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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________

FORM 10-Q


þ			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019


o			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.


Kentucky (State or other jurisdiction of incorporation or organization)			30-0939371 (I.R.S. Employer Identification No.)

100 Valvoline Way

Lexington, Kentucky 40509

Telephone Number (859) 357-7777

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 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 þ			Accelerated Filer o
Non-Accelerated Filer o			Smaller Reporting Company o
			Emerging Growth Company o

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. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, par value $0.01 per share

VVV

New York Stock Exchange

At April 30, 2019, there were 188,193,774 shares of the Registrant’s common stock outstanding.

VALVOLINE INC. AND CONSOLIDATED SUBSIDIARIES

TABLE OF CONTENTS


			Page
PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Comprehensive Income			3

Condensed Consolidated Balance Sheets			4

Condensed Consolidated Statements of Stockholders’ Deficit			5

Condensed Consolidated Statements of Cash Flows			7

Notes to Condensed Consolidated Financial Statements			8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			51

ITEM 4. CONTROLS AND PROCEDURES			51

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			52

ITEM 1A. RISK FACTORS			52

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			52

ITEM 6. EXHIBITS			54

SIGNATURE			55

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Statements of Comprehensive Income


	Three months ended March 31						Six months ended March 31
(In millions, except per share data - unaudited)	2019		2018		2019		2018
Sales	$	591	$	569	$	1,148	$	1,114
Cost of sales	388		362		762		712
Gross profit	203		207		386		402

Selling, general and administrative expenses	113		111		218		218
Legacy and separation-related expenses, net	3		8		3		17
Equity and other income, net	(9)		(12)		(18)		(21)
Operating income	96		100		183		188
Net pension and other postretirement plan income	(3)		(10)		(5)		(20)
Net interest and other financing expenses	19		16		36		30

Income before income taxes	80		94		152		178
Income tax expense	17		27		36		121
Net income	$	63	$	67	$	116	$	57

NET INCOME PER SHARE
Basic	$	0.33	$	0.33	$	0.61	$	0.28
Diluted	$	0.33	$	0.33	$	0.61	$	0.28

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	189		200		189		201
Diluted	189		200		189		202

COMPREHENSIVE INCOME
Net income	$	63	$	67	$	116	$	57
Other comprehensive (loss) income, net of tax
Currency translation adjustments	2		3		(2)		4
Amortization of pension and other postretirement plan prior service credit	(2)		(2)		(4)		(4)
Other comprehensive income (loss)	—		1		(6)		—
Comprehensive income	$	63	$	68	$	110	$	57

See Notes to Condensed Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets


(In millions, except per share amounts - unaudited)	March 31 2019		September 30 2018
Assets
Current assets
Cash and cash equivalents	$	114	$	96
Accounts receivable, net	368		409
Inventories, net	192		176
Prepaid expenses and other current assets	59		44
Total current assets	733		725
Noncurrent assets
Property, plant and equipment, net	441		420
Goodwill and intangibles, net	478		448
Equity method investments	34		31
Deferred income taxes	125		138
Other noncurrent assets	103		92
Total noncurrent assets	1,181		1,129
Total assets	$	1,914	$	1,854

Liabilities and Stockholders’ Deficit
Current liabilities

Current portion of long-term debt	$	30	$	30
Trade and other payables	154		178
Accrued expenses and other liabilities	206		203
Total current liabilities	390		411
Noncurrent liabilities
Long-term debt	1,318		1,292
Employee benefit obligations	325		333

Other noncurrent liabilities	179		176
Total noncurrent liabilities	1,822		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 March 31, 2019 and September 30, 2018	2		2
Paid-in capital	10		7
Retained deficit	(336)		(399)


Accumulated other comprehensive income	26		32
Total stockholders’ deficit	(298)		(358)
Total liabilities and stockholders’ deficit	$	1,914	$	1,854

See Notes to Condensed Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit


	Six months ended March 31, 2019
								Accumulated other comprehensive income
(In millions, except per share amounts)	Common stock					Paid-in capital				Retained deficit
(Unaudited)	Shares	Amount											Totals
Balance at September 30, 2018	188	$	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, 2018	188	$	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, 2019	188	$	2	$	10	$	(336)	$	26		$	(298)


	Six months ended March 31, 2018
								Accumulated other comprehensive income
(In millions, except per share amounts)	Common stock					Paid-in capital				Retained deficit
(Unaudited)	Shares	Amount											Totals
Balance at September 30, 2017	203	$	2	$	5	$	(167)	$	43		$	(117)
Net loss	—	—		—		(10)		—			(10)
Dividends paid, $0.0745 per common share	—	—		—		(15)		—			(15)
Stock-based compensation	—	—		2		—		—			2
Repurchase 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, 2017	201	$	2	$	—	$	(238)	$	42		$	(194)
Net income	—	—		—		67		—			67
Dividends paid, $0.0745 per common share	—	—		—		(15)		—			(15)
Stock-based compensation	—	—		3		(1)		—			2
Repurchase 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, 2018	197	$	2	$	3	$	(274)	$	43		$	(226)

See Notes to Condensed Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows


	Six months ended March 31
(In millions - unaudited)	2019		2018
Cash flows from operating activities
Net income	$	116	$	57
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization	28		25
Debt issuance cost and discount amortization	1		1
Deferred income taxes	—		65
Equity income from unconsolidated affiliates, net of distributions	(2)		(4)


Pension contributions	(2)		(9)

Stock-based compensation expense	5		7
Other operating activities, net	—		(3)
Change in assets and liabilities ^(a)
Accounts receivable	7		(50)
Inventories	(4)		(16)
Payables and accrued liabilities	(13)		2
Other assets and liabilities	(2)		33
Total cash provided by operating activities	134		108
Cash flows from investing activities
Additions to property, plant and equipment	(48)		(30)
Acquisitions, net of cash acquired	(35)		(67)


Other investing activities, net	(2)		6
Total cash used in investing activities	(85)		(91)
Cash flows from financing activities

Proceeds from borrowings, net of issuance costs	162		95
Repayments on borrowings	(137)		(15)
Repurchases of common stock	—		(123)
Payments for purchase of additional ownership in subsidiary	(1)		(15)
Cash dividends paid	(40)		(30)
Other financing activities	(4)		(5)
Total cash used in financing activities	(20)		(93)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash	—		2
Increase (decrease) in cash, cash equivalents, and restricted cash	29		(74)
Cash, cash equivalents, and restricted cash - beginning of period	96		201
Cash, cash equivalents, and restricted cash - end of period	$	125	$	127

(a) Excludes changes resulting from operations acquired.

See Notes to Condensed Consolidated Financial Statements.


Index to Notes to Condensed Consolidated Financial Statements			Page

Note 1 - Basis of Presentation and Significant Accounting Policies			9
Note 2 - Revenue Recognition			11
Note 3 - Fair Value Measurements			17
Note 4 - Acquisitions and Divestitures			18
Note 5 - Accounts Receivable			19
Note 6 - Inventories			19
Note 7 - Goodwill and Other Intangibles			19
Note 8 - Restructurin g Activities			20
Note 9 - Debt			21
Note 10 - Income Taxes			22
Note 1 1 - Employee Benefit Plans			22
Note 1 2 - Litigation, Claims and Contingencies			22
Note 1 3 - Earnings Per Share			23
Note 1 4 - Reportable Segment Information			23
Note 1 5 - Guarantor Financial Information			25
Note 1 6 - Subsequent Events			33

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 (“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 the interim periods are not necessarily indicative of results 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 six months ended March 31, 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.

•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 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 March 31, 2019, Valvoline had $11 million of deposits held with a financial institution restricted for use in completing an acquisition, which was classified 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 six months ended March 31, 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 to be a business there must also be at least one substantive process, and it narrows the definition of outputs by more closely aligning it 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 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. 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.

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 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. However, the Company does not currently expect to elect the hindsight or short-term lease practical expedients.

The Company has begun its assessment and implementation, including finalizing 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 Sheets as Valvoline has a significant number of operating leases, which will be recognized as right-of-use assets with associated lease liabilities upon adoption.

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 six months ended March 31, 2019:


	March 31, 2019
Impact of Changes to Condensed Consolidated Balance Sheet	As reported		Adjustments ^(a)		Under prior guidance
(In millions)
Accounts receivable, net	$	368	$	34	$	402
Inventories, net	$	192	$	(14)	$	178
Deferred income taxes	$	125	$	(6)	$	119

Retained deficit	$	336	$	(14)	$	322

^(a) Adjustments include the opening retained deficit adjustments as detailed in the table above.


	Three months ended March 31, 2019
Impact of Changes to Condensed Consolidated Statement of Comprehensive Income	As reported		Adjustments		Under prior guidance
(In millions)
Sales	$	591	$	(9)	$	582
Cost of sales	388		(13)		375
Gross profit	$	203	$	4	$	207
Selling, general and administrative expenses	$	113	$	1	$	114
Operating income	$	96	$	3	$	99
Income before income taxes	$	80	$	3	$	83
Income tax expense	$	17	$	1	$	18
Net income	$	63	$	2	$	65

Basic earnings per share	$	0.33	$	0.01	$	0.34
Diluted earnings per share	$	0.33	$	0.01	$	0.34


	Six months ended March 31, 2019
Impact of Changes to Condensed Consolidated Statement of Comprehensive Income	As reported		Adjustments		Under prior guidance
(In millions)
Sales	$	1,148	$	(24)	$	1,124
Cost of sales	762		(28)		734
Gross profit	$	386	$	4	$	390
Selling, general and administrative expenses	$	218	$	3	$	221

Operating income	$	183	$	1	$	184
Income before income taxes	$	152	$	1	$	153
Income tax expense	$	36	$	—	$	36
Net income	$	116	$	1	$	117

Basic earnings per share	$	0.61	$	0.01	$	0.62
Diluted earnings per share	$	0.61	$	0.01	$	0.62

Disaggregation of revenue

The following summarizes sales by primary customer channel for the Company’s reportable segments:


(In millions)	Three months ended March 31, 2019		Six months ended March 31, 2019
Quick Lubes
Company-owned operations	$	128	$	252
Non-company owned operations	72		137
Total Quick Lubes	200		389

Core North America
Retail	140		256
Installer and other	103		219
Total Core North America	243		475

International	148		284

Consolidated sales	$	591	$	1,148

Sales by reportable segment disaggregated by geographic market follows for the three and six months ended March 31, 2019:


(In millions)	Quick Lubes		Core North America		International		Totals
Three months ended
North America ^(a)	$	200	$	243	$	—	$	443
Europe, Middle East and Africa (EMEA)	—		—		47		47
Asia Pacific	—		—		73		73
Latin America ^(a)	—		—		28		28
Total	$	200	$	243	$	148	$	591

Six months ended
North America ^(a)	$	389	$	475	$	—	$	864
Europe, Middle East and Africa (EMEA)	—		—		91		91
Asia Pacific	—		—		140		140
Latin America ^(a)	—		—		53		53
Total	$	389	$	475	$	284	$	1,148

^(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 March 31, 2019		Six months ended March 31, 2019
Sales at a point in time	$	581	$	1,128
Franchised revenues transferred over time	10		20
Consolidated sales	$	591	$	1,148

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 the supply 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 of a year or more.

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 franchisees generally receive and consume the benefits provided by the Company’s performance over the course of the franchise agreement, which typically ranges 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 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 represent 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 March 31, 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.

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.

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 Hierarchy	March 31 2019		September 30 2018
Cash and cash equivalents
Money market funds	Level 1	$	3	$	5
Time deposits	Level 2	29		22
Prepaid expenses and other current assets
Currency derivatives ^(a)	Level 2	1		1
Other noncurrent assets
Non-qualified trust funds	Level 1	24		25
Total assets at fair value		$	57	$	53

Accrued expenses and other liabilities
Currency derivatives ^(a)	Level 2	$	1	$	1
Total liabilities at fair value		$	1	$	1

(a) The Company had outstanding contracts with notional values of $79 million and $74 million as of March 31, 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 six months ended March 31, 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.


	March 31, 2019										September 30, 2018
(In millions)	Fair value		Carrying value		Unamortized discount and issuance costs		Fair value		Carrying value		Unamortized discount and issuance costs
2024 Notes	$	384	$	371	$	4	$	376	$	370	$	5
2025 Notes	386		395		5		376		395		5
Total	$	770	$	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.

NOTE 4 - ACQUISITIONS AND DIVESTITURES

During the six months ended March 31, 2019, the Company acquired 40 service center stores for a total of $35 million. These acquisitions included 31 franchise service center stores acquired from Oil Changers Inc. on October 31, 2018, four former franchise service centers stores, and five service center stores acquired in single and multi-store transactions. During the six months ended March 31, 2018, the Company acquired 61 service center stores, of which 59 were former franchise service center stores, for $67 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 six months ended March 31:


(In millions)	2019		2018
Inventories	$	—	$	1
Property, plant and equipment	2		2
Goodwill	24		40
Intangible assets^(a)
Reacquired franchise rights	4		24
Customer relationships	3		—
Trademarks and trade names	1		—
Other	1		—
Net assets acquired	$	35	$	67

(a) Intangible assets acquired during the six months ended March 31, 2019 have a weighted average amortization period of 11 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)	March 31 2019		September 30 2018
Trade	$	362	$	390
Other	14		26
Accounts receivable, gross	376		416
Allowance for doubtful accounts	(8)		(7)
Total accounts receivable, net	$	368	$	409

During the six months ended March 31, 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 method.

The following summarizes Valvoline’s inventories as of:


(In millions)	March 31 2019		September 30 2018
Finished products	$	205	$	189
Raw materials, supplies and work in process	29		30
Reserve for LIFO cost valuation	(39)		(40)
Excess and obsolete inventory reserves	(3)		(3)
Total inventories, net	$	192	$	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 six months ended March 31, 2019:


(In millions)	Quick Lubes		Core North America		International		Total
Balance at September 30, 2018	$	252	$	89	$	40	$	381
Acquisitions ^(a)	24		—		—		24
Currency translation	(1)		—		—		(1)

Balance at March 31, 2019	$	275	$	89	$	40	$	404

(a) Refer to Note 4 for details regarding the acquisitions during the six months ended March 31, 2019.

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:


	March 31, 2019										September 30, 2018
(In millions)	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Definite-lived intangible assets
Trademarks and trade names	$	30	$	(3)	$	27	$	29	$	(2)	$	27
Reacquired franchise rights	36		(6)		30		32		(4)		28
Customer relationships	19		(3)		16		14		(3)		11
Other intangible assets	2		(1)		1		1		—		1
Total definite-lived intangible assets	$	87	$	(13)	$	74	$	76	$	(9)	$	67

NOTE 8 - RESTRUCTURING ACTIVITIES

In the second quarter of fiscal 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 completed by the end of fiscal 2019, with the associated termination benefits anticipated to be paid by the end of fiscal 2020.

As a result of these activities, Valvoline recognized $6 million of expense 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 during the three and six months ended March 31, 2019. The Company expects that it will incur additional employee termination expenses of approximately $5 million to $9 million during the remainder of fiscal 2019.

The results by segment, as disclosed in Note 14, do not include these and restructuring-related 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 six months ended March 31, 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 period	6
Payments	—

Balance at March 31, 2019	$	6

NOTE 9 - DEBT

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


(In millions)	March 31 2019		September 30 2018
2025 Notes	$	400	$	400
2024 Notes	375		375
Term Loans	255		270
Revolver	186		147
Trade Receivables Facility	141		140
Other ^(a)	(9)		(10)
Total debt	$	1,348	$	1,322

Current portion of long-term debt	30		30
Long-term debt	$	1,318	$	1,292

(a) At March 31, 2019, Other included $10 million of debt issuance costs and discounts and $1 million of debt primarily acquired through acquisitions. At September 30, 2018, Other included $11 million of debt issuance costs and discounts and $1 million of debt 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

As of March 31, 2019 and September 30, 2018, the $875 million term loan facility (“Term Loans”) under the senior credit agreement (“Senior Credit Agreement”) had outstanding principal balances of $255 million and $270 million, respectively. Consistent with the payment schedule, during the six months ended March 31, 2019, the Company made principal payments of $15 million on the Term Loans.

As of March 31, 2019 and September 30, 2018, there was $186 million and $147 million, respectively, outstanding under the $450 million revolving credit facility (“Revolver”) under the Senior Credit Agreement. During the six months ended March 31, 2019, Valvoline borrowed $87 million and made payments of $48 million on the Revolver. As of March 31, 2019, the total borrowing capacity remaining under the Revolver was $255 million due to a reduction of $9 million for letters of credit outstanding.

Trade Receivables Facility

As of March 31, 2019 and September 30, 2018, there was $141 million and $140 million, respectively, outstanding under the $175 million trade receivables securitization facility (“Trade Receivables Facility”). During the six months ended March 31, 2019, Valvoline made payments of $74 million and borrowed $75 million under the Trade Receivables Facility.

Based on the availability of eligible receivables, the total borrowing capacity remaining under the Trade Receivables Facility at March 31, 2019 was approximately $21 million. The financing subsidiary owned $253 million and $275 million of outstanding accounts receivable as of March 31, 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. Income tax expense for the three months ended March 31, 2019 was $17 million, an effective tax rate of 21.3%, compared to expense of $27 million, an effective tax rate of 28.7%, for the three months ended March 31, 2018. Income tax expense for the six months ended March 31, 2019 was $36 million, an effective tax rate of 23.7%, compared to expense of $121 million, an effective tax rate of 68.0%, for the six months ended March 31, 2018.

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, in addition to a $5 million benefit in the three and six months ended March 31, 2019 related to the expected utilization of tax attributes as a result of the clarification of certain provisions of Kentucky tax reform legislation. Furthermore, the three and six months ended March 31, 2018 included approximately $2 million and $70 million, respectively, related to enactment of the provisions of U.S. tax reform, primarily related to the remeasurement of net deferred tax assets at the lower enacted corporate statutory income tax rate.

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 income:


					Other postretirement benefits
	Pension benefits
(In millions)	2019		2018		2019		2018
Three months ended March 31
Service cost	$	1	$	1	$	—	$	—
Interest cost	20		18		—		1
Expected return on plan assets	(20)		(26)		—		—
Amortization of prior service credit	—		—		(3)		(3)

Net periodic benefit cost (income)	$	1	$	(7)	$	(3)	$	(2)

Six months ended March 31
Service cost	$	1	$	1	$	—	$	—
Interest cost	40		37		1		1
Expected return on plan assets	(40)		(52)		—		—
Amortization of prior service credit	—		—		(6)		(6)

Net periodic benefit cost (income)	$	1	$	(14)	$	(5)	$	(5)

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 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 ended						Six months ended
	March 31						March 31
(In millions, except per share data)	2019		2018		2019		2018
Numerator
Net income	$	63	$	67	$	116	$	57
Denominator

Weighted average common shares outstanding	189		200		189		201
Effect of potentially dilutive securities ^(a)	—		—		—		1
Weighted average diluted shares outstanding	189		200		189		202

Earnings per share
Basic	$	0.33	$	0.33	$	0.61	$	0.28
Diluted	$	0.33	$	0.33	$	0.61	$	0.28

(a) Approximately 2 million of 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 six months ended March 31, 2019.

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, 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.

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 ended									Six months ended
(In millions)	March 31									March 31
			2019			2018			2019			2018
Sales
Quick Lubes	$	200		$	158		$	389		$	312
Core North America	243			258			475			509
International	148			153			284			293
Consolidated sales	$	591		$	569		$	1,148		$	1,114

Operating income
Quick Lubes	$	44		$	38		$	82		$	73
Core North America	40			46			71			89
International	23			24			41			43
Total operating segments	107			108			194			205
Unallocated and other ^(a)	(11)			(8)			(11)			(17)
Consolidated operating income	$	96		$	100		$	183		$	188

(a) Unallocated and other includes Legacy and separation-related expenses, net, and restructuring and related expenses.

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 March 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Sales	$	—	$	465	$	143	$	(17)	$	591
Cost of sales	—		300		105		(17)		388
Gross profit	—		165		38		—		203

Selling, general and administrative expenses	2		90		21		—		113
Legacy and separation-related expenses, net	3		—		—		—		3
Equity and other (income) expenses, net	—		(14)		5		—		(9)
Operating (loss) income	(5)		89		12		—		96
Net pension and other postretirement plan income	—		(3)		—		—		(3)
Net interest and other financing expenses	15		2		2		—		19

(Loss) income before income taxes	(20)		90		10		—		80
Income tax (benefit) expense	(6)		21		2		—		17
Equity in net income of subsidiaries	(77)		(8)		—		85		—
Net income	$	63	$	77	$	8	$	(85)	$	63

Total comprehensive income	$	63	$	77	$	9	$	(86)	$	63


Condensed Consolidating Statements of Comprehensive Income
For the three months ended March 31, 2018

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Sales	$	—	$	441	$	142	$	(14)	$	569
Cost of sales	—		275		101		(14)		362
Gross profit	—		166		41		—		207

Selling, general and administrative expenses	3		85		23		—		111
Legacy and separation-related expenses, net	1		7		—		—		8
Equity and other (income) expenses, net	—		(14)		2		—		(12)
Operating (loss) income	(4)		88		16		—		100
Net pension and other postretirement plan income	—		(10)		—		—		(10)
Net interest and other financing expenses	13		2		1		—		16
(Loss) income before income taxes	(17)		96		15		—		94
Income tax (benefit) expense	(4)		28		3		—		27
Equity in net income of subsidiaries	(80)		(12)		—		92		—
Net income	$	67	$	80	$	12	$	(92)	$	67

Total comprehensive income	$	68	$	80	$	15	$	(95)	$	68


Condensed Consolidating Statements of Comprehensive Income
For the six months ended March 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Sales	$	—	$	905	$	275	$	(32)	$	1,148
Cost of sales	—		593		201		(32)		762
Gross profit	—		312		74		—		386

Selling, general and administrative expenses	5		171		42		—		218
Legacy and separation-related expenses, net	3		—		—		—		3
Equity and other (income) expenses, net	—		(27)		9		—		(18)
Operating (loss) income	(8)		168		23		—		183
Net pension and other postretirement plan income	—		(5)		—		—		(5)
Net interest and other financing expenses	30		3		3		—		36
(Loss) income before income taxes	(38)		170		20		—		152
Income tax (benefit) expense	(11)		41		6		—		36
Equity in net income of subsidiaries	(143)		(14)		—		157		—
Net income	$	116	$	143	$	14	$	(157)	$	116

Total comprehensive income	$	110	$	137	$	11	$	(148)	$	110


Condensed Consolidating Statements of Comprehensive Income
For the six months ended March 31, 2018

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Sales	$	—	$	863	$	276	$	(25)	$	1,114
Cost of sales	—		538		199		(25)		712
Gross profit	—		325		77		—		402

Selling, general and administrative expenses	7		166		45		—		218
Legacy and separation-related expenses, net	7		10		—		—		17
Equity and other (income) expenses, net	—		(26)		5		—		(21)
Operating (loss) income	(14)		175		27		—		188
Net pension and other postretirement plan income	—		(20)		—		—		(20)
Net interest and other financing expenses	25		3		2		—		30
(Loss) income before income taxes	(39)		192		25		—		178
Income tax expense	17		98		6		—		121
Equity in net income of subsidiaries	(113)		(19)		—		132		—
Net income	$	57	$	113	$	19	$	(132)	$	57

Total comprehensive income	$	57	$	113	$	22	$	(135)	$	57


Condensed Consolidating Balance Sheets
As of March 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Assets
Current assets
Cash and cash equivalents	$	—	$	30	$	84	$	—	$	114
Accounts receivable, net	—		25		444		(101)		368
Inventories, net	—		108		84		—		192
Prepaid expenses and other current assets	—		39		20		—		59
Total current assets	—		202		632		(101)		733
Noncurrent assets
Property, plant and equipment, net	—		397		44		—		441
Goodwill and intangibles, net	—		406		72		—		478
Equity method investments	—		34		—		—		34
Investment in subsidiaries	877		523		—		(1,400)		—
Deferred income taxes	74		37		14		—		125
Other noncurrent assets	1		94		8		—		103
Total noncurrent assets	952		1,491		138		(1,400)		1,181
Total assets	$	952	$	1,693	$	770	$	(1,501)	$	1,914

Liabilities and Stockholders’ Deficit
Current liabilities

Current portion of long-term debt	$	30	$	—	$	—	$	—	$	30
Trade and other payables	—		198		57		(101)		154
Accrued expenses and other liabilities	8		168		30		—		206
Total current liabilities	38		366		87		(101)		390
Noncurrent liabilities
Long-term debt	1,176		1		141		—		1,318
Employee benefit obligations	—		308		17		—		325

Other noncurrent liabilities	36		141		2		—		179
Total noncurrent liabilities	1,212		450		160		—		1,822
Commitments and contingencies
Stockholders’ (deficit) equity	(298)		877		523		(1,400)		(298)
Total liabilities and stockholders’ deficit/equity	$	952	$	1,693	$	770	$	(1,501)	$	1,914


Condensed Consolidating Balance Sheets
As of September 30, 2018

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
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 assets	1		38		5		—		44
Total current assets	1		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 subsidiaries	801		509		—		(1,310)		—
Deferred income taxes	62		63		13		—		138
Other noncurrent assets	2		85		5		—		92
Total noncurrent assets	865		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 payables	3		241		53		(119)		178
Accrued expenses and other liabilities	7		168		28		—		203
Total current liabilities	40		409		81		(119)		411
Noncurrent liabilities
Long-term debt	1,151		1		140		—		1,292
Employee benefit obligations	—		317		16		—		333

Other noncurrent liabilities	33		141		2		—		176
Total noncurrent liabilities	1,184		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


Condensed Consolidating Statements of Cash Flows
For the six months ended March 31, 2019

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Cash flows provided by operating activities	$	18	$	65	$	51	$	—	$	134
Cash flows from investing activities
Additions to property, plant and equipment	—		(40)		(8)		—		(48)

Acquisitions, net of cash required	—		(13)		(22)		—		(35)

Other investing activities, net	—		—		(2)		—		(2)

Cash flows used in investing activities	—		(53)		(32)		—		(85)
Cash flows from financing activities

Proceeds from borrowings, net of issuance costs	87		—		75		—		162
Repayments on borrowings	(63)		—		(74)		—		(137)

Payments for purchase of additional ownership in subsidiary	—		—		(1)		—		(1)
Cash dividends paid	(40)		—		—		—		(40)
Other financing activities	(2)		(2)		—		—		(4)

Cash flows used in financing activities	(18)		(2)		—		—		(20)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash	—		—		—		—		—
Increase in cash, cash equivalents, and restricted cash	—		10		19		—		29
Cash, cash equivalents, and restricted cash- beginning of year	—		20		76		—		96
Cash, cash equivalents, and restricted cash - end of period	$	—	$	30	$	95	$	—	$	125


Condensed Consolidating Statements of Cash Flows
For the six months ended March 31, 2018

(In millions)	Valvoline Inc. (Parent Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Consolidated
Cash flows (used in) provided by operating activities	$	(24)	$	199	$	(67)	$	—	$	108
Cash flows from investing activities
Additions to property, plant and equipment	—		(28)		(2)		—		(30)

Acquisitions, net of cash required	—		(67)		—		—		(67)
Other investing activities, net	—		6		—		—		6
Return of advance from subsidiary	187		—		—		(187)		—
Cash flows provided by (used in) investing activities	187		(89)		(2)		(187)		(91)
Cash flows from financing activities



Proceeds from borrowings, net of issuance costs	6		—		89		—		95
Repayments on borrowings	(14)		—		(1)		—		(15)
Repurchases of common stock	(123)		—		—		—		(123)
Payments for purchase of additional ownership in subsidiary	—		—		(15)		—		(15)
Cash dividends paid	(30)		—		—		—		(30)
Other financing activities	(2)		(1)		(2)		—		(5)
Other intercompany activity, net	—		(187)		—		187		—
Total cash (used in) provided by financing activities	(163)		(188)		71		187		(93)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash	—		—		2		—		2
(Decrease) increase in cash, cash equivalents and restricted cash	—		(78)		4		—		(74)
Cash, cash equivalents, and restricted cash- beginning of year	—		99		102		—		201
Cash, cash equivalents, and restricted cash - end of period	$	—	$	21	$	106	$	—	$	127

NOTE 16 – SUBSEQUENT EVENTS

Credit agreement amendment

On April 12, 2019, Valvoline amended and extended the Senior Credit Agreement, which 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 and (ii) a five-year $475 million revolving credit facility (including a $100 million letter of credit sublimit). The proceeds from the amended term loan facility were used to pay the outstanding principal balance of the Term Loans of $255 million, outstanding 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, including the undrawn amended revolving credit facility, are expected to fund general corporate purposes and working capital needs.

Quick Lubes acquisition

On April 12, 2019, the Company completed the acquisition of 12 service center stores in the Las Vegas, Nevada market. This acquisition provides an opportunity to further expand Valvoline’s Quick Lubes footprint in the western United States and increases the Quick Lubes system to 495 company-owned locations.

Dividend declared

On April 25, 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 June 17, 2019 to shareholders of record on May 31, 2019.

FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical facts, 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.


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

Business Overview			34
Results of Operations - Consolidated Review			37
Results of Operations - Reportable Segment Review			41
Financial Position, Liquidity and Capital Resources			46
New Accounting Pronouncements			50
Critical Accounting Policies and Estimates			50

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 1,300 Valvoline branded franchised and company-owned 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.

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, the Company is focused on:

•Accelerating Quick Lube unit growth through organic service center expansion and opportunistic acquisitions, while enhancing service center store-level performance;

•Improving execution and continuing to focus investment in key emerging markets where demand is growing;

•Strengthening and expanding Valvoline's existing business by improving distribution channels and increasing penetration of Valvoline's full product portfolio;

•Broadening electric vehicle ("EV") capabilities by developing relationships with original equipment manufacturers and leveraging innovation in the development of future EV products and light services in direct and adjacent markets; and

•Investing in talent and technology to develop Valvoline's global hands-on expert capabilities and culture to drive speed and efficiency in both customer-facing and back-office critical processes.

SECOND FISCAL QUARTER 2019 OVERVIEW

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

•Increases in both sales and earnings in Quick Lubes were driven by organic system-wide same-store sales growth of 10.8% compared to the prior year period and the addition of 186 net new stores from the prior year through new store openings and acquisitions. During the quarter, the Company also invested in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.

•Sales and earnings in Core North America improved sequentially from the first quarter of fiscal 2019 as a result of actions implemented during the second quarter of fiscal 2019 in response to difficult market and competitive dynamics in the retail customer channel, in addition to favorable raw materials costs. Though improved, challenges in the retail customer channel remain and unfavorably impacted year-over-year volumes. In addition, volumes were lower in the installer customer channel due to the timing of distributor sales and changes with certain key accounts, which negatively impacted year-over-year earnings.

•International sales and earnings were lower compared to the prior year period primarily due to unfavorable currency movements, in addition to softness in Latin America and certain Asia Pacific markets that offset gains in the Europe, Middle East and Africa region.

•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 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 associated with 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 dispositions, 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.

•Net pension and other postretirement plan income - Net pension and other postretirement plan 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 March 31											Six months ended March 31
	2019					2018				2019			2018
(In millions)			% of Sales			% of Sales			% of Sales			% of Sales
Sales	$	591	100.0%	$	569	100.0%	$	1,148	100.0%	$	1,114	100.0%
Gross profit	$	203	34.3%	$	207	36.4%	$	386	33.6%	$	402	36.1%
Net operating expenses	$	107	18.1%	$	107	18.8%	$	203	17.7%	$	214	19.2%
Operating income	$	96	16.2%	$	100	17.6%	$	183	15.9%	$	188	16.9%
Net income	$	63	10.7%	$	67	11.8%	$	116	10.1%	$	57	5.1%

Sales

Sales for the three months ended March 31, 2019 increased $22 million, or 4%, compared to the three months ended March 31, 2018. Sales for the six months ended March 31, 2019 increased $34 million, or 3%, compared to the six months ended March 31, 2018. The following table provides a reconciliation of the changes:


	Year over year change		Year over year change
(In millions)	Three months ended March 31, 2019		Six months ended March 31, 2019
Pricing	$	14	$	31
Revenue recognition adjustments	9		24
Volume	—		(15)
Product mix	7		6
Currency exchange	(11)		(17)
Acquisitions	3		5
Change in sales	$	22	$	34

Key drivers of the increase in sales for the three and six months ended March 31, 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. For the six months ended March 31, 2019, lubricant gallons sold decreased 3% to 86.4 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 “Reportable Segment Review” below.

Gross profit

Gross profit decreased $4 million and $16 million for the three and six months ended March 31, 2019, respectively, compared to the prior year periods. The table below provides a reconciliation of the changes:


	Year over year change		Year over year change
(In millions)	Three months ended March 31, 2019		Six months ended March 31, 2019
Volume and mix	$	6	$	(8)
Revenue recognition adjustments	(4)		(4)
Acquisitions	2		4
Currency exchange	(2)		(4)
Price and cost	(6)		(4)

Change in gross profit	$	(4)	$	(16)

For the three and six months ended March 31, 2019, the decreases in gross profit were primarily driven by the differential between cost and price, which included incremental costs of approximately $1 million related to the temporary shutdown of the Company's second largest domestic blending facility due to a fire and resulting chemical releases at a nearby third-party petrochemical terminal. In addition, gross profit was negatively impacted due to the adoption of new revenue recognition guidance and unfavorable currency exchange due to the strong U.S dollar. These decreases were partially offset by acquisitions of Quick Lubes service center stores as well as favorable product mix. During the three months ended March 31, 2019, volume improvements in Quick Lubes

more than offset declines in Core North America, while in the six months ended March 31, 2019, volume declines in Core North America and International more than offset growth in Quick Lubes.

The Valvoline blending facility in Texas that was temporarily shut down during the second fiscal quarter of 2019 due to the nearby fire sustained no damage and was reopened and restarted operations in late April 2019. As a result of the shutdown, the Company's supply chain was impacted and production was effectively shifted, which resulted in incremental expenses to fulfill customer orders through other locations and means. Management is in the process of estimating the incremental costs, inclusive of those incurred during the third fiscal quarter of 2019, and plans to pursue insurance recoveries related to the business interruption. The Company estimates that these additional expenses will not be material.

Gross profit margin was 34.3% and 33.6% for the three and six months ended March 31, 2019, respectively, compared to 36.4% and 36.1% for the three and six months ended March 31, 2018, respectively. The decreases in gross profit margin year-over-year were largely due to certain reclassifications related to the adoption of new revenue recognition guidance and the dilutive effect of the pass through of raw material costs.

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

Net operating expenses

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


	Three months ended March 31														Six months ended March 31
	2019						2018						2019				2018
(In millions)			% of Sales				% of Sales				% of Sales				% of Sales
Selling, general and administrative expenses	$	113	19.1	%	$	111	19.5	%	$	218	19.0	%	$	218	19.6	%
Legacy and separation-related expenses, net	3		0.5	%	8		1.4	%	3		0.3	%	17		1.5	%
Equity and other income, net	(9)		(1.5)	%	(12)		(2.1)	%	(18)		(1.6)	%	(21)		(1.9)	%
Net operating expenses	$	107	18.1	%	$	107	18.8	%	$	203	17.7	%	$	214	19.2	%

Selling, general and administrative expenses increased $2 million and were flat in the three and six months ended March 31, 2019, respectively, compared to the prior year periods. Selling, general and administrative expenses increased $8 million in the three and six months ended March 31, 2019 due to restructuring and related expenses, largely offset by declines in operating costs, including advertising, promotion, and compensation-related costs, as well as the favorable impact of currency exchange and certain reclassifications related to the adoption of new revenue recognition guidance in fiscal 2019. These declines in the six months ended March 31, 2019 offset the increases due to restructuring and related expenses as well as higher depreciation and amortization, resulting in flat selling, general and administrative expenses year-on-year.

Legacy and separation-related expenses, net decreased $5 million and $14 million for the three and six months ended March 31, 2019, respectively, compared to the prior year periods. The decreases are primarily related to lower expenses in the current year associated with legacy and separation-related matters, including a legacy multiemployer pension plan partial withdrawal assessment received in the prior year and indemnities due under

the Tax Matters Agreement, which increased in the prior year as a result of U.S. tax reform legislation and the higher expected utilization of legacy tax attributes.

Equity and other income decreased $3 million in each of the three and six months ended March 31, 2019 compared to the prior year periods. These decreases are primarily related to the prior year sale of two Quick Lubes stores that resulted in a gain of $3 million.

Net pension and other postretirement plan income

Net pension and other postretirement plan income for the three and six months ended March 31, 2019 decreased $7 million and $15 million, respectively, from the prior year periods. These decreases are 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 $3 million and $6 million during the three and six months ended March 31, 2019, respectively, compared to the prior year periods. These increases are generally attributed to higher net borrowings under the trade receivables securitization and revolving credit facilities since the prior year periods, which resulted in increased outstanding debt at March 31, 2019 compared to the prior year.

Income tax expense

Income tax expense for the three months ended March 31, 2019 was $17 million, an effective tax rate of 21.3%, compared to expense of $27 million, an effective tax rate of 28.7%, for the three months ended March 31, 2018. Income tax expense for the six months ended March 31, 2019 was $36 million, an effective tax rate of 23.7%, compared to expense of $121 million, an effective tax rate of 68.0%, for the six months ended March 31, 2018.

EBITDA and Adjusted EBITDA

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


	Three months ended						Six months ended
	March 31						March 31
(In millions)	2019		2018		2019		2018
Net income	$	63	$	67	$	116	$	57
Income tax expense	17		27		36		121
Net interest and other financing expenses	19		16		36		30
Depreciation and amortization	14		14		28		25
EBITDA	113		124		216		233
Net pension and other postretirement plan income ⁽^a)	(3)		(10)		(5)		(20)
Legacy and separation-related expenses, net	3		8		3		17

Restructuring and related expenses	8		—		8		—
Business interruption expenses	1		—		1		—
Adjusted EBITDA	$	122	$	122	$	223	$	230

(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.

Adjusted EBITDA was flat in the three months ended March 31, 2019 and decreased $7 million in the six months ended March 31, 2019 compared to the prior year periods. Adjusted EBITDA was driven by the performance of the Quick Lubes reportable segment and its system-wide same-store sales growth from increased transactions and ticket, which was offset by declines in the Core North America and International reportable segments. For the six months ended March 31, 2019, the strong performance of the Quick Lubes reportable segment was more than offset by declines in the International and Core North America reportable segments, which was primarily driven by challenges within the Core North America retail customer channel.

Reportable segment review

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

•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.

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 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.

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


	Three months ended March 31									Six months ended March 31
(In millions)	2019			2018			2019			2018
Sales
Quick Lubes	$	200		$	158		$	389		$	312
Core North America	243			258			475			509
International	148			153			284			293
Consolidated sales	$	591		$	569		$	1,148		$	1,114

Operating income
Quick Lubes	$	44		$	38		$	82		$	73
Core North America	40			46			71			89
International	23			24			41			43
Total operating segments	107			108			194			205
Unallocated and other	(11)			(8)			(11)			(17)
Consolidated operating income	$	96		$	100		$	183		$	188

Depreciation and amortization
Quick Lubes	$	9		$	8		$	17		$	14
Core North America	4			4			8			8
International	1			2			3			3
Consolidated depreciation and amortization	$	14		$	14		$	28		$	25

Operating information
Quick Lubes
Lubricant sales gallons	7.0			5.9			13.5			11.6
Premium lubricants (percent of U.S. branded volumes)	64.6		%	62.2		%	64.2		%	61.8		%
Gross profit as a percent of sales ^(a)	39.6		%	40.1		%	39.0		%	40.3		%
Core North America
Lubricant sales gallons	22.4			24.6			44.1			48.4
Premium lubricants (percent of U.S. branded volumes)	53.5		%	49.7		%	51.7		%	48.8		%
Gross profit as a percent of sales ^(a)	34.2		%	37.6		%	33.0		%	37.7		%
International
Lubricant sales gallons ^(b)	15.0			15.0			28.8			29.3
Lubricant sales gallons, including unconsolidated joint ventures	24.9			24.6			49.1			49.7
Premium lubricants (percent of lubricant volumes)	28.1		%	26.3		%	28.3		%	27.0		%
Gross profit as a percent of sales ^(a)	27.8		%	29.6		%	27.5		%	28.9		%

(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.

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
		Second Quarter 2019		First Quarter 2019		Fourth Quarter 2018		Third Quarter 2018		Second Quarter 2018
Beginning of period			471		462		451		445		442
	Opened	7		5		11		4		—
	Acquired	5		—		—		1		2
	Net conversions between company-owned and franchised	—		4		—		1		1
	Closed	—		—		—		—		—
End of period			483		471		462		451		445

			Franchised
		Second Quarter 2019		First Quarter 2019		Fourth Quarter 2018		Third Quarter 2018		Second Quarter 2018
Beginning of period			830		780		703		696		697
	Opened	15		24		5		10		2
	Acquired	—		31		73		—		—
	Net conversions between company-owned and franchised	—		(4)		—		(1)		(1)
	Closed	(1)		(1)		(1)		(2)		(2)
End of period			844		830		780		703		696

Total stores			1,327		1,301		1,242		1,154		1,141

The year over year change resulted in 186 net new company-owned and franchised stores as a result of 76 net openings and 110 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 ended						Six months ended
	March 31						March 31
	2019		2018		2019		2018
Same-store sales growth** - Company-owned	10.2	%	11.2	%	10.0	%	9.6	%
Same-store sales growth** - Franchised*	11.2	%	8.5	%	10.5	%	8.3	%
Same-store sales growth** - Combined*	10.8	%	9.6	%	10.3	%	8.8	%

* 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 $42 million, or 27%, to $200 million during the current quarter compared to the prior year quarter. Sales increased $77 million, or 25%, to $389 million during the six months ended March 31, 2019 compared to the prior year period. Volume growth increased sales by $16 million and $28 million for the three and

six month periods ended March 31, 2019, respectively, due to the increase in transactions and lubricant gallons sold, primarily attributed to the Company's marketing efforts and effective service delivery. Implemented pricing actions as well as mix improvements from increases in premium mix as well as non-oil change services, led to higher average ticket, which combined to increase sales by $10 million and $19 million in the three and six months ended March 31, 2019, respectively. The impact of the adoption of new revenue recognition guidance increased sales by $9 million and $17 million for the three and six months ended March 31, 2019, respectively, and acquisitions increased sales by $7 million and $13 million for the three and six month periods ended March 31, 2019, respectively.

Gross profit increased $16 million and $26 million for the three and six month periods ended March 31, 2019, respectively, primarily due to increased transactions and average ticket. Increases in volumes and mix improvements combined to increase gross profit by approximately $11 million and $13 million for the three and six months ended March 31, 2019, respectively. Favorable pricing in excess of cost increased gross profit by $1 million and $6 million for the three and six months ended March 31, 2019, respectively, while acquisitions increased gross profit by $3 million and $6 million for the three and six months ended March 31, 2019, respectively. Adoption of the new revenue recognition guidance favorably impacted gross profit by $1 million for the three and six months ended March 31, 2019. Gross profit margin decreased 0.6% to 39.6% and 1.3% to 39.0% during the three and six months ended March 31, 2019, respectively, compared to the prior periods primarily as a result of the reclassification of certain costs in connection with adoption of the new revenue recognition guidance.

Selling, general and administrative expenses, which include the allocation of shared costs, increased $5 million and $13 million for the three and six month periods ended March 31, 2019, respectively. These increases were primarily a result of the higher allocation of shared costs and increased operating expenses, inclusive of those associated with acquisitions and advertising.

The Quick Lubes segment also benefited in the prior year from the sale of two service center stores, which resulted in a $3 million gain that was recorded in Equity and other income in the three and six months ended March 31, 2018.

Core North America

Core North America sales decreased $15 million, or 6%, to $243 million during the current quarter compared to the prior year quarter. During the six months ended March 31, 2019 compared to the prior year, sales decreased $34 million, or 7%, to $475 million. These decreases in sales were largely driven by lower volumes, which reduced sales by $16 million and $38 million in the three and six months ended March 31, 2019, respectively, compared to the prior year periods. Lower volumes in the three months ended March 31, 2019 were primarily attributable to the installer customer channel where the timing of distributor sales and a key account in reorganization proceedings had unfavorable impacts on volume. Volumes during the current year periods, particularly in the six months ended March 31, 2019, were also negatively impacted by the ongoing weakness and competitive pressures in the retail automotive lubricant market. Also impacting volumes and sales, but to a lesser extent, was the shift of Great Canadian Oil Change product sales to the Quick Lubes reportable segment, which reduced Core North America sales for the three and six months ended March 31, 2019 by $5 million and $9 million, respectively. Partially offsetting these declines was favorable product and customer mix of $4 million in the three months ended March 31, 2019, price increases of $2 million and $6 million in the three and six months ended March 31, 2019, respectively, as well as an increase of $7 million related to the adoption of new revenue recognition guidance for the six months ended March 31, 2019.

Gross profit decreased approximately $16 million and $35 million for the three and six months ended March 31, 2019, respectively, compared to the prior year periods. These declines were largely related to lower volumes, which unfavorably impacted gross profit by $9 million and $21 million in the three and six months ended March 31, 2019, respectively, inclusive of the shift of profit from Great Canadian Oil Change product sales to Quick Lubes. In addition, the adoption of new revenue recognition guidance negatively impacted gross profit by $5 million in the three and six months ended March 31, 2019 related to the timing of distributor sales and certain reclassifications. Also contributing to the decline in gross profit for during the the three and six months ended

March 31, 2019 were costs in excess of pricing of $5 million and $9 million, respectively, which included costs of approximately $1 million related to the temporary shutdown of the Company's second largest domestic blending facility resulting from the fire at a nearby third-party petrochemical terminal. For the three months ended March 31, 2019, these declines were partially offset by favorable product and customer mix of $3 million. Gross profit margin decreased 3.4% and 4.7% to 34.2% and 33.0% during the three and six months ended March 31, 2019, respectively. These declines are primarily the result of lower branded volumes in the retail channel, the dilutive impact of passing through cost increases on margin rate, as well as the impact related to the adoption of the new revenue recognition guidance.

Selling, general and administrative expenses, which includes the allocation of shared costs, decreased $8 million and $16 million during the three and six months ended March 31, 2019, respectively. These decreases were a result of lower allocated shared costs and operating expenses of $6 million and $12 million, as well as reclassifications of $2 million and $4 million related to the adoption of new revenue recognition guidance during the three and six months ended March 31, 2019, respectively.

International

International sales decreased $5 million, or 3%, to $148 million during the current quarter compared to the prior year quarter. Sales decreased $9 million, or 3%, to $284 during the six months ended March 31, 2019 compared to the prior year period. The decline in sales was largely attributable to unfavorable currency exchange of $10 million and $16 million for the three and six months ended March 31, 2019, respectively. This reduction was partially offset by favorable pricing and product mix to increase sales by $5 million and $12 million for the three and six months ended March 31, 2019, respectively. For the three months ended March 31, 2019, volume grew 8% in the Europe, Middle East and Africa region driven by channel development actions previously implemented and was offset by declines in Latin America and certain Asia Pacific markets for overall flat volume year-over-year. For the six months ended March 31, 2019, volumes were down approximately 2% compared to the prior year period and reduced sales by $5 million.

Gross profit decreased by approximately $4 million and $7 million for the three and six months ended March 31, 2019, respectively. These decreases were primarily related to unfavorable currency exchange of $2 million and $4 million for the three and six months ended March 31, 2019, respectively. The remaining declines in gross profit from the prior year periods related to a combination of factors, including the differential between cost and price, unfavorable mix, and lower volumes. Gross profit margin decreased 1.8% and 1.4% to 27.8% and 27.5% for the three and six months ended March 31, 2019, respectively, primarily related to the dilutive impact of passing through cost increases on margin rate.

Selling, general and administrative expenses, which include the allocation of shared costs, decreased by approximately $3 million and $5 million for the three and six months ended March 31, 2019, respectively. These decreases were generally related to lower operating expenses and favorable currency exchange. Equity and other income increased by approximately $1 million for the three and six months ended March 31, 2019 primarily due to the benefit of subsidies received for operating in a free trade zone in the three and six months ended March 31, 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 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 March 31, 2019, the Company had $125 million in cash, cash equivalents, and restricted cash, of which approximately $93 million was held by Valvoline’s non-U.S. subsidiaries and included $11 million that remains restricted 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 six months ended March 31:



(In millions)	2019		2018
Cash provided by (used in):
Operating activities	$	134	$	108
Investing activities	(85)		(91)
Financing activities	(20)		(93)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash	—		2
Increase (decrease) in cash, cash equivalents, and restricted cash	$	29	$	(74)

Operating activities

The increase in cash flows provided by operating activities for the six months ended March 31, 2019 compared to the prior year period was primarily due to favorable changes in working capital, which generally related to the timing of certain cash receipts and payments period over period and included $13 million in additional sales of certain customer accounts receivable, as well as the mix shift to a higher proportion of Quick Lubes retail sales.

Investing activities

The decrease in cash flows used in investing activities for the six months ended March 31, 2019 compared to the prior year was primarily due to lower cash consideration for acquisitions of $32 million, partially offset by lower proceeds related to the prior year sale of two Quick Lubes service center locations, as well as increased capital expenditures for company-owned quick lube new store openings and the Company’s first blending and packaging plant in China, in addition to the investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America. During the six months ended March 31, 2019, the Company acquired 40 service center stores in single and multi-store transactions, while in the six months ended March 31, 2018, the Company acquired 61 service center stores in single and multi-store transactions.

During the second quarter of fiscal 2019, Valvoline entered into a definitive agreement to acquire the business assets, including a manufacturing facility, of a Serbian company specializing in lubricant production. The acquisition will expand the Company's presence in Eastern Europe and further invest in Valvoline's regional European supply chain capabilities. The acquisition is pending customary closing conditions and is expected to close in the second half of fiscal 2019.

Financing activities

The decrease in cash flows used in financing activities for the six months ended March 31, 2019 compared to the prior year period was primarily driven by decreased share repurchase activity of $123 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 $55 million and higher dividend payments of $10 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 previously included in this Item 2 for additional information.


	Six months ended March 31
(In millions)	2019		2018
Cash flows provided by operating activities	$	134	$	108

Additions to property, plant and equipment	(48)		(30)
Free cash flow	$	86	$	78

As of March 31, 2019, working capital (current assets minus current liabilities, excluding long-term debt due within one year) was $373 million compared to $344 million as of September 30, 2018. Liquid assets (cash, cash equivalents, and accounts receivable) were 124% of current liabilities as of March 31, 2019 and 123% at 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 related declines in accounts receivable attributed to lower retail channel sales and the shift to Quick Lubes retail sales.

Debt

As of March 31, 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, including the Revolver and Trade Receivable Facility. Approximately 57% of Valvoline’s outstanding borrowings as of March 31, 2019 had fixed rates, with the remainder bearing variable interest rates.

In aggregate, during the six months ended March 31, 2019, Valvoline borrowed $162 million against and repaid $122 million to its revolving facilities, with an additional $15 million paid to its term loan facility.

As of March 31, 2019, Valvoline was in compliance with all covenants of its debt obligations and had $276 million of remaining borrowing capacity under its revolving facilities.

On April 12, 2019, Valvoline amended and extended its Senior Credit Agreement to provide additional capacity within the revolving credit facility increasing it to $475 million (including a $100 million letter of credit sublimit), lowering expected interest costs, and extending its maturity until 2024. Proceeds from the amended term loan of $575 million were used to pay the outstanding balances on the Term Loan and Revolver, pay down the Trade Receivables Facility, in addition to related interest and fees, as well as expenses associated with the amendment. Remaining proceeds, including the undrawn amended revolving credit facility, are expected to fund general

corporate purposes and working capital needs. Refer to Note 16 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.

Dividend payments

During the six months ended March 31, 2019, the Company paid $40 million of cash dividends for $0.212 per common share. On April 25, 2019, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.106 per share on Valvoline common stock, which is payable on June 17, 2019 to shareholders of record on May 31, 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 quarter of fiscal 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 expects its restructuring and cost-savings actions will be implemented by the end of fiscal 2019. Part of this program includes employee separation actions, which are also expected to be completed by the end of fiscal 2019, with the associated termination benefits anticipated to be paid beginning in the third quarter of fiscal 2019 and substantially concluded by the end of fiscal 2020.

As a result of this restructuring program, Valvoline recognized $8 million of restructuring and related expenses during the three and six months ended March 31, 2019. The Company expects that it will incur additional restructuring expenses of approximately $5 million to $9 million during the remainder of fiscal 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 expenses are expensed as incurred and are primarily related third-party professional service costs 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 for the three and six months ended March 31, 2019 as follows:


(In millions)	Total
Restructuring expenses	$	6
Restructuring-related expenses	2
Total restructuring and related expenses	$	8

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 expects the restructuring actions to generate annualized pre-tax cash savings of approximately $40 million to $50 million with a majority of the savings to begin in fiscal 2020 and expected to be fully achieved by the end of that year. 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.

Refer to Note 8 in 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.

Summary

As of March 31, 2019, cash, cash equivalents, and restricted cash totaled $125 million and total debt was $1.3 billion. Valvoline’s ability to generate positive cash flows from operations is dependent on general economic conditions and 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 IA 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 $276 million as of March 31, 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, as well as 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 six months ended March 31, 2019.

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 six months ended March 31, 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 March 31, 2019 that have materially affected, or are reasonably likely to materially affect, Valvoline’s internal control over financial reporting.

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 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 and taking into account established accruals for estimated liabilities, 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 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.

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 March 31, 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 March 31, 2019, $75 million remained available for share repurchases under this authorization.

ITEM 6. EXHIBITS









10.1*			Amendment and Restate ment Agreement , dated as of April 12, 2019, among Valvoline Inc. ("Valvoline"), as the Borrower, the subsidiaries of Valvoline party there to, The Bank of Nova Scotia, as Administrative Agent, and the Lenders party thereto (including Exhibi t A - Amended and Restated Cre dit Agreement, dated as of April 12, 2019, among Valvoline , the Administrative Agen t, Citi bank N.A., as Syndication Agen t, and the other Lenders party thereto).

31.1*			Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*			Certification of Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**			Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, and Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

* Filed herewith.

** Furnished herewith.

™ Trademark, Valvoline or its subsidiaries, registered in various countries.

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)

May 2, 2019	By:	/s/ Mary E. Meixelsperger
		Mary E. Meixelsperger
		Chief Financial Officer