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VALVOLINE INC - Quarter Report: 2019 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
______________________
FORM 10-Q
☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 001-37884
VALVOLINE INC.

vvv-20190630_g1.jpg

Kentucky

30-0939371

(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
Telephone Number (859) 357-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareVVVNew York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes þ     No  o

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).         Yes þ     No  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
☑
Accelerated Filer
☐

Non-Accelerated Filer
☐

Smaller Reporting Company
☐

Emerging Growth Company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ☐    No þ
At July 30, 2019, there were 188,189,958 shares of the Registrant’s common stock outstanding.


VALVOLINE INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS


Page
PART I – FINANCIAL INFORMATION
PART II – OTHER INFORMATION



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Three months ended June 30Nine months ended June 30
(In millions, except per share data - unaudited) 2019201820192018
Sales$613 $577 $1,761 $1,691 
Cost of sales406 376 1,168 1,088 
Gross profit207 201 593 603 
Selling, general and administrative expenses116 110 334 328 
Net legacy and separation-related (income) expenses— (3)3 14 
Equity and other income, net(11)(8)(29)(29)
Operating income102 102 285 290 
Net pension and other postretirement plan income(2)(10)(7)(30)
Net interest and other financing expenses19 15 55 45 
Income before income taxes85 97 237 275 
Income tax expense20 33 56 154 
Net income$65 $64 $181 $121 
NET INCOME PER SHARE
Basic$0.34 $0.33 $0.96 $0.61 
Diluted$0.34 $0.33 $0.96 $0.61 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic189 195 189 199 
Diluted189 196 189 200 
COMPREHENSIVE INCOME
Net income$65 $64 $181 $121 
Other comprehensive income (loss), net of tax
Currency translation adjustments1 (13)(1)(9)
Amortization of pension and other postretirement plan prior service credit(3)(3)(7)(7)
Other comprehensive loss(2)(16)(8)(16)
Comprehensive income$63 $48 $173 $105 

See Notes to Condensed Consolidated Financial Statements.
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Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except per share amounts - unaudited)June 30
2019		September 30
2018
Assets
Current assets
Cash and cash equivalents$126 $96 
Accounts receivable, net423 409 
Inventories, net200 176 
Prepaid expenses and other current assets52 44 
Total current assets801 725 
Noncurrent assets
Property, plant and equipment, net455 420 
Goodwill and intangibles, net490 448 
Equity method investments35 31 
Deferred income taxes113 138 
Other noncurrent assets106 92 
Total noncurrent assets1,199 1,129 
Total assets$2,000 $1,854 
Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt$7 $30 
Trade and other payables163 178 
Accrued expenses and other liabilities242 203 
Total current liabilities412 411 
Noncurrent liabilities
Long-term debt1,334 1,292 
Employee benefit obligations322 333 
Other noncurrent liabilities184 176 
Total noncurrent liabilities1,840 1,801 
Commitments and contingencies
Stockholders’ deficit
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
— — 
Common stock, par value $0.01 per share, 400 shares authorized;188 shares issued and outstanding at June 30, 2019 and September 30, 2018
2 2 
Paid-in capital13 7 
Retained deficit(291)(399)
Accumulated other comprehensive income24 32 
Total stockholders’ deficit(252)(358)
Total liabilities and stockholders’ deficit
$2,000 $1,854 

See Notes to Condensed Consolidated Financial Statements.
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Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit

Nine months ended June 30, 2019
Accumulated other comprehensive income
(In millions, except per share amounts)Common stockPaid-in capitalRetained deficit
(Unaudited)SharesAmountTotals
Balance at September 30, 2018188 $2 $7 $(399)$32 $(358)
Net income— — — 53 — 53 
Dividends paid, $0.106 per common share
— — — (20)— (20)
Stock-based compensation— — 1 — — 1 
Cumulative effect of adoption of new revenue standard, net of tax— — — (13)— (13)
Currency translation adjustments— — — — (4)(4)
Amortization of pension and other postretirement prior service credits in income, net of tax— — — — (2)(2)
Balance at December 31, 2018188 $2 $8 $(379)$26 $(343)
Net income— — — 63 — 63 
Dividends paid, $0.106 per common share
— — — (20)— (20)
Stock-based compensation— — 2 — — 2 
Currency translation adjustments— — — — 2 2 
Amortization of pension and other postretirement prior service credits in income, net of tax— — — — (2)(2)
Balance at March 31, 2019188 $2 $10 $(336)$26 $(298)
Net income— — — 65 — 65 
Dividends paid, $0.106 per common share
— — — (20)— (20)
Stock-based compensation— — 3 — — 3 
Currency translation adjustments— — — — 1 1 
Amortization of pension and other postretirement prior service credits in income, net of tax— — — — (3)(3)
Balance at June 30, 2019188$2 $13 $(291)$24 $(252)

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Nine months ended June 30, 2018
Accumulated other comprehensive income
(In millions, except per share amounts)Common stockPaid-in capitalRetained deficit
(Unaudited)SharesAmountTotals
Balance at September 30, 2017203 $2 $5 $(167)$43 $(117)
Net loss— — — (10)— (10)
Dividends paid, $0.0745 per common share
— — — (15)— (15)
Stock-based compensation— — 2 — — 2 
Repurchases of common stock(2)— — (39)— (39)
Purchase of remaining ownership interest in subsidiary— — (7)(7)— (14)
Currency translation adjustments— — — — 1 1 
Amortization of pension and other postretirement prior service credits in income, net of tax— — — — (2)(2)
Balance at December 31, 2017201 $2 $— $(238)$42 $(194)
Net income— — — 67 — 67 
Dividends paid, $0.0745 per common share
— — — (15)— (15)
Stock-based compensation— — 3 (1)— 2 
Repurchases of common stock(4)— — (87)— (87)
Currency translation adjustments— — — — 3 3 
Amortization of pension and other postretirement prior service credits in income, net of tax— — — — (2)(2)
Balance at March 31, 2018197 $2 $3 $(274)$43 $(226)
Net income— — — 64 — 64 
Dividends paid, $0.0745 per common share
— — — (15)— (15)
Stock-based compensation— — 3 — — 3 
Repurchases of common stock(4)— — (98)— (98)
Currency translation adjustments— — — — (13)(13)
Amortization of pension and other postretirement prior service credits in income, net of tax— — — — (3)(3)
Balance at June 30, 2018193$2 $6 $(323)$27 $(288)

See Notes to Condensed Consolidated Financial Statements.
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Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended
June 30
(In millions - unaudited)20192018
Cash flows from operating activities
Net income$181 $121 
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization43 39 
Debt issuance cost and discount amortization2 2 
Deferred income taxes— 71 
Equity income from unconsolidated affiliates, net of distributions
(4)(4)
Pension contributions(7)(13)
Stock-based compensation expense8 10 
Other operating activities, net— (1)
Change in assets and liabilities (a)
Accounts receivable(48)(80)
Inventories(11)(23)
Payables and accrued liabilities34 12 
Other assets and liabilities16 47 
Total cash provided by operating activities214 181 
Cash flows from investing activities
Additions to property, plant and equipment(73)(51)
Acquisitions, net of cash acquired(50)(71)
Other investing activities, net(1)5 
Total cash used in investing activities(124)(117)
Cash flows from financing activities
Proceeds from borrowings, net of issuance costs743 170 
Repayments on borrowings(727)(39)
Repurchases of common stock— (220)
Payments for purchase of additional ownership in subsidiary(1)(15)
Cash dividends paid(60)(45)
Other financing activities(4)(6)
Total cash used in financing activities(49)(155)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash— (3)
Increase (decrease) in cash, cash equivalents, and restricted cash41 (94)
Cash, cash equivalents, and restricted cash - beginning of period96 201 
Cash, cash equivalents, and restricted cash - end of period$137 $107 
(a) Excludes changes resulting from operations acquired.

See Notes to Condensed Consolidated Financial Statements.

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Index to Notes to Condensed Consolidated Financial StatementsPage

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Valvoline Inc. and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline Inc. (“Valvoline” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission (“SEC”) regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for interim periods are not necessarily indicative of those to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current presentation.

Recent accounting pronouncements

The following standards relevant to Valvoline were either issued or adopted in the current year, or are expected to have a meaningful impact on Valvoline in future periods.

Recently adopted

In the first fiscal quarter of 2019, Valvoline adopted the following:

•In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, which established a single comprehensive model for entities to use in accounting for revenue from contracts with customers and superseded most industry-specific revenue recognition guidance. This new guidance introduced a five-step model for revenue recognition focused on the transfer of control, as opposed to the transfer of risk and rewards under prior guidance. Valvoline adopted this new revenue recognition guidance on October 1, 2018 using the modified retrospective method applied to those contracts that were not completed at the date of adoption. Under this method, the new revenue recognition guidance has been applied prospectively from the date of adoption, while prior period financial statements continue to be reported in accordance with the previous guidance. The cumulative effect of the changes at adoption was recognized through an increase to opening retained deficit of $13 million, net of tax, related to the timing of certain sales to distributors. Revenue transactions recorded under the new guidance are substantially consistent with the treatment under prior guidance, and the impact of adoption was not material to the condensed consolidated financial statements as of and for the three and nine months ended June 30, 2019 and is not expected to be material on an ongoing basis. As part of the adoption, Valvoline modified certain control procedures and processes, none of which had a material effect on the Company’s internal control over financial reporting. Refer to Note 2 for additional information regarding Valvoline’s updated accounting policy for revenue from contracts with customers and adoption of this new guidance.

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•In August 2016, the FASB issued new accounting guidance regarding the classification of certain cash receipts and payments in the statement of cash flows. The Company adopted the accounting guidance on October 1, 2018 using a retrospective approach and made an accounting policy election to classify distributions received from equity method investments based on the nature of the activities of the investee that generated the distribution, which is consistent with the Company’s previous classification as cash flows from operating activities. The other cash flow classification matters addressed in this guidance were either not relevant or material to Valvoline’s current activities. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Statements of Cash Flows.

•In November 2016, the FASB issued new accounting guidance, which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Valvoline adopted this guidance retrospectively on October 1, 2018. The application of this guidance did not have a material impact on the Condensed Consolidated Statements of Cash Flows, nor did it require retrospective adjustment to the prior period financial statements as Valvoline did not have restricted cash or restricted cash equivalents in the prior periods presented. As of June 30, 2019, Valvoline had $11 million of deposits held with financial institutions, which is generally restricted for use in completing an acquisition, and is included in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet. This restricted cash has been included within the end-of-period total amounts shown within the Condensed Consolidated Statement of Cash Flows for the nine months ended June 30, 2019.

•In January 2017, the FASB issued new accounting guidance, which clarifies the definition of a business used across several areas of accounting, including the evaluation of whether a transaction should be accounted for as an acquisition (or disposal) of assets or as a business combination. The new guidance clarifies that a business must have at least one substantive process and also narrows the definition of outputs by more closely aligning with how outputs are described in the new revenue recognition standard. Valvoline adopted this guidance on October 1, 2018 with prospective application. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

•In May 2017, the FASB issued accounting guidance that amended the scope of modification accounting for share-based payment awards. The new guidance requires modification accounting if the fair value, vesting condition, or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. Valvoline adopted this guidance prospectively on October 1, 2018, and the Company did have certain modifications of share-based awards in connection with the restructuring activities described in Note 8; however, the award modifications and the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

•In August 2018, the FASB issued new accounting guidance related to fees paid by a customer in a cloud computing arrangement, which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service arrangement with the existing capitalization guidance for implementation costs incurred to develop or obtain internal-use software. Valvoline adopted this guidance prospectively on October 1, 2018 and capitalized approximately $3 million of cloud computing arrangement implementation costs during the nine months ended June 30, 2019. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Issued but not yet adopted

In February 2016, the FASB issued new accounting guidance, which outlines a comprehensive lease accounting model that requires lessees to recognize a right-of-use asset and a corresponding lease liability on the balance sheet. The lease liability will be measured at the present value of future lease payments, and the right-of-use asset will be measured at the lease liability amount, adjusted for prepaid lease payments, lease incentives received and the lessee’s initial direct costs (e.g., commissions). Lease expense will be recognized similar to current accounting guidance with operating leases resulting in straight-line expense and finance leases resulting in accelerated expense recognition similar to the existing accounting for capital leases.

Management will finalize its assessment and adopt the new guidance in the first fiscal quarter of 2020. This new guidance is expected to be adopted with election of the optional transition approach through recognition of the cumulative effect as an adjustment to retained deficit at adoption on October 1, 2019 without retrospective application to prior period financial statements. While the Company is finalizing its determinations, Valvoline
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expects to elect certain practical expedients permitted by the new guidance, including the package of practical expedients that allows for previous accounting conclusions regarding lease identification and classification to be carried forward for leases which commence prior to adoption, as well as the practical expedient to not separate lease and non-lease components and account for them as a single lease component. The Company does not currently expect to elect the hindsight or short-term lease practical expedients.

The Company has made progress in its assessment and implementation efforts, including the identification and assessment of all forms of its leases, implementing an enterprise-wide lease management system, and evaluating additional changes to business processes and internal controls to ensure the reporting and disclosure requirements of the new guidance are met. At this time, the Company cannot estimate the specific quantitative impact of adopting this new guidance; however, adoption is expected to have a material impact on the Condensed Consolidated Balance Sheet as Valvoline has a significant number of operating leases, including many of its service center store locations, which will be recognized as right-of-use assets with associated lease liabilities upon adoption. The Company does not currently anticipate a material impact on the Condensed Consolidated Statements of Comprehensive Income, Cash Flows, or Stockholders’ Deficit.

NOTE 2 - REVENUE RECOGNITION

As described in Note 1, Valvoline adopted new revenue recognition accounting guidance effective October 1, 2018, and accordingly, changed its accounting policy for revenue recognition prospectively from the date of adoption as described herein.

Impacts on financial statements

The adoption of the new revenue accounting guidance did not have a significant impact on the Company’s condensed consolidated financial statements. As a result of the Company’s adoption using the modified retrospective adoption approach, the Company recorded an adjustment to its Condensed Consolidated Balance Sheet as of October 1, 2018 related to the timing of certain sales to distributors.

The following table reconciles the Condensed Consolidated Balance Sheet line items impacted by the cumulative effect of adoption of the new revenue recognition accounting guidance on October 1, 2018:

(In millions)September 30, 2018
as reported		Adjustments Balances at October 1, 2018
Accounts receivable, net$409 $(33)$376 
Inventories, net$176 $14 $190 
Deferred income taxes$138 $6 $144 
Retained deficit$399 $13 $412 

Most revenue transactions and activities recorded under the new revenue recognition accounting guidance are substantially consistent with the treatment under prior guidance. The following tables summarize the impact of the new revenue accounting guidance on Valvoline’s Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Comprehensive Income as of and for the three and nine months ended June 30, 2019:

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June 30, 2019
Impact of Changes to Condensed Consolidated Balance SheetAs reported
Adjustments (a)
Under prior guidance
(In millions)
Accounts receivable, net$423 $37 $460 
Inventories, net$200 $(15)$185 
Deferred income taxes$113 $(6)$107 
Accrued expenses and other liabilities$242 $(1)$241 
Retained deficit$291 $(15)$276 
(a) Adjustments include the opening retained deficit adjustments as detailed in the table above.

Three months ended June 30, 2019
Impact of Changes to Condensed Consolidated Statement of Comprehensive IncomeAs reportedAdjustmentsUnder prior guidance
(In millions)
Sales$613 $(10)$603 
Cost of sales406 (14)392 
Gross profit$207 $4 $211 
Selling, general and administrative expenses$116 $3 $119 
Equity and other income, net$11 $1 $12 
Operating income$102 $2 $104 
Income before income taxes$85 $2 $87 
Income tax expense$20 $1 $21 
Net income$65 $1 $66 
Basic earnings per share$0.34 $0.01 $0.35 
Diluted earnings per share$0.34 $0.01 $0.35 


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Nine months ended June 30, 2019
Impact of Changes to Condensed Consolidated Statement of Comprehensive IncomeAs reportedAdjustmentsUnder prior guidance
(In millions)
Sales$1,761 $(34)$1,727 
Cost of sales1,168 (42)1,126 
Gross profit$593 $8 $601 
Selling, general and administrative expenses$334 $6 $340 
Equity and other income, net$29 $1 $30 
Operating income$285 $3 $288 
Income before income taxes$237 $3 $240 
Income tax expense$56 $1 $57 
Net income$181 $2 $183 
Basic earnings per share$0.96 $0.01 $0.97 
Diluted earnings per share$0.96 $0.01 $0.97 

Disaggregation of revenue

The following summarizes sales by primary customer channel for the Company’s reportable segments:
(In millions)Three months ended June 30, 2019Nine months ended June 30, 2019
Quick Lubes
Company-owned operations$136 $388 
Non-company owned operations75 212 
Total Quick Lubes211 600 
Core North America
Retail 143 399 
Installer and other117 336 
Total Core North America260 735 
International142 426 
Consolidated sales$613 $1,761 


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Sales by reportable segment disaggregated by geographic market follows for the three and nine months ended June 30, 2019:
(In millions)Quick LubesCore North AmericaInternationalTotals
Three months ended
North America (a)
$211 $260 $— $471 
Europe, Middle East and Africa ("EMEA")— — 43 43 
Asia Pacific— — 72 72 
Latin America (a)
— — 27 27 
Total$211 $260 $142 $613 
Nine months ended
North America (a)
$600 $735 $— $1,335 
Europe, Middle East and Africa ("EMEA")— — 134 134 
Asia Pacific— — 212 212 
Latin America (a)
— — 80 80 
Total$600 $735 $426 $1,761 
(a) Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.


The following disaggregates the Company’s sales by timing of revenue recognized:

(In millions)Three months ended June 30, 2019Nine months ended June 30, 2019
Sales at a point in time$602 $1,730 
Franchised revenues transferred over time11 31 
Consolidated sales$613 $1,761 


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Nature of goods and services

Valvoline generates all operating revenues from contracts with customers, primarily as a result of the sale and service delivery of engine and automotive maintenance products to customers. Valvoline derives its sales from its broad line of products and complementary services through three principal activities managed across its three reportable segments: (i) engine and automotive maintenance products, (ii) company-owned quick-lube operations, and (iii) franchised quick-lube operations. Valvoline’s sales are generally to retail, installer, industrial, distributor, franchise, and end consumers to facilitate vehicle and equipment service and maintenance. Approximately 98% of Valvoline’s net sales are products and services sold at a point in time through either ship-and-bill performance obligations or company-owned quick lube operations. The remaining 2% of Valvoline’s net sales generally relate to franchise fees.

Revenue is recognized for the amount that reflects the consideration the Company is expected to be entitled to based on when control of the promised good or service is transferred to the customer. Revenue recognition is evaluated through the following five steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligations in the contract(s); (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract(s); and (v) recognition of revenue when or as a performance obligation is satisfied. Below is a summary of the key considerations for Valvoline’s material revenue-generating activities:

Engine and automotive maintenance products

Engine and automotive maintenance products primarily include lubricants, antifreeze, chemicals, filters, and other complementary products for use across a wide array of vehicles and engines. The Company’s customers typically enter into a sales agreement which outlines a framework of terms and conditions that apply to all current and future purchase orders for the customer submitted under such sales agreement. In these situations, the Company’s contract with the customer is the sales agreement combined with the customer purchase order as specific products and quantities are not indicated until a purchase order is submitted. As the Company’s contract with the customer is typically for a single purchase order under the supply agreement to be delivered at a point in time, the duration of the contract is almost always one year or less. The Company’s products are distinct and separately identifiable on customer purchase orders, with each product sale representing a separate performance obligation that is generally delivered simultaneously. Valvoline is the principal to these contracts as the Company has control of the products prior to transfer to the customer. Accordingly, revenue is recognized on a gross basis.

The Company determines the point in time at which control is transferred and the performance obligation is satisfied by considering when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product, which generally coincides with the transfer of title and risk of loss to the customer and is typically determined based on delivery terms within the underlying contract.

Customer payment terms vary by region and customer and are generally 30 to 60 days after delivery. Valvoline does not provide extended payment terms greater than one year.

Company-owned quick-lube operations

Performance obligations related to company-owned quick-lube operations primarily include the sale of engine and automotive maintenance products and related services. These performance obligations are distinct and are delivered simultaneously at a point in time. Accordingly, revenue from company-owned quick-lube operations is recognized when payment is tendered at the point of sale, which coincides with the completion of product and service delivery and the transfer of control and benefits from the performance obligations to the customer.

Franchised quick-lube operations

The primary performance obligations related to franchised quick-lube operations include product sales as described above and the license of intellectual property, which provides access to the Valvoline brand and proprietary information to operate service center stores over the term of a franchise agreement. Other franchise performance obligations do not result in material revenue. Each performance obligation is distinct, and
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franchisees generally receive and consume the benefits provided by the Company’s performance over the course of the franchise agreement, which typically range from 10 to 15 years. Billings and payments occur monthly.

In exchange for the license of Valvoline intellectual property, franchisees generally remit initial fees upon opening a service center store and royalties at a contractual rate of the applicable service center store sales over the term of the franchise agreement. The license provides access to the intellectual property over the term of the franchise agreement and is considered a right-to-access license of symbolic intellectual property as substantially all of its utility is derived from association with the Company’s past and ongoing activities. The license granted to operate each franchised service center store is the predominant item to which the royalties relate and represents a distinct performance obligation which is recognized over time as the underlying sales occur, as this is the most appropriate measure of progress toward complete satisfaction of the performance obligation.

Variable consideration

The Company only offers an assurance-type warranty with regard to the intended functionality of products sold, which therefore, does not represent a distinct performance obligation within the context of the contract. Product returns and refunds are generally not material and are not accepted unless the item is defective as manufactured. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which Valvoline expects to receive.

The nature of Valvoline’s contracts with customers often give rise to variable consideration consisting primarily of promotional rebates and customer pricing discounts based on achieving certain levels of sales activity that generally decrease the transaction price. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration, or amounts payable to the customer when there is a basis to reasonably estimate the amount and it is probable there will not be a significant reversal. Variable consideration is recorded as a reduction of the transaction price at the time of sale and is primarily estimated utilizing the most likely amount method that is expected to be earned as the Company is able to estimate the anticipated discounts within a sufficiently narrow range of possible outcomes based on its extensive historical experience with certain customers, similar programs and management’s judgment with respect to estimating customer participation and performance levels. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.

Allocation of transaction price

In each contract with multiple performance obligations, Valvoline allocates the transaction price, including variable consideration, to each performance obligation on a relative standalone selling price basis, which is generally determined based on the directly observable data of the Company’s standalone sales of the performance obligations in similar circumstances to similar customers. In the absence of directly observable standalone prices, the Company may utilize prices charged by competitors selling similar products or use an expected cost-plus margin approach. The amount allocated to each performance obligation is recognized as revenue as control is transferred to the customer.

Contract balances

Valvoline invoices customers once or as performance obligations are satisfied, at which point payment becomes unconditional. As the majority of the Company’s performance obligations are satisfied at a point in time and customers typically do not make material payments in advance, nor does Valvoline have a right to consideration in advance of control transfer, the Company had no contract assets or contract liabilities recorded within its Condensed Consolidated Balance Sheet at adoption or as of June 30, 2019. The Company recognizes a receivable on its Condensed Consolidated Balance Sheet when the Company performs a service or transfers a product in advance of receiving consideration, and the Company’s right to consideration is unconditional and only the passage of time is required before payment of that consideration is due.

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Practical expedients and accounting policies

Valvoline elected the following practical expedients and policy elections in accordance with the new revenue recognition accounting guidance adopted beginning in fiscal 2019:

•Significant financing component – The promised amount of consideration has not been adjusted as the Company does not have significant financing arrangements with its customers. The Company expects that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

•Incremental costs of obtaining a contract - The Company expenses incremental direct costs of obtaining a contract, primarily sales commissions, when incurred due to the short-term nature of individual contracts, which would result in amortization periods of one year or less. These costs are not material and are recorded in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income.

•Shipping and handling costs - Valvoline elected to account for shipping and handling activities that occur after the customer has obtained control as fulfillment activities (i.e., an expense) rather than as a performance obligation. Accordingly, amounts billed for shipping and handling are a component of the transaction price included in net sales, while costs incurred are included in cost of sales.

•Sales and use-based taxes - Valvoline excludes from its revenue any amounts collected from customers for sales (and similar) taxes. These amounts are, however, reflected in accrued expenses until remitted to the appropriate governmental authority.

•Disclosure of remaining performance obligations - The Company elected to apply the practical expedient to omit disclosures of remaining performance obligations for contracts which have an initial expected term of one year or less. In addition, the Company has elected to not disclose remaining performance obligations for its franchise agreements with variable consideration based on service center store sales.
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NOTE 3 - FAIR VALUE MEASUREMENTS

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of:

(In millions)Fair Value HierarchyJune 30
2019		September 30
2018
Cash and cash equivalents
Money market fundsLevel 1 $3 $5 
Time deposits (a)
Level 2 34 22 
Prepaid expenses and other current assets
Currency derivatives (b)
Level 2 1 1 
Time deposits (a)
Level 2 1 — 
Other noncurrent assets
Non-qualified trust fundsLevel 1 21 25 
Total assets at fair value$60 $53 
Accrued expenses and other liabilities
Currency derivatives (b)
Level 2 $2 $1 
Total liabilities at fair value$2 $1 
(a) Time deposits with original maturities of three months or less are classified within cash equivalents and those with original maturities of one year or less are classified within Prepaid expenses and other current assets.
(b) The Company had outstanding contracts with notional values of $82 million and $74 million as of June 30, 2019 and September 30, 2018, respectively.

There have been no changes in the nature of inputs or valuation approaches relative to the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis from those as of September 30, 2018. There were no material gains or losses recognized in earnings during the three and nine months ended June 30, 2019 or 2018 related to these assets and liabilities.

Long-term debt

The fair values of the Company’s outstanding fixed rate senior notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. Long-term debt is included in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.
June 30, 2019September 30, 2018
(In millions)Fair valueCarrying valueUnamortized discount and
issuance costs		Fair valueCarrying valueUnamortized
discount and
issuance costs
2024 Notes$388 $371 $4 $376 $370 $5 
2025 Notes401 395 5 376 395 5 
Total$789 $766 $9 $752 $765 $10 

Refer to Note 9 for more information on Valvoline’s other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value.

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NOTE 4 - ACQUISITIONS AND DIVESTITURES

During the nine months ended June 30, 2019, the Company acquired 54 service center stores for $50 million. These acquisitions included 31 franchise service center stores acquired from Oil Changers Inc. on October 31, 2018, 18 service center stores acquired in single and multi-store transactions, and five former franchise service centers stores. During the nine months ended June 30, 2018, the Company acquired 63 service center stores, of which 60 were former franchise service center stores, for $71 million.

The Company’s acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. Goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions.

A summary follows of the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the nine months ended June 30:

(In millions)20192018
Inventories$— $1 
Property, plant and equipment3 2 
Goodwill34 42 
Intangible assets (a)
Reacquired franchise rights5 26 
Customer relationships5 — 
Trademarks and trade names1 — 
Other2 — 
Net assets acquired$50 $71 
(a) Intangible assets acquired during the nine months ended June 30, 2019 have a weighted average amortization period of 10 years.

The fair values above are preliminary for up to one year from the date of acquisition as they are subject to measurement period adjustments as new information is obtained about facts and circumstances that existed as of the acquisition date. The Company does not currently expect any material changes to the preliminary purchase price allocations for acquisitions completed during the last twelve months.

The incremental results of operations of the acquired stores, which were not material to the Company’s consolidated results, have been included in the condensed consolidated financial statements from the date of each acquisition, and accordingly, pro forma disclosure of financial information has not been presented.

NOTE 5 - ACCOUNTS RECEIVABLE

The following summarizes Valvoline’s accounts receivable as of:

(In millions)June 30
2019		September 30
2018
Trade$412 $390 
Other16 26 
Accounts receivable, gross428 416 
Allowance for doubtful accounts(5)(7)
Total accounts receivable, net$423 $409 

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During the nine months ended June 30, 2019 and 2018, Valvoline sold accounts receivable to a financial institution of $63 million and $50 million, respectively.

NOTE 6 - INVENTORIES

Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method.

The following summarizes Valvoline’s inventories as of:

(In millions)June 30
2019		September 30
2018
Finished products$210 $189 
Raw materials, supplies and work in process34 30 
Reserve for LIFO cost valuation(41)(40)
Excess and obsolete inventory reserves(3)(3)
Total inventories, net$200 $176 

NOTE 7 - GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table summarizes the changes in the carrying amount of goodwill by reportable segment and in total during the nine months ended June 30, 2019:

(In millions)Quick LubesCore North AmericaInternationalTotal
Balance at September 30, 2018$252 $89 $40 $381 
Acquisitions (a)
34 — — 34 
Balance at June 30, 2019$286 $89 $40 $415 
(a) Refer to Note 4 for details regarding acquisitions completed during the nine months ended June 30, 2019.


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Other intangible assets

Valvoline’s purchased intangible assets were specifically identified when acquired, have finite lives, and are reported in Goodwill and intangibles, net on the Condensed Consolidated Balance Sheets. The following summarizes the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of:

June 30, 2019September 30, 2018
(In millions)Gross carrying amountAccumulated amortizationNet carrying amountGross carrying amountAccumulated amortizationNet carrying amount
Definite-lived intangible assets
Trademarks and trade names$30 $(4)$26 $29 $(2)$27 
Reacquired franchise rights37 (7)30 32 (4)28 
Customer relationships21 (4)17 14 (3)11 
Other intangible assets3 (1)2 1 — 1 
Total definite-lived intangible assets$91 $(16)$75 $76 $(9)$67 

NOTE 8 - RESTRUCTURING ACTIVITIES

In the second fiscal quarter of 2019, Valvoline outlined a broad-based restructuring and cost-savings program that is expected to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. Part of this program includes employee separation actions, which are expected to be generally completed by the end of 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020.

During the three and nine months ended June 30, 2019, Valvoline recognized $4 million and $10 million of expense, respectively, for employee termination benefits, which includes severance and other benefits that will be paid to employees pursuant to the restructuring program. These expenses were recognized in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income. The Company expects that it will incur additional employee termination expenses of approximately $3 million to $5 million, primarily during the fourth fiscal quarter of 2019.

The results by segment, as disclosed in Note 14, do not include these and restructuring expenses, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses are included in Unallocated and other.

The following table represents the expenses recognized related to employee termination benefits during the nine months ended June 30, 2019 and the estimated remaining liability, which is included in the Condensed Consolidated Balance Sheet primarily within Accrued expenses and other liabilities:

(In millions)Employee Termination Benefits
Balance at September 30, 2018$— 
Expenses recognized during the period10 
Payments (1)
Balance at June 30, 2019$9 

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NOTE 9 - DEBT

The following table summarizes Valvoline’s total debt as of:

(In millions)June 30
2019		September 30 2018 
2025 Notes$400 $400 
2024 Notes375 375 
Term Loans575 270 
Revolvers— 147 
Trade Receivables Facility— 140 
Other (a)
(9)(10)
Total debt$1,341 $1,322 
Current portion of long-term debt7 30 
Long-term debt$1,334 $1,292 
 
(a) Other includes debt issuance costs and discounts of $10 million and $11 million as of June 30, 2019 and September 30, 2018, respectively. In addition, Other includes $1 million of debt as of June 30, 2019 and September 30, 2018 which was primarily acquired through acquisitions.

Senior Notes

The Company’s outstanding fixed rate senior notes consist of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes”) and 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes” and together with the 2025 Notes, the “Senior Notes”).

Senior Credit Agreement

In fiscal 2016, Valvoline entered into a Senior Credit Agreement (the “2016 Credit Agreement”), which provided an aggregate principal amount of $1,325 million in senior secured credit facilities, comprised of (i) a five-year $875 million term loan facility (the “2016 Term Loan”), and (ii) a five-year $450 million revolving credit facility (the “2016 Revolver”), including a $100 million letter of credit sublimit.

On April 12, 2019, Valvoline amended the 2016 Credit Agreement (the 2016 Credit Agreement, as amended, the “2019 Credit Agreement”) to extend the maturity to 2024, provide additional capacity under the revolving facility, and lower interest rates, among other modifications. This 2019 Credit Agreement provides for an aggregate principal amount of $1,050 million in senior secured credit facilities, comprised of (i) a five-year $575 million term loan facility (the “2019 Term Loan”) and (ii) a five-year $475 million revolving credit facility (the “2019 Revolver”), including a $100 million letter of credit sublimit. As a result of the amendment, the Company recognized immaterial expense related to the accelerated amortization of previously capitalized debt issuance costs, which is included in Net interest and other financing expenses in the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2019.

Prior to the amendment in fiscal 2019, the Company made payments of $15 million to the 2016 Term Loan consistent with its payment schedule and had net borrowings of $39 million under the 2016 Revolver. The 2019 Term Loan proceeds of $575 million were used to pay the outstanding principal balance of the 2016 Term Loan of $255 million, the outstanding 2016 Revolver balance of $186 million, and $120 million on the trade receivables securitization facility described below, in addition to accrued and unpaid interest and fees, as well as expenses related to the amendment. Remaining proceeds, including the remaining capacity under the 2019 Revolver, are expected to fund general corporate purposes and working capital needs. As of June 30, 2019, the total borrowing capacity remaining under the 2019 Revolver was $466 million due to a reduction of $9 million for letters of credit outstanding.

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The outstanding principal balance of the 2019 Term Loan is required to be repaid in quarterly installments of approximately $7 million beginning June 30, 2020 and approximately $14 million beginning June 30, 2021, with the balance due at maturity on April 12, 2024, and prepayment due in the amount of the net cash proceeds from certain events. Amounts outstanding under the 2019 Credit Agreement may be prepaid at any time, and from time to time, in whole or part, without premium or penalty. At Valvoline’s option, amounts outstanding under the 2019 Credit Agreement bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate fluctuates between LIBOR plus 1.375% per annum and LIBOR plus 2.000% per annum (or between the alternate base rate plus 0.375% per annum and the alternate base rate plus 1.000% per annum), based upon Valvoline’s corporate credit ratings or its consolidated net leverage ratio, whichever yields the lowest rate.

Valvoline’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, non-U.S. subsidiaries and certain other subsidiaries) guarantee the 2019 Credit Agreement, which is also secured by a first-priority security interest in substantially all the personal property assets, and certain real property assets, of Valvoline and the guarantors, including all or a portion of the equity interests of certain of Valvoline’s domestic subsidiaries and first-tier non-U.S. subsidiaries, and in certain cases, a portion of the equity interests of other non-U.S. subsidiaries.

The 2019 Credit Agreement contains usual and customary representations, warranties, events of default, and affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as the maintenance of financial covenants as of the end of each fiscal quarter, including a maximum consolidated net leverage ratio of 4.5 and a minimum consolidated interest coverage ratio of 3.0. As of June 30, 2019, Valvoline was in compliance with all covenants under the 2019 Credit Agreement.

Trade Receivables Facility

As of June 30, 2019, there were no amounts outstanding under the $175 million trade receivables securitization facility (the “Trade Receivables Facility”), and as of September 30, 2018, there was $140 million outstanding. During the nine months ended June 30, 2019, Valvoline borrowed $82 million and made payments of $222 million, including the payment made with a portion of the proceeds from the 2019 Term Loan.

Based on the availability of eligible receivables, the full capacity of the Trade Receivables Facility was available as of June 30, 2019. The financing subsidiary owned $274 million and $275 million of outstanding accounts receivable as of June 30, 2019 and September 30, 2018, respectively, and these amounts are included in Accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.

NOTE 10 – INCOME TAXES

Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. The following summarizes income tax expense and the effective tax rate in each interim period:

Three months ended June 30Nine months ended June 30
(In millions)2019201820192018
Income tax expense$20 $33 $56 $154 
Effective tax rate percentage23.5 %34.0 %23.6 %56.0 %

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The decreases in income tax expense and the effective tax rate from the prior year periods were principally driven by the prior year enactment of U.S. and Kentucky tax reform legislation, which resulted in the full benefit of lower corporate statutory income tax rates in fiscal 2019 and expense of approximately $6 million and $76 million recognized during the three and nine months ended June 30, 2018, respectively, primarily related to the remeasurement of net deferred tax assets at the lower corporate statutory income tax rates. Furthermore, a benefit of $5 million was recognized in the nine months ended June 30, 2019 related to the expected utilization of tax attributes as a result of the clarification of certain provisions of Kentucky tax reform legislation.

The Company finalized its provisional estimates of the impacts of U.S. tax reform legislation during the three months ended December 31, 2018, which resulted in no significant adjustments.

NOTE 11 – EMPLOYEE BENEFIT PLANS

The following table summarizes the components of pension and other postretirement benefit cost (income):

Other postretirement benefits
Pension benefits
(In millions)2019201820192018
Three months ended June 30
Service cost$— $— $— $— 
Interest cost21 19 — — 
Expected return on plan assets(20)(26)— — 
Amortization of prior service credit— — (3)(3)
Net periodic benefit cost (income)$1 $(7)$(3)$(3)
Nine months ended June 30
Service cost$1 $1 $— $— 
Interest cost61 56 1 1 
Expected return on plan assets(60)(78)— — 
Amortization of prior service credit— — (9)(9)
Net periodic benefit cost (income)$2 $(21)$(8)$(8)

NOTE 12 – LITIGATION, CLAIMS AND CONTINGENCIES

From time to time, Valvoline is party to lawsuits, claims, and other legal proceedings that arise in the ordinary course of business. The Company establishes liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable. Where appropriate, the Company has recorded liabilities with respect to these matters, which were immaterial for the periods presented as reflected in the condensed consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, Valvoline discloses matters for which management believes a material loss is at least reasonably possible.

In all instances, management has assessed each matter based on current information available and made a judgment concerning its potential outcome, giving due consideration to the amount and nature of the claim and the probability of success. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable.

Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not exceed the amounts reflected in the condensed consolidated financial statements, based on information available at this time, it is the
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opinion of management that such pending claims or proceedings will not have a material adverse effect on its condensed consolidated financial statements.

NOTE 13 - EARNINGS PER SHARE

The following table summarizes basic and diluted earnings per share for the following periods:

Three months endedNine months ended
June 30June 30
(In millions, except per share data)2019 201820192018
Numerator 
Net income $65 $64 $181 $121 
Denominator 
Weighted average common shares outstanding189  195 189 199 
Effect of potentially dilutive securities (a)
—  1 — 1 
Weighted average diluted shares outstanding189 196 189 200 
  
Earnings per share 
Basic$0.34  $0.33 $0.96 $0.61 
Diluted$0.34  $0.33 $0.96 $0.61 
(a) Approximately 1 million and 2 million outstanding stock appreciation rights were not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three and nine months ended June 30, 2019, respectively.

NOTE 14 - REPORTABLE SEGMENT INFORMATION

Valvoline manages and reports within the following three segments: 

•Quick Lubes - services the passenger car and light truck quick lube market through company-owned and independent franchised retail quick lube service center stores and independent Express Care stores that service vehicles with Valvoline products, as well as through investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.

•Core North America - sells engine and automotive maintenance products in the United States and Canada to retailers, installers, and heavy-duty customers to service vehicles and equipment.

•International - sells engine and automotive maintenance products in approximately 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment.

These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company’s resources. Sales and operating income are the primary U.S. GAAP measures evaluated in assessing each reportable segment’s financial performance. Operating income by segment includes the allocation of shared corporate costs, which are allocated consistently based on each segment’s proportional contribution to various financial measures. Intersegment sales are not material, and assets are not allocated and included in the assessment of segment performance; consequently, these items are not disclosed by segment herein.

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To maintain operating focus on business performance, certain corporate and non-operational items, including restructuring and related expenses, as well as adjustments related to legacy businesses that no longer are attributed to Valvoline, are excluded from the segment operating results utilized by the chief operating decision maker in evaluating segment performance and are separately delineated within Unallocated and other to reconcile to total reported Operating income as shown in the table below.

The following table presents sales and operating income for each reportable segment:

Three months endedNine months ended


(In millions)
June 30
June 30
2019201820192018
Sales
Quick Lubes
$211 $167 $600 $479 
Core North America
260 264 735 773 
International
142 146 426 439 
Consolidated sales$613 $577 $1,761 $1,691 
Operating income
Quick Lubes
$48 $38 $130 $111 
Core North America
38 41 109 130 
International
20 20 61 63 
Total operating segments
106 99 300 304 
Unallocated and other (a)
(4)3 (15)(14)
Consolidated operating income$102 $102 $285 $290 
(a) Unallocated and other includes Legacy and separation-related expenses, net, and restructuring and related expenses.


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NOTE 15 - GUARANTOR FINANCIAL INFORMATION

The Senior Notes detailed in Note 9 are general unsecured senior obligations of Valvoline Inc. and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the combined “Guarantor Subsidiaries.” Other subsidiaries (the “Non-Guarantor Subsidiaries”) largely represent the international operations of the Company, which do not guarantee the Senior Notes.

The following tables present, on a consolidating basis, the condensed statements of comprehensive income, condensed balance sheets, and condensed statements of cash flows for the parent issuer of these Senior Notes, the Guarantor Subsidiaries on a combined basis, the Non-Guarantor Subsidiaries on a combined basis, and the eliminations necessary to arrive at the Company’s consolidated results.

Condensed Consolidating Statements of Comprehensive Income
For the three months ended June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$— $491 $140 $(18)$613 
Cost of sales— 324 100 (18)406 
Gross profit— 167 40 — 207 
Selling, general and administrative expenses3 87 26 — 116 
Net legacy and separation-related expenses— — — — — 
Equity and other (income) expenses, net— (16)5 — (11)
Operating (loss) income(3)96 9 — 102 
Net pension and other postretirement plan income— (2)— — (2)
Net interest and other financing expenses17 2 — — 19 
(Loss) income before income taxes(20)96 9 — 85 
Income tax (benefit) expense (5)24 1 — 20 
Equity in net income of subsidiaries(80)(8)— 88 — 
Net income$65 $80 $8 $(88)$65 
Total comprehensive income$63 $78 $9 $(87)$63 

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Condensed Consolidating Statements of Comprehensive Income
For the three months ended June 30, 2018
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$— $456 $137 $(16)$577 
Cost of sales— 294 98 (16)376 
Gross profit— 162 39 — 201 
Selling, general and administrative expenses3 81 26 — 110 
Net legacy and separation-related income(3)— — — (3)
Equity and other (income) expenses, net— (11)3 — (8)
Operating income— 92 10 — 102 
Net pension and other postretirement plan income— (10)— — (10)
Net interest and other financing expenses14 1 — — 15 
(Loss) income before income taxes(14)101 10 — 97 
Income tax (benefit) expense(1)30 4 — 33 
Equity in net income of subsidiaries(77)(6)— 83 — 
Net income$64 $77 $6 $(83)$64 
Total comprehensive income$48 $61 $(5)$(56)$48 

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Condensed Consolidating Statements of Comprehensive Income
For the nine months ended June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$— $1,396 $415 $(50)$1,761 
Cost of sales— 917 301 (50)1,168 
Gross profit— 479 114 — 593 
Selling, general and administrative expenses8 258 68 — 334 
Net legacy and separation-related expenses3 — — — 3 
Equity and other (income) expenses, net— (43)14 — (29)
Operating (loss) income(11)264 32 — 285 
Net pension and other postretirement plan income— (7)— — (7)
Net interest and other financing expenses47 5 3 — 55 
(Loss) income before income taxes(58)266 29 — 237 
Income tax (benefit) expense(16)65 7 — 56 
Equity in net income of subsidiaries(223)(22)— 245 — 
Net income$181 $223 $22 $(245)$181 
Total comprehensive income$173 $215 $20 $(235)$173 

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Condensed Consolidating Statements of Comprehensive Income
For the nine months ended June 30, 2018
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$— $1,319 $413 $(41)$1,691 
Cost of sales— 832 297 (41)1,088 
Gross profit— 487 116 — 603 
Selling, general and administrative expenses10 247 71 — 328 
Net legacy and separation-related expenses4 10 — — 14 
Equity and other (income) expenses, net— (37)8 — (29)
Operating (loss) income(14)267 37 — 290 
Net pension and other postretirement plan income— (30)— — (30)
Net interest and other financing expenses39 4 2 — 45 
(Loss) income before income taxes(53)293 35 — 275 
Income tax expense16 128 10 — 154 
Equity in net income of subsidiaries(190)(25)— 215 — 
Net income$121 $190 $25 $(215)$121 
Total comprehensive income$105 $174 $17 $(191)$105 

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Condensed Consolidating Balance Sheets
As of June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Assets
Current assets
Cash and cash equivalents$— $29 $97 $— $126 
Accounts receivable, net— 203 359 (139)423 
Inventories, net— 117 83 — 200 
Prepaid expenses and other current assets1 29 22 — 52 
Total current assets1 378 561 (139)801 
Noncurrent assets
Property, plant and equipment, net— 408 47 — 455 
Goodwill and intangibles, net— 418 72 — 490 
Equity method investments— 35 — — 35 
Investment in subsidiaries1,158 553 — (1,711)— 
Deferred income taxes79 19 15 — 113 
Other noncurrent assets3 95 8 — 106 
Total noncurrent assets$1,240 1,528 142 (1,711)1,199 
Total assets$1,241 $1,906 $703 $(1,850)$2,000 
Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt$7 $— $— $— $7 
Trade and other payables97 107 98 (139)163 
Accrued expenses and other liabilities20 188 34 — 242 
Total current liabilities124 295 132 (139)412 
Noncurrent liabilities
Long-term debt1,333 1 — — 1,334 
Employee benefit obligations— 305 17 — 322 
Other noncurrent liabilities36 147 1 — 184 
Total noncurrent liabilities1,369 453 18 — 1,840 
Commitments and contingencies
Stockholders’ (deficit) equity(252)1,158 553 (1,711)(252)
Total liabilities and stockholders’ deficit / equity$1,241 $1,906 $703 $(1,850)$2,000 

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Condensed Consolidating Balance Sheets
As of September 30, 2018
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Assets
Current assets
Cash and cash equivalents$— $20 $76 $— $96 
Accounts receivable, net— 48 480 (119)409 
Inventories, net— 95 81 — 176 
Prepaid expenses and other current assets1 38 5 — 44 
Total current assets1 201 642 (119)725 
Noncurrent assets
Property, plant and equipment, net— 384 36 — 420 
Goodwill and intangibles, net— 396 52 — 448 
Equity method investments— 31 — — 31 
Investment in subsidiaries801 509 — (1,310)— 
Deferred income taxes62 63 13 — 138 
Other noncurrent assets2 85 5 — 92 
Total noncurrent assets865 1,468 106 (1,310)1,129 
Total assets$866 $1,669 $748 $(1,429)$1,854 
Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt$30 $— $— $— $30 
Trade and other payables3 241 53 (119)178 
Accrued expenses and other liabilities7 168 28 — 203 
Total current liabilities40 409 81 (119)411 
Noncurrent liabilities
Long-term debt1,151 1 140 — 1,292 
Employee benefit obligations— 317 16 — 333 
Other noncurrent liabilities33 141 2 — 176 
Total noncurrent liabilities1,184 459 158 — 1,801 
Commitments and contingencies
Stockholders’ (deficit) equity(358)801 509 (1,310)(358)
Total liabilities and stockholders’ deficit / equity$866 $1,669 $748 $(1,429)$1,854 

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Condensed Consolidating Statements of Cash Flows
For the nine months ended June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Cash flows (used in) provided by operating activities$(94)$98 $210 $— $214 
Cash flows from investing activities
Additions to property, plant and equipment— (60)(13)— (73)
Acquisitions, net of cash acquired— (28)(22)— (50)
Other investing activities, net— 1 (2)— (1)
Cash flows used in investing activities— (87)(37)— (124)
Cash flows from financing activities
Proceeds from borrowings, net of issuance costs661 — 82 — 743 
Repayments on borrowings(505)— (222)— (727)
Payments for purchase of additional ownership in subsidiary— — (1)— (1)
Cash dividends paid(60)— — — (60)
Other financing activities(2)(2)— — (4)
Cash flows provided by (used in) financing activities94 (2)(141)— (49)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash— — — — — 
Increase in cash, cash equivalents, and restricted cash— 9 32 — 41 
Cash, cash equivalents, and restricted cash - beginning of year— 20 76 — 96 
Cash, cash equivalents, and restricted cash - end of period$— $29 $108 $— $137 

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Condensed Consolidating Statements of Cash Flows
For the nine months ended June 30, 2018
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Cash flows (used in) provided by operating activities$(28)$287 $(78)$— $181 
Cash flows from investing activities
Additions to property, plant and equipment— (48)(3)— (51)
Acquisitions, net of cash acquired— (71)— — (71)
Other investing activities, net— 5 — — 5 
Return of advance from subsidiary263 — — (263)— 
Cash flows provided by (used in) investing activities263 (114)(3)(263)(117)
Cash flows from financing activities
Proceeds from borrowings, net of issuance costs70 — 100 — 170 
Repayments on borrowings(38)— (1)— (39)
Repurchases of common stock(220)— — — (220)
Payments for purchase of additional ownership in subsidiary— — (15)— (15)
Cash dividends paid(45)— — — (45)
Other financing activities(2)(2)(2)— (6)
Other intercompany activity, net— (263)— 263 — 
Total cash (used in) provided by financing activities(235)(265)82 263 (155)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash— — (3)— (3)
Decrease in cash, cash equivalents and restricted cash— (92)(2)— (94)
Cash, cash equivalents, and restricted cash - beginning of year— 99 102 — 201 
Cash, cash equivalents, and restricted cash - end of period$— $7 $100 $— $107 

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NOTE 16 – SUBSEQUENT EVENTS

Acquisition activity

From July 1 through July 31, 2019, Valvoline completed four acquisitions for an aggregate purchase price of approximately $18 million. These acquisitions included three single-store acquisitions of service center stores within the Quick Lubes reportable segment and an Eastern European lubricant production company, including its manufacturing facility, within the International reportable segment. These acquisitions provide an opportunity to further grow Valvoline's Quick Lubes system of more than 500 company-owned service center stores and expand Valvoline’s presence in Eastern Europe, including additional investment in the Company’s regional European supply chain capabilities.

Dividend declared

On July 18, 2019, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.106 per share of Valvoline common stock. The dividend is payable on September 16, 2019 to shareholders of record on August 30, 2019.
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FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, including estimates, projections, and statements related to the Company’s business plans and operating results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Factors that might cause such differences include, but are not limited to, those discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q and Valvoline’s most recently filed periodic reports on Forms 10-K and 10-Q. 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.


Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Page

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as well as the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q.

BUSINESS OVERVIEW

Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide marketer and supplier of engine and automotive maintenance products and services. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed powerful name recognition across multiple product and service channels. In addition to the iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, Valvoline provides a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Valvoline’s premium branded product offerings enhance its high-quality reputation and provide customers with solutions that address a wide variety of needs.
In the United States and Canada, Valvoline’s products and services are sold through more than 1,350 franchised and company-owned service center stores, to retailers with over 30,000 retail outlets, and to installer customers with over 12,000 locations. Valvoline also has a strong international presence with products sold in approximately 140 countries.
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Valvoline has three reportable segments: Quick Lubes, Core North America, and International, with certain corporate and non-operational items included in Unallocated and other to reconcile to consolidated results.

BUSINESS STRATEGY
To deliver on Valvoline’s key business and growth strategies in fiscal 2019 and beyond, the Company is focused on:

•Aggressively growing Quick Lubes through organic service center expansion and opportunistic acquisitions, while enhancing retail service capabilities through a consistent and preferred customer experience delivered by hands-on experts;

•Strengthening the foundation in Core North America by leveraging investments in technology and marketing to drive speed, efficiency and value across the business and customer interactions, while increasing penetration of Valvoline’s full product portfolio;

•Accelerating International market share growth through continued development of and investment in key emerging and high value markets where demand is growing;

•Broadening capabilities to serve future transport vehicles by developing relationships with original equipment manufacturers and leveraging innovation in the development of future products and light services in direct and adjacent markets; and

•Accelerating the shift to a services-driven business by leveraging customer relationships and experiences to develop new capabilities and expand across geographies.

THIRD FISCAL QUARTER 2019 OVERVIEW

The following were the significant events for the third fiscal quarter of 2019, each of which is discussed more fully in this Quarterly Report on Form 10-Q:

•Valvoline reported net income of $65 million and diluted earnings per share of $0.34 in the three months ended June 30, 2019. Quick Lubes had another strong quarter, Core North America improved sequentially, and International performed consistently.

•Quick Lubes delivered system-wide same-store sales growth of nearly 10% during the quarter and opened its 500th company-owned service center store and its 850th franchised service center store during the period, resulting in 198 total net new service center stores added to the system since the prior year. Service center store additions along with same-store sales growth continue to drive overall momentum in sales and earnings.

•Core North America improved performance from recent quarters, including sequential volume and sales growth from the second fiscal quarter of 2019, which reflects progress made toward addressing difficult market and competitive dynamics in the retail customer channel. Compared to the prior year quarter, volumes were lower in the retail customer channel as a result of these dynamics, and declines in the installer customer channel were primarily due to changes with certain key accounts and the timing of distributor sales. Core North America's quarterly results included unfavorable impacts related to the temporary shutdown of the Company's second largest domestic blending facility and the new revenue recognition guidance that resulted in a decline in the segment's operating income, which otherwise would have increased 5% from the prior year quarter.

•International sales and earnings decreased compared to the prior year period predominantly due to unfavorable currency movements. Continued volume gains in the EMEA region were offset by softness in Latin America and certain Asia-Pacific markets.

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•On April 12, 2019, Valvoline amended its 2016 Credit Agreement to provide additional capacity under the revolving facility, lower interest rates, and extend the maturity to 2024. Proceeds from the amendment were used to pay down balances on the 2016 Term Loan, the 2016 Revolver, and the Trade Receivables Facility, and the remaining proceeds, including the undrawn amended revolving credit facility, are primarily expected to fund general corporate purposes and working capital needs.

•Valvoline returned value to its shareholders through a $0.106 per share cash dividend paid during the quarter.

Use of Non-GAAP Measures

To aid in the understanding of Valvoline’s ongoing business performance, certain items within this document are presented on an adjusted, non-GAAP basis. These non-GAAP measures are not defined within U.S. GAAP and do not purport to be alternatives to net income/loss or cash flows from operating activities as measures of operating performance or cash flows. The following are the non-GAAP measures management has included and how management defines them:

•EBITDA, which management defines as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;

•Adjusted EBITDA, which management defines as EBITDA adjusted for key items, as further described below, and net pension and other postretirement plan expense/income; and

•Free cash flow, which management defines as operating cash flows less capital expenditures and certain other adjustments as applicable.

These measures are not prepared in accordance with U.S. GAAP and management believes the use of non-GAAP measures assists investors in understanding the ongoing operating performance of Valvoline’s business by presenting comparable financial results between periods. The non-GAAP information provided is used by Valvoline’s management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA, Adjusted EBITDA and free cash flow. EBITDA, Adjusted EBITDA, and free cash flow provide a supplemental presentation of Valvoline’s operating performance. For a reconciliation of non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.

Due to depreciable assets associated with the nature of the Company’s operations and interest costs related to Valvoline’s capital structure, management believes EBITDA is an important supplemental measure to evaluate the Company’s operating results between periods on a comparable basis.

Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating performance. Adjusted EBITDA excludes the impact of the following:

•Key items - Key items consist of income or expenses associated with certain unusual, infrequent or non-operational income or expenses not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods. Key items may consist of adjustments related to: the impairment of an equity investment; legacy businesses, including the separation from Ashland and associated impacts of related indemnities; significant acquisitions or divestitures; restructuring-related matters; and other matters that are non-operational or unusual in nature. Key items are considered by management to be outside the comparable operational performance of the business and are also often related to legacy matters or market-driven events that are not directly related to the underlying business and do not have an immediate, corresponding impact on the Company’s ongoing performance. Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows.

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•Net pension and other postretirement plan expense/income - Net pension and other postretirement plan expense/income includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA will continue to include pension and other postretirement service costs related to current employee service as well as the costs of other benefits provided to employees for current service.

Management uses free cash flow as an additional non-GAAP metric 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. Unlike cash flow from operating activities, free cash flow includes the impact of capital expenditures, providing a more complete picture of cash generation. Free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. The amount of mandatory versus discretionary expenditures can vary significantly between periods.

Valvoline’s results of operations are presented based on Valvoline’s management structure and internal accounting practices. The structure and practices are specific to Valvoline; therefore, Valvoline’s financial results, EBITDA, Adjusted EBITDA and free cash flow are not necessarily comparable with similar information for other comparable companies. EBITDA, Adjusted EBITDA and free cash flow each have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, net income and cash flows from operating activities as determined in accordance with U.S. GAAP. Because of these limitations, net income and cash flows from operating activities should primarily be relied upon as determined in accordance with U.S. GAAP, and EBITDA, Adjusted EBITDA, and free cash flow should only be used as supplements. In evaluating EBITDA, Adjusted EBITDA, and free cash flow, one should be aware that in the future Valvoline may incur expenses/income similar to those for which adjustments are made in calculating EBITDA, Adjusted EBITDA, and free cash flow. Valvoline’s presentation of EBITDA, Adjusted EBITDA, and free cash flow should not be construed as a basis to infer that Valvoline’s future results will be unaffected by unusual or nonrecurring items.

RESULTS OF OPERATIONS

Consolidated review

The following table summarizes the results of the Company’s operations:

Three months ended June 30Nine months ended June 30
2019201820192018
(In millions)% of Sales% of Sales% of Sales% of Sales
Sales$613 100.0%  $577 100.0%  $1,761 100.0%  $1,691 100.0%  
Gross profit$207 33.8%  $201 34.8%  $593 33.7%  $603 35.7%  
Net operating expenses$105 17.1%  $99 17.2%  $308 17.5%  $313 18.5%  
Operating income$102 16.6%  $102 17.7%  $285 16.2%  $290 17.1%  
Net income$65 10.6%  $64 11.1%  $181 10.3%  $121 7.2%  

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Sales

Sales for the three months ended June 30, 2019 increased $36 million, or 6%, compared to the three months ended June 30, 2018. Sales for the nine months ended June 30, 2019 increased $70 million, or 4%, compared to the nine months ended June 30, 2018. The following table provides a reconciliation of the changes:

Year over year changeYear over year change
(In millions) Three months ended June 30, 2019Nine months ended June 30, 2019
Pricing$19 $50 
Revenue recognition adjustments10 34 
Volume8 (7)
Product mix5 11 
Currency exchange(8)(25)
Acquisitions2 7 
Change in sales$36 $70 
 

Key drivers of the increase in sales for the three and nine months ended June 30, 2019 compared to the prior year periods were higher product pricing, favorable product mix, acquisitions of Quick Lubes service center stores, and the impact related to the adoption of new revenue recognition guidance, partially offset by unfavorable currency exchange. During the three months ended June 30, 2019, the effects of volume improvements in Quick Lubes more than offset declines in Core North America, favorably impacting sales during the period. For the nine months ended June 30, 2019, lubricant gallons sold decreased 2% to 132.0 million, which unfavorably impacted sales as the volume declines in Core North America and International more than offset the impact of volume gains in Quick Lubes.

The changes to reportable segment sales and the drivers thereof are discussed in further detail in the “Reportable Segment Review” section below.

Gross profit

Gross profit for the three months ended June 30, 2019 increased $6 million compared to the three months ended June 30, 2018, while gross profit decreased $10 million for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018. The table below provides a reconciliation of the changes:

Year over year changeYear over year change
(In millions) Three months ended June 30, 2019Nine months ended June 30, 2019
Volume and product mix$10 $2 
Revenue recognition adjustments(4)(8)
Acquisitions3 7 
Currency exchange(2)(6)
Price and cost(1)(5)
Change in gross profit$6 $(10)

The increase in gross profit for the three months ended June 30, 2019 compared to the prior year period was driven by favorable changes in volume and product mix, as well as the addition of acquired Quick Lubes service center stores. The benefit of volume improvements in Quick Lubes and broad premium product mix increases
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more than offset the volume declines in Core North America and International during the nine months ended June 30, 2019, leading to a favorable volume and mix impact on gross profit. Offsetting these favorable impacts were decreases in gross profit related to the adoption of new revenue recognition guidance, currency exchange due to the strong U.S. dollar, and costs in excess of price, which included incremental costs related to the temporary shutdown of the Company's second largest domestic blending facility due to a fire at a nearby third-party petrochemical terminal. In the three months ended June 30, 2019, these unfavorable impacts partially offset the favorable effects, while they more than offset the increases in the nine months ended June 30, 2019.

The Valvoline blending facility in Texas that was temporarily shut down near the end of the second fiscal quarter of 2019, due to a nearby third-party fire and resulting chemical releases, sustained no damage, reopened and resumed operations in late April 2019. The Company quickly addressed the shutdown by utilizing its supply chain to shift production and minimize business impacts in order to fulfill customer orders timely. These actions resulted in incremental expenses of $5 million and $6 million during the three and nine months ended June 30, 2019, respectively. Management is pursuing insurance recoveries related to the business interruption and does not expect material incremental costs to be incurred in the fourth fiscal quarter of 2019.

The decreases in gross profit margin year-over-year were largely due to certain reclassifications related to the adoption of new revenue recognition guidance, the incremental business interruption expenses related to the temporary shutdown of the blending facility, and the dilutive effect of the pass through of raw materials cost. These unfavorable impacts more than offset improvements driven by product mix, acquisitions and currency exchange.

The changes to reportable segment gross profit and the drivers thereof are discussed in further detail in the “Reportable Segment Review” section below.

Net operating expenses

The table below provides details of the components of net operating expenses:

Three months ended June 30Nine months ended June 30
2019201820192018
(In millions)% of Sales% of Sales% of Sales% of Sales
Selling, general and administrative expenses$116 18.9 %$110 19.1 %$334 19.0 %$328 19.4 %
Net legacy and separation-related (income) expenses— — %(3)(0.5)%3 0.2 %14 0.8 %
Equity and other income, net(11)(1.8)%(8)(1.4)%(29)(1.7)%(29)(1.7)%
Net operating expenses$105 17.1 %$99 17.2 %$308 17.5 %$313 18.5 %

Selling, general and administrative expenses increased $6 million in both the three and nine months ended June 30, 2019 compared to the prior year periods. These increases were largely driven by restructuring and related expenses of $4 million and $12 million recognized during the three and nine months ended June 30, 2019, respectively. In addition, acquisitions, marketing and advertising, as well as depreciation and amortization contributed to the increase in each period. During the three and nine months ended June 30, 2019, these increases were partially offset by the favorable impacts of currency exchange and certain reclassifications related to the adoption of new revenue recognition guidance in fiscal 2019. These increases were further offset by declines in employee-related costs in the nine months ended June 30, 2019.

Net legacy and separation-related income decreased $3 million for the three months ended June 30, 2019 and net expenses decreased $11 million for the nine months ended June 30, 2019 compared to the prior year periods. These changes were largely related to the effects of the enactment of U.S. and Kentucky tax reform in fiscal 2018,
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which drove adjustments to the estimated indemnities due under the Tax Matters Agreement. Furthermore, the decrease in net expenses for the nine months ended June 30, 2019 is related to a decline due to a legacy multiemployer pension plan partial withdrawal assessment recognized in the prior year period.

Equity and other income, net increased $3 million and was flat in the three and nine months ended June 30, 2019, respectively, compared to the prior year periods. Increases in the three and nine months ended June 30, 2019 compared to the prior year were primarily related to other income for fees associated with the termination of certain contracts and an incentive received for operating in a free-trade zone outside the U.S. In the nine months ended June 30, 2019, these increases, coupled with additional free-trade zone incentives received earlier in the fiscal year, were offset by a decrease in other income related to a gain recognized in the prior year due to the sale of two Quick Lubes stores and lower equity income as a result of reduced volumes from unconsolidated subsidiaries during the first half of fiscal 2019.

Net pension and other postretirement plan income

Net pension and other postretirement plan income for the three and nine months ended June 30, 2019 decreased $8 million and $23 million, respectively, from the prior year periods. These decreases were due to pension de-risking actions the Company began taking in fiscal 2017 to shift the U.S. qualified plan’s target asset allocation toward more fixed income securities and better match the asset duration to that of the pension plan obligations, which resulted in a lower expected return on plan assets and a decrease in related recurring non-service income.

Net interest and other financing expense

Net interest and other financing expense increased by $4 million and $10 million during the three and nine months ended June 30, 2019, respectively, compared to the prior year periods. These changes were generally attributed to increased borrowing transactions during the current year, including the amendment of the 2016 Credit Agreement, which resulted in additional expenses associated with executing the transaction and higher outstanding debt.

Income tax expense

The following summarizes income tax expense and the effective tax rate in each interim period:

Three months ended June 30Nine months ended June 30
(In millions)2019201820192018
Income tax expense$20 $33 $56 $154 
Effective tax rate percentage23.5 %34.0 %23.6 %56.0 %

The decreases in income tax expense and the effective tax rate from the prior year periods were principally driven by the prior year enactment of U.S. and Kentucky tax reform legislation, which resulted in the full benefit of lower corporate statutory income tax rates in fiscal 2019 and expense of approximately $6 million and $76 million recognized during the three and nine months ended June 30, 2018, respectively, primarily related to the remeasurement of net deferred tax assets at the lower corporate statutory income tax rates. Furthermore, a $5 million benefit was recognized in the nine months ended June 30, 2019 related to the expected utilization of tax attributes as a result of the clarification of certain provisions of Kentucky tax reform legislation.

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EBITDA and Adjusted EBITDA

The following table reconciles net income to EBITDA and Adjusted EBITDA:

Three months endedNine months ended
June 30June 30
(In millions)2019201820192018
Net income$65 $64 $181 $121 
Income tax expense20 33 56 154 
Net interest and other financing expenses19 15 55 45 
Depreciation and amortization15 14 43 39 
EBITDA119 126 335 359 
Net pension and other postretirement plan income (a)
(2)(10)(7)(30)
Net legacy and separation-related (income) expenses— (3)3 14 
Restructuring and related expenses4 — 12 — 
Business interruption expenses5 — 6 — 
Acquisition-related foreign currency exchange loss— 2 — 2 
Adjusted EBITDA$126 $115 $349 $345 
   
(a) Net pension and other postretirement plan income includes remeasurement gains and losses, when applicable, and recurring non-service pension and other postretirement net periodic income, which consists of interest cost, expected return on plan assets and amortization of prior service credit. Refer to Note 11 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for further details.

The increase in adjusted EBITDA of $11 million and $4 million for the three and nine months ended June 30, 2019, respectively, from the prior year periods was driven by the performance of the Quick Lubes reportable segment and its system-wide same-store sales growth from an increase in both transactions and average ticket. For the nine months ended June 30, 2019, the strong performance of the Quick Lubes reportable segment more than offset declines in the Core North America and International reportable segments. The declines in Core North America were primarily a result of volume challenges within the retail customer channel, while decreases in International were generally related to volume declines in many regions outside of EMEA.

Reportable segment review
Valvoline’s business is managed within the following three reportable segments:

•Quick Lubes - services the passenger car and light truck quick lube market through company-owned and independent franchised retail quick lube service center stores and independent Express Care stores that service vehicles with Valvoline products, as well as through investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.
•Core North America - sells engine and automotive maintenance products in the United States and Canada to retailers, installers, and heavy-duty customers to service vehicles and equipment.
•International - sells engine and automotive maintenance products in approximately 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment.

Valvoline’s reportable segments are measured for profitability based on operating income; therefore, Valvoline does not generally allocate items to each reportable segment below operating income, such as net pension and other postretirement plan income, interest expense, or income tax expense. Operating income by segment includes the allocation of shared corporate costs, which are allocated consistently based on each segment’s proportional contribution to various financial measures. Valvoline does not allocate certain significant corporate
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and non-operational matters, including, but not limited to, company-wide restructuring activities and costs or adjustments that relate to former businesses that Valvoline no longer operates. These matters are attributed to Unallocated and other. Results of Valvoline’s reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies.

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The following table presents sales, operating income and statistical operating information by reportable segment:

Three months ended June 30Nine months ended June 30
(In millions)2019201820192018
Sales
Quick Lubes
$211 $167 $600 $479 
Core North America
260 264 735 773 
International
142 146 426 439 
Consolidated sales$613 $577 $1,761 $1,691 
Operating income
Quick Lubes
$48 $38 $130 $111 
Core North America
38 41 109 130 
International
20 20 61 63 
Total operating segments
106 99 300 304 
Unallocated and other
(4)3 (15)(14)
Consolidated operating income$102 $102 $285 $290 
Depreciation and amortization
Quick Lubes
$9 $7 $26 $21 
Core North America
5 5 13 13 
International
1 2 4 5 
Consolidated depreciation and amortization$15 $14 $43 $39 
Operating information
Quick Lubes
Lubricant sales gallons
7.2 6.2 20.7 17.8 
Premium lubricants (percent of U.S. branded volumes)
65.5 %63.0 %64.6 %62.2 %
Gross profit as a percent of sales (a)
39.1 %40.5 %39.0 %40.4 %
Core North America
Lubricant sales gallons
24.1 25.5 68.2 73.9 
Premium lubricants (percent of U.S. branded volumes)
53.1 %49.7 %52.2 %49.1 %
Gross profit as a percent of sales (a)
32.5 %34.4 %32.8 %36.5 %
International
Lubricant sales gallons (b)
14.3 14.3 43.1 43.6 
Lubricant sales gallons, including unconsolidated joint ventures
25.2 24.7 74.3 74.4 
Premium lubricants (percent of lubricant volumes)
29.0 %26.9 %28.6 %26.9 %
Gross profit as a percent of sales (a)
28.4 %29.3 %27.8 %29.0 %
(a) Gross profit as a percent of sales is defined as sales, less cost of sales, divided by sales.
(b) Excludes volumes from unconsolidated joint ventures.

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Quick Lubes

Quick Lubes sales are influenced by the number of service center stores and the business performance of those stores. The following tables provide supplemental information regarding company-owned and franchised stores that Valvoline believes is relevant to an understanding of the Quick Lubes business and its performance.

Company-owned
Third Quarter 2019Second Quarter 2019First Quarter 2019Fourth Quarter 2018Third Quarter 2018
Beginning of period483 471 462 451 445 
Opened4 7 5 11 4 
Acquired13 5 — — 1 
Net conversions between company-owned and franchised1 — 4 — 1 
Closed— — — — — 
End of period501 483 471 462 451 
Franchised 
Third Quarter 2019 Second Quarter 2019 First Quarter 2019 Fourth Quarter 2018 Third Quarter 2018
Beginning of period844 830 780 703 696 
Opened11 15 24 5 10 
Acquired— — 31 73 — 
Net conversions between company-owned and franchised(1)— (4)— (1)
Closed(3)(1)(1)(1)(2)
End of period851 844 830 780 703 
Total stores1,352 1,327 1,301 1,242 1,154 

The year over year change resulted in 198 net new company-owned and franchised stores as a result of 76 net openings and 122 acquired stores. Service center store growth was primarily related to the Company’s expansion into Canada with the acquisition of franchised service center stores from Great Canadian Oil Change and Oil Changers, as well as new company-owned service center store openings and franchisee expansion in key markets.
Three months endedNine months ended
 June 30June 30
 2019201820192018
Same-store sales growth** - Company-owned9.2 %8.7 %9.7 %9.3 %
Same-store sales growth** - Franchised*10.0 %7.4 %10.3 %8.0 %
Same-store sales growth** - Combined*9.7 %7.9 %10.1 %8.5 %
    
* Valvoline’s franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
** Valvoline determines same-store sales growth on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in operation.

Quick Lubes sales increased $44 million, or 26%, during the current quarter compared to the prior year quarter. Sales increased $121 million, or 25%, during the nine months ended June 30, 2019 compared to the prior year period. Volume growth increased sales by approximately $13 million and $41 million for the three and nine months ended June 30, 2019, respectively. Volume growth was driven by the increase in transactions primarily attributed
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to the Company’s marketing efforts, effective service delivery, and organic service center store growth. Implemented pricing actions, increases in premium mix, and increases in non-oil change services, led to higher average ticket, and combined to increase sales by $15 million and $34 million for the three and nine months ended June 30, 2019, respectively. The impact of the adoption of new revenue recognition guidance increased sales by $9 million and $26 million for the three and nine months ended June 30, 2019, respectively, while acquisitions increased sales by $7 million and $20 million for the three and nine months ended June 30, 2019, respectively.

Gross profit increased $14 million and $40 million for the three and nine months ended June 30, 2019, respectively, primarily due an increase in both transactions and average ticket. Increases in volumes and mix improvements combined to increase gross profit by $10 million and $23 million for the three and nine months ended June 30, 2019, respectively. Favorable pricing in excess of cost increased gross profit by $6 million for the nine months ended June 30, 2019, while acquisitions increased gross profit by $4 million and $10 million for the three and nine months ended June 30, 2019, respectively. Adoption of the new revenue recognition guidance impacted gross profit favorably by approximately $1 million for the nine months ended June 30, 2019. Gross profit margin decreased 1.4% during each of the three and nine months ended June 30, 2019 compared to the prior periods primarily resulting from the reclassification of certain costs in connection with adoption of new revenue recognition guidance.

Selling, general and administrative expenses, which includes the allocation of shared costs, increased $6 million and $19 million for the three and nine months ended June 30, 2019, respectively. These increases were primarily the result of a higher allocation of shared costs and increased operating expenses, including costs associated with acquisitions and advertising.

Equity and other income for the Quick Lubes segment in the three and nine months ended June 30, 2019 included $2 million from contract termination fees associated with certain Express Care stores, which was partially offset by a decrease in other income related to reclassifications in connection with the adoption of new revenue recognition guidance. These impacts were offset by reductions in other income in the current year-to-date as the prior year period included a $3 million gain related to the sale of two service center stores.

Core North America

Core North America sales decreased $4 million, or 2%, during the current quarter compared to the prior year quarter. During the nine months ended June 30, 2019, sales decreased $38 million, or 5% compared to the prior year period. These decreases in sales were largely driven by volume decreases of $5 million and $43 million for the three and nine months ended June 30, 2019, respectively, primarily due to ongoing competitive pressures in the retail automotive lubricant market and lower volumes in the installer customer channel from a key account that was in reorganization proceedings and the timing of certain distributor sales. The shift of Great Canadian Oil Change product sales to the Quick Lubes reportable segment also negatively impacted Core North America sales for the three and nine months ended June 30, 2019 by approximately $5 million and $13 million, respectively. Partially offsetting these declines were favorable pricing and premium product mix of $4 million and $10 million for the three and nine months ended June 30, 2019, respectively, and an increase related to adoption of new revenue recognition guidance of approximately $1 million and $8 million for the three and nine months ended June 30, 2019, respectively.

Gross profit decreased $6 million and $41 million for the three and nine months ended June 30, 2019, respectively, compared to the prior year periods. The adoption of new revenue recognition guidance resulted in certain reclassifications and impacted the timing of certain distributor sales, which decreased gross profit by approximately $4 million and $9 million for the three and nine months ended June 30, 2019, respectively. Volume declines, which included the shift of Great Canadian Oil Change to Quick Lubes, impacted gross profit by approximately $1 million and $22 million for the three and nine months ended June 30, 2019, respectively. Also negatively impacting gross profit during the three and nine months ended June 30, 2019 were costs in excess of pricing of $1 million and $10 million, respectively. These costs included $3 million and $4 million related to the recent temporary shutdown of the Company’s second largest domestic blending facility due to the fire at a nearby
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third-party petrochemical terminal for the three and nine months ended June 30, 2019, respectively. Gross profit margin decreased 1.9% and 3.7% for the three and nine months ended June 30, 2019, respectively, compared to the prior year periods. These declines were primarily the result of incremental business interruption expenses related to the temporary shutdown of the blending facility, the impact related to the adoption of new revenue recognition guidance, and the dilutive impact on margin rate of passing through cost increases. In the three months ended June 30, 2019, these declines were partially offset by improvements in product mix and pricing.

Selling, general and administrative expenses, which includes the allocation of shared costs, decreased $4 million and $20 million during the three and nine months ended June 30, 2019, respectively. These decreases were a result of lower allocated shared costs and reduced operating expenses of $1 million and $13 million, as well as reclassifications related to the adoption of new revenue recognition guidance of $3 million and $7 million during the three and nine months ended June 30, 2019, respectively.

International

International sales decreased $4 million, or 3%, during the current quarter compared to the prior year quarter. Sales decreased $13 million, or 3%, during the nine months ended June 30, 2019 compared to the prior year period. The decline in sales was largely attributable to unfavorable currency exchange of $8 million and $24 million for the three and nine months ended June 30, 2019, respectively. This reduction was partially offset by favorable pricing and product mix to increase sales by approximately $4 million and $16 million for the three and nine months ended June 30, 2019, respectively. For the three months ended June 30, 2019, volumes were flat compared to the prior year. The EMEA region had solid growth, with increased volumes of 9% in Europe attributed to ongoing channel development, which was offset by declines in Latin America and certain Asia Pacific markets primarily driven by a slower heavy-duty aftermarket in China. For the nine months ended June 30, 2019, volumes were down approximately 1% compared to the prior year period and reduced sales by $5 million.

Gross profit decreased by $2 million and $9 million for the three and nine months ended June 30, 2019, respectively. These decreases were primarily related to unfavorable currency exchange of $2 million and $6 million for the three and nine months ended June 30, 2019, respectively. During the three and nine months ended June 30, 2019, incremental costs of $2 million were recognized related to the temporary shutdown of the Company’s second largest domestic blending facility due to the fire and resulting chemical releases at a nearby third-party petrochemical terminal. Improvements in product and geographic mix offset these costs in the three months ended June 30, 2019, while these costs were coupled with lower volumes and partially offset by favorable product and geographic mix in the nine months ended June 30, 2019, and resulted in an unfavorable gross profit impact of $3 million. Gross profit margin decreased 0.9% and 1.2% for the three and nine months ended June 30, 2019, respectively, primarily related to the incremental business interruption expenses related to the temporary shutdown of the blending facility and the dilutive impact on margin rate of passing through cost increases.

Selling, general and administrative expenses, which include the allocation of shared costs, were flat during the three months ended June 30, 2019 and decreased $5 million for the nine months ended June 30, 2019. The decrease during the nine months ended June 30, 2019 was generally related to lower operating expenses, including a decline in compensation-related costs, and favorable currency exchange.

Equity and other income increased during the three and nine months ended June 30, 2019 primarily due to incentives received for operating in a free-trade zone and income from unconsolidated subsidiaries. In the nine months ended June 30, 2019, these increases were partially offset by lower equity income due to decreased volumes from unconsolidated subsidiaries during the first half of fiscal 2019.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

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
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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.

As of June 30, 2019, the Company had $137 million in cash, cash equivalents, and restricted cash, of which approximately $108 million was held by Valvoline’s non-U.S. subsidiaries and included $11 million restricted primarily for use in completing an acquisition. The Company utilizes a variety of strategies to deploy available cash in locations where it is needed. As a result of U.S. tax reform legislation, which provides the opportunity to mobilize cash with lower tax consequences, the Company does not indefinitely reinvest non-U.S. current and undistributed earnings. Withholding taxes are provided for within the income tax provision in the same period such earnings are generated. Certain other outside basis differences restricted by regulations, operational, or investing needs for non-U.S. subsidiaries remain indefinitely reinvested.

Cash flows

Valvoline’s cash flows as reflected in the Condensed Consolidated Statements of Cash Flows are summarized as follows for the nine months ended June 30:

(In millions)2019 2018
Cash provided by (used in): 
Operating activities$214 $181 
Investing activities(124)(117)
Financing activities(49)(155)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash— (3)
Increase (decrease) in cash, cash equivalents, and restricted cash$41 $(94)

Operating activities

The increase in cash flows provided by operating activities for the nine months ended June 30, 2019 compared to the prior year period was primarily due to increased cash earnings driven by the mix shift to a higher proportion of Quick Lubes retail sales. Cash flows from operating activities in fiscal 2019 also included $13 million in additional sales of certain customer accounts receivable.

Investing activities

Increases in capital expenditures for company-owned quick lube new store openings and the Company’s first blending and packaging plant in China were generally offset by lower cash consideration paid for acquisitions in the current year. Accordingly, the increase in cash flows used in investing activities for the nine months ended June 30, 2019 compared to the prior year was primarily due to lower proceeds related to the prior year sale of two Quick Lubes service center locations and the current year investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.

From July 1 through July 31, 2019, Valvoline completed four acquisitions for an aggregate purchase price of approximately $18 million. These acquisitions included three single-store acquisitions of service center stores within the Quick Lubes reportable segment and an Eastern European lubricant production company, including its manufacturing facility, within the International reportable segment. These acquisitions provide an opportunity to further expand Valvoline’s presence, both in Quick Lubes and in Eastern Europe, including additional investment in the Company’s regional European supply chain capabilities.

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Financing activities

The decrease in cash flows used in financing activities for the nine months ended June 30, 2019 compared to the prior year period was primarily driven by decreased share repurchase activity of $220 million and lower payments of $14 million related to the purchase of the remaining ownership interest in a consolidated subsidiary, which were partially offset by lower net proceeds from borrowings of $115 million and higher dividend payments of $15 million due to the increase in the quarterly dividend in fiscal 2019.

Free cash flow and other liquidity information

The following table sets forth free cash flow and reconciles cash flows from operating activities to free cash flow. 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 the “Use of Non-GAAP Measures” section included above in this Item 2 for additional information.

Nine months ended June 30
(In millions) 20192018
Cash flows provided by operating activities
$214 $181 
Additions to property, plant and equipment
(73)(51)
Free cash flow
$141 $130 

As of June 30, 2019, working capital (current assets minus current liabilities, excluding long-term debt due within one year) was $396 million compared to $344 million as of September 30, 2018. Liquid assets (cash, cash equivalents, and accounts receivable) were 133% of current liabilities as of June 30, 2019 and 123% as of September 30, 2018. The increase in working capital is primarily related to the timing of certain cash receipts and payments since year-end, in addition to increases in inventories, partially offset by an increase in accrued expenses and other liabilities.

Debt

On April 12, 2019, Valvoline amended the 2016 Credit Agreement to extend the maturity to 2024, provide additional capacity under the revolving facility, and lower interest rates. Outside of the amendment, during the nine months ended June 30, 2019, Valvoline made net repayments of $20 million under the Trade Receivables Facility, payments of $15 million to the 2016 Term Loan consistent with its payment schedule, and net borrowings of $39 million under the 2016 Revolver. The 2019 Term Loan proceeds of $575 million were used to pay the outstanding principal balance of the 2016 Term Loan of $255 million, the outstanding 2016 Revolver balance of $186 million, and $120 million on the Trade Receivables Facility, in addition to accrued and unpaid interest and fees, as well as expenses related to the amendment. Remaining proceeds from the amendment, including the 2019 Revolver capacity, are expected to fund general corporate purposes and working capital needs. Refer to Note 9 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for further details regarding the amendment.

As of June 30, 2019 and September 30, 2018, the Company had long-term debt (including the current portion and debt issuance costs and discounts) of $1.3 billion of loans and revolving facilities. Approximately 58% of Valvoline’s outstanding borrowings as of June 30, 2019 had fixed rates, with the remainder bearing variable interest rates. As of June 30, 2019, Valvoline was in compliance with all covenants of its debt obligations and had $641 million of remaining borrowing capacity under its revolving facilities.

Dividend payments

During the nine months ended June 30, 2019, the Company paid $60 million of cash dividends for $0.318 per common share. On July 18, 2019, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.106
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per share of Valvoline common stock, which is payable on September 16, 2019 to shareholders of record on August 30, 2019. Future declarations of quarterly dividends are subject to approval by the Board of Directors and may be adjusted as business needs or market conditions change.

Restructuring and related expenses

In the second fiscal quarter of 2019, the Company outlined a broad-based restructuring and cost-savings program that is expected to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. The Company’s restructuring and cost-savings actions continue to progress, and Valvoline expects such actions will be largely implemented by the end of 2019. Part of this program includes employee separation actions, which are also expected to be generally completed by the end of 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020.

As a result of this restructuring program, Valvoline recognized $4 million and $12 million of restructuring and related expenses during the three and nine months ended June 30, 2019, respectively. The Company expects that it will incur additional restructuring expenses of approximately $3 million to $5 million, primarily during the fourth fiscal quarter of 2019. Restructuring expenses include employee severance and termination benefits that will be paid to employees pursuant to the restructuring program. Restructuring-related expenses consist of those costs which are beyond those normally included in restructuring and incremental to the Company’s normal operating costs. These restructuring-related costs are expensed as incurred and are primarily related to third-party professional service fees incurred in connection with execution of the restructuring program.

Restructuring and related expenses are recorded in Selling, general and administrative expenses within the Company’s Condensed Consolidated Statements of Comprehensive Income as follows:

Three months endedNine months ended
(In millions)June 30, 2019June 30, 2019
Restructuring expenses$4 $10 
Restructuring-related expenses— 2 
Total restructuring and related expenses$4 $12 

Results by segment do not include these restructuring and related expenses, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses were included in Unallocated and other.

Valvoline’s restructuring actions remain on track and are expected to generate annualized pre-tax savings of approximately $40 million to $50 million with modest benefits expected to begin to be realized in late fiscal 2019 and full savings expected to be delivered by the end of fiscal 2020. The ongoing annual savings are anticipated to benefit operating expenses, including Cost of sales and Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income, with a portion expected to be reinvested in the business to provide flexibility to address the ongoing market dynamics in Core North America and to invest in growth opportunities.

Refer to Note 8 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for additional details regarding this restructuring program.

Off-balance sheet arrangements and contractual obligations

Other than the matters disclosed in this Quarterly Report on Form 10-Q and in the ordinary course of business since the end of fiscal 2018, there have been no material changes in the Company’s contractual obligations.




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Summary

As of June 30, 2019, cash, cash equivalents, and restricted cash totaled $137 million and total debt was $1.3 billion. 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 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 year ended September 30, 2018. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives. The Company’s total remaining borrowing capacity was $641 million as of June 30, 2019.

Management believes that the Company has sufficient liquidity based on its current cash position, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions, debt servicing obligations, tax-related and other contractual commitments, and operating requirements for the next twelve months.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion and analysis of recently issued accounting pronouncements and the impacts on Valvoline, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s critical accounting policies and estimates are discussed in detail in Item 7 of Part II in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018. As described in Note 1 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q, the Company adopted various new accounting pronouncements effective October 1, 2018, most notably, the new revenue recognition accounting guidance. Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q for further discussion related to the new revenue recognition accounting policies.

Management reassessed the critical accounting policies as disclosed in the Annual Report on Form 10-K and determined that, other than the new revenue recognition accounting policies, there were no other changes to critical accounting policies and estimates in the nine months ended June 30, 2019.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s market risks are discussed in detail in Item 7A of Part II in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Management reassessed the quantitative and qualitative market risk disclosures as described in the Annual Report on Form 10-K and determined there were no material changes to market risks in the nine months ended June 30, 2019.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Valvoline’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the assistance of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), and based upon such evaluation, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective. These controls are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to Valvoline’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control

There were no significant changes in Valvoline’s internal control over financial reporting that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, Valvoline’s internal control over financial reporting.

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PART II - OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS

From time to time, Valvoline is party to lawsuits, claims, and other legal proceedings that arise in the ordinary course of business. Many of these legal matters involve complex issues of law and fact and may proceed for protracted periods of time. The Company’s legal proceedings are reviewed on an ongoing basis to establish liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable and to provide disclosure of matters for which management believes a material loss is at least reasonably possible. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. As disclosed within the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, the Company believes it has established adequate accruals for losses that are probable and reasonably estimable.

Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not exceed the amounts reflected in the condensed consolidated financial statements, based on information available at this time and taking into account established accruals for estimated losses, it is the opinion of management that such pending claims or proceedings are not reasonably likely to have a material adverse effect on its financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

Other than the risk factor set forth below, there were no material changes from the risk factors previously disclosed in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

Valvoline may not achieve some or all of the expected benefits of its restructuring and cost-savings program and this program may adversely affect the Company’s business.

In the second fiscal quarter of 2019, Valvoline announced a broad-based restructuring and cost-savings program that is expected to reduce costs, simplify processes, and focus the organization’s structure and resources on key growth initiatives. Implementation of the program may be costly and disruptive to Valvoline’s business and the Company may not be able to realize the cost savings and benefits initially anticipated. Cost savings expectations are estimates that are inherently difficult to predict; therefore, there can be no assurance that the estimates described in this Quarterly Report on Form 10-Q will prove to be accurate or that the objectives of the program will be achieved. A variety of factors could cause the Company not to realize some or all of the expected cost savings, including, among others, delays in the anticipated timing of activities related to the program, unexpected costs associated with operating the business or executing the program, or the Company’s ability to achieve the efficiencies contemplated by the program. Further, any cost savings that the Company realizes may be offset, in whole or in part, by a reduction in net sales or through increases in other expenses. Additionally, as a result of these restructuring and cost-savings initiatives, Valvoline may experience a loss of continuity and accumulated knowledge and incur inefficiencies during transitional periods. Reorganization and restructuring can require a significant amount of management’s and other employees’ time and focus, which may divert attention from effectively operating and growing Valvoline’s business.

If Valvoline fails to achieve some or all of the expected benefits or savings of its restructuring and cost-savings program within the expected time periods, or if its transitions and plans are not effective, it could have an adverse effect on Valvoline’s business, financial condition, results of operations, or cash flows. For more information about the restructuring and cost-savings program, refer to Note 8 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q as well as to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 of Part I of this Quarterly Report on Form 10-Q.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company did not repurchase any shares of common stock during the three months ended June 30, 2019 pursuant to the Board of Directors authorization on January 31, 2018 to repurchase up to $300 million of common stock through September 30, 2020. As of June 30, 2019, $75 million remained available for share repurchases under this authorization.

Share repurchase activity during the three months ended June 30, 2019 was as follows:

Monthly period
Total number of shares purchased (1)
Average price paid per shareTotal number of shares purchased as part of publicly announced plans or programsDollar value of shares that may yet be purchased under the plans or programs
(in millions)
April 1, 2019 - April 30, 2019— $— — $75 
May 1, 2019 - May 31, 2019— $— — $75 
June 1, 2019 - June 30, 20196,001 $19.10 — $75 
Total6,001 $19.10 — 

(1) Total number of shares purchased includes shares withheld from vested restricted stock awards to satisfy withholding taxes.

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ITEM 6.  EXHIBITS

31.1*
  
31.2*
  
32**
  
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
104 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* Filed herewith.
** Furnished herewith.
™ Trademark, Valvoline or its subsidiaries, registered in various countries.

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SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

VALVOLINE INC.
(Registrant)
August 1, 2019By: /s/ Mary E. Meixelsperger
Mary E. Meixelsperger
Chief Financial Officer

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