, plant and equipment from continuing operations


(29.5)


(19.3)

Discretionary free cash flow from continuing operations (b)


$         323.5


$         115.1








(a)

Free cash flow from continuing operations is defined as operating cash flows from continuing operations less capital expenditures of the continuing operations and certain other adjustments attributable to continuing operations, as applicable.

(b)

Represents a non-GAAP measure. Refer to "Use of Non-GAAP Measures" and the Appendix for additional details.

(c)

Discretionary free cash flow from continuing operations is defined as operating cash flows from continuing operations less maintenance capital expenditures of the continuing operations and certain other adjustments attributable to continuing operations, as applicable.

 

Valvoline Inc. and Consolidated Subsidiaries
Appendix - Description of Non-GAAP Measures and Adjustments

EBITDA Measures
Management believes EBITDA measures provide a meaningful supplemental presentation of Valvoline's operating performance between periods on a comparable basis due to the depreciable assets associated with the nature of the Company's operations, as well as income tax and interest costs related to Valvoline's tax and capital structures, respectively.

Free Cash Flow and Discretionary Free Cash Flow
Management uses free cash flow and discretionary free cash flow as additional non-GAAP metrics of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Free cash flow includes the impact of capital expenditures, providing a supplemental view of cash generation. Discretionary free cash flow includes maintenance capital expenditures, which are routine uses of cash that are necessary to maintain the Company's operations and provides a supplemental view of cash flow generation to maintain operations before discretionary investments in growth. Free cash flow and discretionary free cash flow have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments.

Adjusted Net Revenue and Profitability Measures
Adjusted net revenue and profitability measures (i.e., adjusted net income, diluted earnings per share and EBITDA) enable the comparison of financial trends and results between periods where certain items may not be reflective of the Company's underlying and ongoing operational performance or vary independent of business performance.

Key Items
The non-GAAP measures used by management exclude the impact of certain unusual, infrequent or non-operational activity not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods ("key items"). Key items are often related to legacy matters or market-driven events considered by management to not be reflective of the ongoing operating performance. Key items may consist of adjustments related to: legacy businesses, including the separation from Valvoline's former parent company, the former Global Products reportable segment, and associated impacts of related activity and indemnities; non-service pension and other postretirement plan activity; restructuring-related matters, including organizational restructuring plans, the separation of Valvoline's businesses, significant acquisitions or divestitures, debt extinguishment and modification, and tax reform legislation; in addition to other matters that management considers non-operational, infrequent or unusual in nature.

Refer to the below for descriptions of the key items that comprise the adjustments which depart from the computations in accordance with U.S. GAAP:

Net pension and other postretirement plan (income) expense: Includes several elements impacted by changes in plan assets and obligations that are primarily driven by the debt and equity markets, including remeasurement gains and losses, when applicable; and recurring non-service pension and other postretirement net periodic activity, which consists of interest cost, expected return on plan assets and amortization of prior service credits. Management considers that these elements are more reflective of changes in current conditions in global markets (in particular, interest rates), outside the operational performance of the business, and are also legacy amounts that are not directly related to the underlying business and do not have an impact on the compensation and benefits provided to eligible employees for current service.

The Company recognized remeasurement adjustments in the fourth quarter of each fiscal year, which resulted in a gain of $41.6 million and a loss of $43.9 million in fiscal 2023 and 2022, respectively.

Net legacy and separation-related expenses: Activity associated with legacy businesses and the separation from Valvoline's former parent company and its former Global Products reportable segment. This activity includes the recognition of and adjustments to indemnity obligations to its former parent company; certain legal, financial, professional advisory and consulting fees; and other expenses incurred by the continuing operations in connection with and directly related to these separation transactions and legacy matters. This incremental activity directly attributable to legacy matters and separation transactions is not considered reflective of the underlying operating performance of the Company's continuing operations.

Of specific note, the Company recognized $25.7 million of pre-tax expense during the twelve months ended September 30, 2023, to reflect its increased estimated indemnity obligation, which also resulted in an income tax benefit of $29.0 million to reflect the release of valuation allowances in connection with the amendment of the Tax Matters Agreement with Valvoline's former parent company.

Information technology transition costs: Consists of redundant expenses incurred from duplicative technology platforms required while implementing the Company's stand-alone enterprise resource planning software system during fiscal 2023 and transitioning its data centers during fiscal 2022. These expenses are reflective of incremental costs directly associated with technology transitions and are not considered to be reflective of the ongoing expenses of operating the Company's technology platforms.

Suspended operations: Represents the results of a former Global Products business where operations were suspended during fiscal 2022 that were not sold with the Global Products business. These results included an impairment loss of $8.1 million recognized in the fourth quarter of fiscal 2023 upon classifying the suspended operations as held for sale. These results are not indicative of the operating performance of the Company's ongoing continuing operations.

Investment and divestiture-related costs: Expense recognized to reduce the carrying value of an investment interest determined to be impaired. This cost is not considered to be reflective of the underlying performance of the Company's ongoing continuing operations.

Debt extinguishment and modification costs: Relates to the modification of the Senior Credit Agreement and includes the accelerated amortization of previously capitalized debt issuance costs, as well as third-party fees expensed in connection with the execution of the amended Senior Credit Agreement. These expenses are not considered to be indicative of the future servicing costs of the Company's ongoing debt facilities.

Cision
Cision

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SOURCE Valvoline Inc.