VALVOLINE INC, 10-Q filed on 4/28/2017
Quarterly Report
Document Entity Information
6 Months Ended
Mar. 31, 2017
Apr. 26, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
VALVOLINE INC 
 
Entity Central Index Key
0001674910 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--09-30 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
204,531,221 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Mar. 31, 2017
Mar. 31, 2016
Operating Income (Loss) [Abstract]
 
 
 
 
Sales
$ 514 
$ 480 
$ 1,003 
$ 936 
Cost of sales
316 
288 
620 
568 
Gross profit
198 
192 
383 
368 
Selling, general and administrative expense
97 
93 
192 
180 
Pension and other postretirement plan non-service income and remeasurement adjustments, net
(17)
(43)
(1)
Separation costs
12 
Equity and other income
(5)
(6)
(15)
(11)
Operating income
117 
104 
237 
200 
Net interest and other financing expense
18 
Net loss on acquisition
(1)
(1)
Income before income taxes
109 
103 
219 
199 
Income tax expense
38 
35 
76 
66 
Net income
71 
68 
143 
133 
Basic and Diluted
 
 
 
 
Basic and Diluted (usd per share)
$ 0.35 
$ 0.33 
$ 0.70 
$ 0.65 
AVERAGE SHARES OUTSTANDING
 
 
 
 
Basic and Diluted (shares)
205 
205 
205 
205 
Dividends paid per common share (usd per share)
$ 0.05 
$ 0.00 
$ 0.10 
$ 0.00 
Unrealized translation gain (loss)
 
 
 
 
Net income
71 
68 
143 
133 
Other comprehensive income (loss), net of tax
 
 
 
 
Unrealized translation gain (loss)
(3)
Pension and other postretirement obligation adjustment
(2)
(4)
Other comprehensive income (loss)
(7)
Comprehensive income
$ 75 
$ 77 
$ 136 
$ 138 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Mar. 31, 2017
Sep. 30, 2016
Current assets
 
 
Cash and cash equivalents
$ 135 
$ 172 
Accounts receivable
405 
363 
Inventories
156 
139 
Other assets
36 
56 
Total current assets
732 
730 
Noncurrent assets
 
 
Cost
765 
727 
Accumulated depreciation
416 
403 
Net property, plant and equipment
349 
324 
Goodwill and intangibles
317 
267 
Equity method investments
30 
26 
Deferred income taxes
393 
389 
Other assets
86 
89 
Total noncurrent assets
1,175 
1,095 
Total assets
1,907 
1,825 
Current liabilities
 
 
Short-term debt
75 
Current portion of long-term debt
16 
19 
Trade and other payables
170 
177 
Accrued expenses and other liabilities
210 
204 
Total current liabilities
471 
400 
Noncurrent liabilities
 
 
Long-term debt
646 
724 
Employee benefit obligations
833 
886 
Deferred income taxes
Other liabilities
173 
143 
Total noncurrent liabilities
1,654 
1,755 
Commitments and contingencies
   
   
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
Common stock, par value $0.01 per share, 400 shares authorized; 205 shares issued and outstanding at March 31, 2017 and September 30, 2016
Paid-in capital
710 
710 
Retained earnings
123 
Parent company investment
(1,049)
(1,039)
Accumulated other comprehensive loss
(4)
(3)
Total stockholders’ deficit
(218)
(330)
Total liabilities and stockholders’ deficit
$ 1,907 
$ 1,825 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2017
Sep. 30, 2016
Statement of Financial Position [Abstract]
 
 
Preferred stock authorized (shares)
40,000,000 
40,000,000 
Preferred stock issued (shares)
Preferred stock outstanding (shares)
Common stock, par value (usd per share)
$ 0.01 
$ 0.01 
Common stock authorized (shares)
400,000,000 
400,000,000 
Common stock issued (shares)
205,000,000 
205,000,000 
Common stock outstanding (shares)
205,000,000 
205,000,000 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities
 
 
Net income
$ 143 
$ 133 
Adjustments to reconcile income to cash flows from operating activities
 
 
Depreciation and amortization
18 
19 
Debt issuance cost amortization
Equity income from affiliates
(7)
(7)
Distributions from equity affiliates
Net loss on acquisition
Pension contributions
(10)
(2)
Gain on pension and other postretirement plan remeasurements
(8)
Stock-based compensation expense
Change in assets and liabilities
 
 
Accounts receivable
(42)1
(15)1
Inventories
(17)1
(17)1
Payables and accrued liabilities
(9)1
(10)1
Other assets and liabilities
(6)1
(19)1
Total cash provided by operating activities
70 
91 
Cash flows from investing activities
 
 
Additions to property, plant and equipment
(27)
(14)
Acquisitions, net of cash acquired
(48)
(67)
Other investing activities, net
(1)
Total cash used in investing activities
(76)
(81)
Cash flows from financing activities
 
 
Net transfers to Parent
(2)
(10)
Proceeds from borrowings
75 
Repayments on borrowings
(83)
Cash dividends paid
(20)
Total cash used in financing activities
(30)
(10)
Effect of currency exchange rate changes on cash and cash equivalents
(1)
Decrease in cash and cash equivalents
(37)
Cash and cash equivalents - beginning of period
172 
Cash and cash equivalents - end of period
$ 135 
$ 0 
Basis of Presentation
Basis of Presentation
BASIS OF PRESENTATION

Valvoline Inc. (“Valvoline” or the “Company”) is a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to as “Ashland” or “Parent”). On September 22, 2015, Ashland announced that its Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the Valvoline business and Ashland's specialty chemicals business (the “Separation”). Following a series of restructuring steps, Valvoline was incorporated in May 2016, and prior to the completion of the Company’s initial public offering (“IPO”) on September 28, 2016, substantially all of the historical Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities, were transferred to Valvoline. After completing the IPO, Ashland owns approximately 83% of the total outstanding shares of Valvoline’s common stock. In April 2017, the Ashland Board of Directors authorized the distribution of all of its remaining interest in Valvoline to Ashland stockholders (the "Distribution") and determined the related record and distribution dates. Refer to Note 14, "Subsequent Events" for further details.

The contribution of the Valvoline business by Ashland to Valvoline was treated as a reorganization of entities under common Ashland control. As a result, Valvoline is retrospectively presenting the condensed consolidated financial statements of Valvoline and its subsidiaries for periods presented prior to the completion of the IPO, which have been prepared on a stand-alone basis and derived from Ashland’s consolidated financial statements and accounting records using the historical results of operations, and assets and liabilities attributed to Valvoline’s operations, as well as allocations of expenses from Ashland. The condensed consolidated financial statements for periods presented subsequent to the completion of the IPO reflect the consolidated operations of Valvoline and its majority-owned subsidiaries as a separate, stand-alone entity.

For periods prior to the completion of the IPO, transactions between Valvoline and Ashland were considered to be effectively settled for cash at the time the transactions were recorded. These transactions and net cash transfers to and from Ashland’s centralized cash management system are reflected as a component of Parent company investment in the Condensed Consolidated Balance Sheets and as a financing activity within the accompanying Condensed Consolidated Statements of Cash Flows. The Parent company investment on the Condensed Consolidated Balance Sheets represents the cumulative net investment by Ashland in Valvoline, including net income through the completion of the IPO and net cash transfers to and from Ashland.

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and Securities and Exchange Commission 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, 2016. Certain prior period amounts have been reclassified to conform to current presentation.

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, all adjustments considered necessary for a fair presentation have been included herein, and the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable.  The results for the interim periods are not necessarily indicative of results to be expected for the entire year.

New accounting standards

A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of all new accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The following standards relevant to Valvoline were either issued or adopted in the current period.

In April 2015, the FASB issued accounting guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Cloud computing arrangements represent the delivery of hosted services over the internet which includes software, platforms, infrastructure and other hosting arrangements. Under the guidance, customers that gain access to software in a cloud computing arrangement account for the software as internal-use software only if the arrangement includes a software license. Valvoline adopted this standard on a prospective basis on October 1, 2016. As a result, certain costs related to these arrangements will be expensed when incurred.

In January 2017, the FASB issued accounting guidance which simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The guidance instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2020. Valvoline is currently evaluating the impact this guidance may have on Valvoline’s condensed consolidated financial statements.

In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Condensed Consolidated Statements of Comprehensive Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This guidance must be applied retrospectively and will become effective for Valvoline on October 1, 2018, with early adoption being optional. Valvoline currently intends to early adopt this guidance on October 1, 2017 and expects this guidance will have a significant impact on the presentation of the Condensed Consolidated Statements of Comprehensive Income as it will result in a reclassification of Pension and other postretirement plan non-service income and remeasurement adjustments, net from within operating income to non-operating income.
Acquisitions
Acquisitions
ACQUISITIONS

Time-It Lube

On January 31, 2017, Valvoline completed the acquisition of the business assets related to 28 quick-lube stores, primarily located in east Texas and Louisiana, from Time-It Lube LLC and Time-It Lube of Texas, LP (together, "Time-It Lube") for a purchase price of $48 million. Of the $48 million, $44 million was preliminarily allocated to goodwill and the remainder was allocated to working capital, customer relationships and trade names. This acquisition is recorded within the Quick Lubes reportable segment.

Goodwill is calculated as the excess of the consideration transferred over the net assets acquired and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition of Time-It Lube. The goodwill is expected to be deductible for income tax purposes.

Oil Can Henry’s

On February 1, 2016, Ashland completed the acquisition of OCH International, Inc. (Oil Can Henry’s), which was the 13th largest quick-lube network in the United States, servicing approximately 1 million vehicles annually with 89 quick-lube stores, 47 company-owned stores and 42 franchise locations, in Oregon, Washington, California, Arizona, Idaho and Colorado.
The total purchase price, net of cash acquired, for the acquisition of Oil Can Henry’s within the Quick Lubes reportable segment was $62 million. Of the $62 million, $83 million was allocated to goodwill and $10 million to assets, including working capital, property, plant and equipment, intangible assets, and other non-current assets. Ashland also assumed $11 million of debt, $11 million of current liabilities and $9 million of noncurrent liabilities.
The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition of Oil Can Henry’s. None of the goodwill is expected to be deductible for income tax purposes.
 
Other Quick Lubes Acquisitions

During the six months ended March 31, 2017, the Company completed the acquisition of five franchise locations within the Quick Lubes reportable segment, and the purchase price has primarily been recorded in Goodwill and intangibles on the Condensed Consolidated Balance Sheets.
Accounts Receivable
Accounts Receivable
ACCOUNTS RECEIVABLE

The following summarizes Valvoline’s accounts receivable as of the Condensed Consolidated Balance Sheet dates:

(In millions)
March 31
2017
 
September 30
2016
Trade and other accounts receivable
$
409

 
$
368

Less: Allowance for doubtful accounts
(4
)
 
(5
)
 
$
405

 
$
363

Inventories
Inventories
INVENTORIES

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

The following summarizes Valvoline’s inventories as of the Condensed Consolidated Balance Sheet dates:
(In millions)
March 31
2017
 
September 30
2016
Finished products
$
159

 
$
149

Raw materials, supplies and work in process
27

 
21

LIFO reserves
(27
)
 
(29
)
Obsolete inventory reserves
(3
)
 
(2
)
 
$
156

 
$
139

Goodwill
Goodwill
GOODWILL

Goodwill

Valvoline reviews goodwill for impairment annually or when events and circumstances indicate an impairment may have occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current carrying value. The performance of the annual impairment analysis during 2016 did not result in any impairment of goodwill, and no events or circumstances that would indicate an impairment may have occurred were noted during the six months ended March 31, 2017. The estimated fair value of each reporting unit with a goodwill balance was significantly in excess of its carrying value.





The following is a progression of goodwill by reportable segment for the six months ended March 31, 2017.

(In millions)
Core North America
 
Quick Lubes
 
International
 
Total
September 30, 2016
$
89

 
$
135

 
$
40

 
$
264

Acquisitions (a)

 
48

 

 
48

March 31, 2017
$
89

 
$
183

 
$
40

 
$
312

 
 
 
 
 
 
 
 
(a) Relates to $44 million for the acquisition of Time-It Lube and $4 million for the acquisition of five locations within the Quick Lubes reportable segment during the six months ended March 31, 2017. See Note 2 for more information on the acquisition of Time-It Lube.
Debt
Debt
DEBT

The following table summarizes Valvoline’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets:
(In millions)
March 31 2017
 
September 30 2016
Senior Notes
$
375

 
$
375

Term Loan A
293

 
375

Accounts Receivable Securitization
75

 

Revolver

 

Other (a)
(6
)
 
(7
)
Total debt
$
737

 
$
743

Short-term debt
75

 

Current portion of long-term debt
16

 
19

Long-term debt
$
646

 
$
724

 
 
 
 
(a) At March 31, 2017, Other includes $8 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. At September 30, 2016, Other included $9 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions.

At March 31, 2017, Valvoline’s long-term debt (including current portion and excluding debt issuance costs) had a carrying value of $670 million, compared to a fair value of $689 million.  At September 30, 2016, Valvoline’s long-term debt (including current portion and excluding debt issuance costs) had a carrying value of $752 million, compared to a fair value of $771 million.  Borrowings under the Term Loans (as defined below) are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the 5.500% senior unsecured notes due 2024 (“Senior Notes”) is based on quoted market prices, which are Level 1 inputs within the fair value hierarchy.

Accounts Receivable Securitization

In November 2016, Valvoline entered into a $125 million accounts receivable securitization facility (the “2017 Accounts Receivable Securitization Facility”) with various financial institutions. The Company may from time to time, obtain up to $125 million (in the form of cash or letters of credit) through the sale of an undivided interest in its accounts receivable. The agreement has a term of one year but is extendable at the discretion of the Company and the financial institutions. The Company accounts for the 2017 Accounts Receivable Securitization Facility as secured borrowings, which are classified as Short-term debt and the receivables sold are included in Accounts receivable in the Condensed Consolidated Balance Sheets. 

During the first quarter of 2017, Valvoline borrowed $75 million under the 2017 Accounts Receivable Securitization Facility and used the net proceeds to repay an equal amount of the Term Loan A. As a result, the Company recognized an immaterial charge related to the accelerated amortization of previously capitalized debt issuance costs, which is included in Net interest and other financing expense in the Condensed Consolidated Statements of Comprehensive Income for the six months ended March 31, 2017. At March 31, 2017, $75 million was outstanding and the total borrowing capacity remaining under the 2017 Accounts Receivable Securitization Facility was $50 million. The weighted-average interest rate for this instrument was 1.6% for both the three and six months ended March 31, 2017.

Senior Credit Agreement

The 2016 Senior Credit Agreement provided for an aggregate principal amount of $1,325 million in senior secured credit facilities (“2016 Credit Facilities”), composed of (i) a five year $875 million term loan A facility (“Term Loans”) and (ii) a five year $450 million revolving credit facility (including a $100 million letter of credit sublimit) (“Revolver”). At March 31, 2017, there were no borrowings under the Revolver and the total borrowing capacity remaining under the Revolver was $436 million due to a reduction of $14 million for letters of credit outstanding.

The 2016 Senior Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated net leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum consolidated net leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are 4.5 and 3.0, respectively. As of March 31, 2017, Valvoline is in compliance with all covenants under the 2016 Senior Credit Agreement.
Income Taxes
Income Taxes
INCOME TAXES

Effective income tax rates

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. Income tax expense for the three months ended March 31, 2017 was $38 million or an effective tax rate of 34.9% compared to an expense of $35 million or an effective tax rate of 34.0% for the three months ended March 31, 2016. The difference in these rates is primarily related to net unfavorable discrete items in the current year and certain non-deductible separation costs.

Income tax expense for the six months ended March 31, 2017 was $76 million or an effective tax rate of 34.7% compared to an expense of $66 million or an effective tax rate of 33.2% for the six months ended March 31, 2016. The increase in the effective tax rate in the current year was primarily attributed to net unfavorable discrete items, certain non-deductible separation costs, and net favorable discrete items in the prior year related to the tax law change from the reinstatement of research and development credits.

Unrecognized tax benefits

Valvoline recognized less than $1 million of uncertain tax positions for the three and six months ended March 31, 2017, which related to increases in positions taken in the current year as well as increases related to positions taken on items from prior years. Valvoline expects no decrease in the amount of accrual for uncertain tax positions in the next twelve months. However, it is reasonably possible that there could be material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax positions, or the expiration of applicable statute of limitations; however, Valvoline is not able to estimate the impact of these items at this time.
Tax Matters Agreement

For the periods prior to Separation from Ashland, Valvoline will be included in Ashland’s consolidated U.S. and state income tax returns and in tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). Under the Tax Matters Agreement between Valvoline and Ashland that was entered into on September 22, 2016, Ashland will generally make all necessary tax payments to the relevant tax authorities with respect to Ashland Group Returns, and Valvoline will make tax sharing payments to Ashland, inclusive of tax attributes utilized. The amount of the tax sharing payments will generally be determined as if Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed their own consolidated, combined or separate tax returns for the periods prior to Separation that include only Valvoline and/or its relevant subsidiaries, as the case may be. Total net liabilities related to these and other obligations owed to Ashland under the Tax Matters Agreement are $67 million and $66 million at March 31, 2017 and September 30, 2016, respectively. The net liability at March 31, 2017 consisted of receivables from Parent of $10 million recorded in other current assets and $77 million recorded in other long-term liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2016, the net liability consisted of receivables from Parent of $5 million recorded in other current assets and $71 million recorded in other long-term liabilities in the Condensed Consolidated Balance Sheets.
Employee Benefit Plans
Employee Benefit Plans
EMPLOYEE BENEFIT PLANS

During September 2016, Ashland transferred a substantial portion of its U.S. qualified and non-qualified pension plans as well as certain other postretirement obligations to Valvoline as part of the pre-IPO process. Prior to the transfer, Valvoline accounted for its participation in the Ashland sponsored pension and other postretirement benefit plans as multi-employer plans. For purposes of these financial statements, costs for multi-employer plans were allocated based on Valvoline employee’s participation in the plan prior to September 1, 2016.

Subsequent to the transfer from Ashland, Valvoline accounts for the plans as single-employer plans recognizing the full amount of any costs, gains, and net liabilities within the condensed consolidated financial statements. The total pension and other postretirement benefit income accounted for under the single employer plan method of $17 million and $42 million during the three and six months ended March 31, 2017, respectively, was primarily recognized within Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Condensed Consolidated Statements of Comprehensive Income.

The total pension and other postretirement benefit costs allocated to Valvoline related to multi-employer pension plans was $3 million and $2 million for the three and six months ended March 31, 2016, respectively. During the three and six months ended March 31, 2016, these allocated costs include non-service income and remeasurement adjustments of $1 million expense and $2 million income, respectively. Of these amounts, $1 million of income was recorded to Cost of Sales during the six months ended March 31, 2016 and $1 million of expense and $1 million of income were recorded for the three and six months ended March 31, 3016, respectively, to Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Condensed Consolidated Statements of Comprehensive Income. During the three months ended March 31, 2016, service cost was $2 million, for which was $1 million was recognized within Cost of goods sold as well as $1 million in Selling, general and administrative expense. During the six months ended March 31, 2016, service cost was $4 million, and $2 million was recognized in each Cost of goods sold and Selling, general and administrative expense. The net periodic benefit costs for the pension and other postretirement benefit plans are disclosed in further below.

Contributions to the pension plans were approximately $7 million and $10 million during the three and six months ended March 31, 2017, respectively. Expected contributions to pension plans for the remainder of 2017 are approximately $7 million.

Plan amendments and remeasurements

Effective January 1, 2017, Valvoline discontinued certain other postretirement health and life insurance benefits. The effect of these plan amendments resulted in a remeasurement gain of $8 million within Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Condensed Consolidated Statements of Comprehensive Income for the six months ended March 31, 2017.

During March 2016, Ashland announced that the majority of its defined benefit pension plans, accounted for as multi-employer plans, would freeze the accrual of benefits effective September 30, 2016. Additionally, during March 2016, Ashland announced that retiree life and medical benefits would be reduced effective October 1, 2016 and January 1, 2017, respectively. The effect of these plan amendments resulted in a remeasurement loss of $5 million for the three and six months ended March 31, 2016. Approximately $2 million was recorded within Cost of sales and $3 million within Pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income for both the three and six months ended March 31, 2016.



Components of net periodic benefit costs (income)

For segment reporting purposes, service cost is proportionately allocated to each reportable segment, while all other components of net periodic benefit income are recognized within Unallocated and other.

The following table summarizes the components of pension and other postretirement benefit income. For the three and six months ended March 31, 2016, these amounts were generally related to allocations to Valvoline under a multi-employer plan.
 
 
 
 
 
 
Other postretirement benefits
 
 
Pension benefits
 
(In millions)
 
2017
 
2016
 
2017
 
2016
Three months ended March 31
 
 
 
 
 
 
 
 
Service cost
 
$

 
$
2

 
$

 
$

Interest cost
 
22

 
6

 

 

Expected return on plan assets
 
(36
)
 
(9
)
 

 

Amortization of prior service credit
 

 

 
(3
)
 
(1
)
Curtailment gain
 

 
(12
)
 

 
(6
)
Actuarial loss
 

 
22

 

 
1

Net periodic benefit (income) costs
 
$
(14
)

$
9


$
(3
)
 
$
(6
)
 
 
 
 
 
 
 
 
 
Six months ended March 31
 
 
 
 
 
 
 
 
Service cost
 
$
1

 
$
4

 
$

 
$

Interest cost
 
43

 
12

 

 
1

Expected return on plan assets
 
(72
)
 
(18
)
 

 

Amortization of prior service credit
 

 

 
(6
)
 
(2
)
Curtailment gain
 

 
(12
)
 

 
(6
)
Actuarial loss (gain)
 

 
22

 
(8
)
 
1

Net periodic benefit (income) costs
 
$
(28
)
 
$
8

 
$
(14
)
 
$
(6
)

Deferred compensation investments

Deferred compensation investments consist of Level 1 measurements within the fair value hierarchy, which are observable inputs such as unadjusted quoted prices in active markets for identical assets and liabilities. Valvoline had $33 million and $34 million of non-qualified benefit plan investments as of March 31, 2017 and September 30, 2016, respectively, which primarily consist of fixed income U.S government bonds and are classified as other noncurrent assets in the Condensed Consolidated Balance Sheets. Gains and losses related to deferred compensation investments are immediately recognized within the Condensed Consolidated Statements of Comprehensive Income.
Litigation, Claims and Contingencies
Litigation, Claims and Contingencies
LITIGATION, CLAIMS AND CONTINGENCIES

There are various claims, lawsuits and administrative proceedings pending or threatened against Valvoline and its various subsidiary companies. Such actions are with respect to commercial and tax disputes, product liability, toxic tort liability, environmental, and other matters which seek remedies or damages, in some cases in substantial amounts. While Valvoline cannot predict with certainty the outcome of such actions, it believes that adequate reserves have been recorded where appropriate. Losses already recognized with respect to such actions were not material as of March 31, 2017 and September 30, 2016.  There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, Valvoline currently believes that such potential losses will not be material.
Earnings Per Share
Earnings Per Share
EARNINGS PER SHARE

The following is the computation of basic and diluted earnings per share (“EPS”). Earnings per share is reported under the treasury stock method.

 
 
Three months ended
 
Six months ended
 
 
March 31
 
March 31
(In millions except per share data)
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
71

 
$
68

 
$
143

 
$
133

Denominator
 
 
 
 
 
 
 
 
Weighted-average shares used to compute basic EPS
 
205

 
205

 
205

 
205

Effect of dilutive securities (a)
 

 

 

 

Weighted-average shares used to compute diluted EPS
 
205


205

 
205

 
205

 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.35

 
$
0.33

 
$
0.70

 
$
0.65

Diluted
 
$
0.35

 
$
0.33

 
$
0.70

 
$
0.65

 
 
 
 
 
 
 
 
 
(a) During the six months ended March 31, 2017, the Company issued share-based awards to six non-employee directors. These awards had no material impact on earnings per share.
Stockholders' Equity
Stockholders' Equity
STOCKHOLDERS’ EQUITY

Stockholder dividends
The Company's dividend activity during the six months ended March 31, 2017 was as follows:
 
 
 
 
 
 
Common Stock
Declaration Date
 
Record Date
 
Payment Date
 
Dividend Per Share

 
Cash Outlay
 
Cash Paid to Parent
November 15, 2016
 
December 5, 2016
 
December 20, 2016
 
$
0.049

 
$
10

 
$
8

January 24, 2017
 
March 1, 2017
 
March 15, 2017
 
$
0.049

 
$
10

 
$
8


Accumulated other comprehensive income (loss)

Components of other comprehensive income (loss) recorded in the Condensed Consolidated Statements of Comprehensive Income are presented in the following table, before tax and net of tax effects.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
(In millions)
Before tax
 
Tax benefit (expense)
 
Net of tax
 
Before tax
 
Tax benefit (expense)
 
Net of tax
Three months ended March 31
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation gain
$
6

 
$

 
$
6

 
$
10

 
$
(1
)
 
$
9

Pension and other postretirement obligation adjustment:
 
 
 
 


 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(3
)
 
1

 
(2
)
 

 

 

Total other comprehensive income
$
3

 
$
1

 
$
4

 
$
10

 
$
(1
)
 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended March 31
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation (loss) gain
$
(3
)
 
$

 
$
(3
)
 
$
5

 
$

 
$
5

Pension and other postretirement obligation adjustment:
 
 
 
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(6
)
 
2

 
(4
)
 

 

 

Total other comprehensive (loss) income
$
(9
)
 
$
2

 
$
(7
)
 
$
5

 
$

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 (a) Amortization of unrecognized prior service credits are included in net periodic benefit income for pension and other postretirement plans and are included in Pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.

In accordance with U.S. GAAP, as disclosed in the table above, certain pension costs are amortized from accumulated other comprehensive income and recognized in net income. See Note 8 of Notes to Condensed Consolidated Financial Statements for more information.
Related Party Transactions
Related Party Transactions
RELATED PARTY TRANSACTIONS

Financial assets

Ashland is party to an agreement to sell certain Valvoline customer accounts receivable in the form of drafts or bills of exchange to a financial institution. Each draft constitutes an order to pay for obligations of the customer to Ashland arising from the sale of goods to the customer. The intention of the arrangement is to decrease the time accounts receivable is outstanding and increase cash flows as Ashland in turn remits payment to Valvoline.  At March 31, 2017, there were no accounts receivable sold to the financial institution. At September 30, 2016, the amount of accounts receivable sold by Ashland to the financial institution was $29 million.

Derivative instruments

Until the IPO, Valvoline participated in Ashland’s centralized derivative programs that engage in certain hedging activities, which Ashland used to manage its exposure to fluctuations in foreign currencies. Gains and losses related to a hedge were either recognized in Ashland’s income immediately, to offset the gain or loss on the hedged item, or deferred and recorded in the equity section of Ashland’s balance sheet as a component of accumulated other comprehensive loss and subsequently recognized in Ashland’s income when the underlying hedged item was recognized in earnings. As a result, gains or losses on hedges during the three and six months ended March 31, 2016 were not material and are reflected in Valvoline’s Condensed Consolidated Statements of Comprehensive Income through allocation from Ashland in Selling, general and administrative expense.  

Valvoline began its own hedging program in late September 2016 to manage exposure to fluctuations in foreign currency with an outstanding notional contract value of $30 million as of March 31, 2017. All derivative instruments are recognized as either assets or liabilities on the Condensed Consolidated Balance Sheets and are measured at fair value. As of March 31, 2017 and September 30, 2016, these balances were not material. Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders’ equity section of the Condensed Consolidated Balance Sheets as a component of accumulated other comprehensive income and subsequently recognized in the Condensed Consolidated Statements of Comprehensive Income when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge is recognized in income immediately. Gains and losses recognized during the three six months ended March 31, 2017 were not material and were recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income.

Stock incentive plans

Valvoline has historically participated in Ashland’s stock incentive plans for key employees and directors, primarily in the form of stock appreciation rights (“SARs”), restricted stock, performance shares and other non-vested stock awards. Equity-based compensation expense has been either directly reported by or allocated to Valvoline based on the awards and terms previously granted to Ashland’s employees. Stock-based compensation expense recorded by Valvoline during the three months ended March 31, 2017 and 2016 were $2 million and $2 million, respectively. Stock-based compensation expense recorded by Valvoline during the six months ended March 31, 2017 and 2016 were $3 million and $5 million, respectively. For the three and six months ended March 31, 2017 and 2016, these costs were primarily included within the Selling, general and administrative caption of the Condensed Consolidated Statements of Comprehensive Income. Compensation expense for stock incentive plans is generally based on the grant-date fair value over the appropriate vesting period. Ashland utilizes several industry-accepted valuation models to determine the fair value. Until the Separation occurs, Valvoline will continue to participate in Ashland’s equity-based compensation plans and record equity-based compensation expense based on the historical allocation of cost. Upon Separation, Ashland intends to convert these equity-based awards to Valvoline-based awards.

Related party receivables and payables

At March 31, 2017, Valvoline had receivables from Parent of $10 million recorded in other current assets on the Condensed Consolidated Balance Sheets. Also, at March 31, 2017, Valvoline had payables to Parent of $9 million, which was included in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets, and $79 million, which was recorded in other long-term liabilities in the Condensed Consolidated Balance Sheets. The current liability relates primarily to current obligations owed to Ashland for transition services and other miscellaneous billings. The receivable and long-term liability primarily relate to net obligations under the Tax Matters Agreement.

During the six months ended March 31, 2017, Valvoline paid Ashland approximately $60 million primarily related to interim tax-sharing payments, net amounts due for transition services and other miscellaneous billings. In addition, during the six months ended March 31, 2017, Ashland paid Valvoline $23 million related to customer payments on certain Valvoline receivables that were collected by Ashland prior to September 30, 2016, which was remitted to Valvoline in fiscal 2017. 

At September 30, 2016, Valvoline had receivables from Parent of $30 million recorded in other current assets on the Condensed Consolidated Balance Sheets. Also, at September 30, 2016, Valvoline had recorded obligations to Parent of $73 million, of which $2 million is in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets and $71 million was recorded in other noncurrent liabilities in the Condensed Consolidated Balance Sheets. The long-term liability related primarily to the obligations under the Tax Matters Agreement.

Corporate allocations

Prior to the completion of the IPO, Valvoline utilized centralized functions of Ashland to support its operations, and in return, Ashland allocated certain of its expenses to Valvoline. Such expenses represent costs related, but not limited to, treasury, legal, accounting, insurance, information technology, payroll administration, human resources, incentive plans and other services. These costs, together with an allocation of Ashland overhead costs, are included within the Selling, general and administrative caption of the Condensed Consolidated Statements of Comprehensive Income. Where it was possible to specifically attribute such expenses to activities of Valvoline, amounts have been charged or credited directly to Valvoline without allocation or apportionment. Allocation of all other such expenses was based on a reasonable reflection of the utilization of service provided or benefits received by Valvoline during the periods presented on a consistent basis, such as headcount, square footage, tangible assets or sales. Valvoline’s management supports the methods used in allocating expenses and believes these methods to be reasonable estimates.

There were no general corporate expenses allocated to Valvoline during the three or six months ended March 31, 2017 while there were $20 million and $41 million allocated during the three and six months ended March 31, 2016, respectively. The following table summarizes the centralized and administrative support costs of Ashland that were allocated to Valvoline for the three and six months ended March 31, 2016.

 
 
Three months ended March 31
 
Six months ended March 31
(In millions)
 
2016
 
2016
Information technology
 
$
5

 
$
10

Financial and accounting
 
3

 
6

Building services
 
3

 
6

Legal and environmental
 
1

 
3

Human resources
 
1

 
2

Shared services
 

 
1

Other general and administrative
 
7

 
13

Total
 
$
20

 
$
41

Reportable Segment Information
Reportable Segment Information
REPORTABLE SEGMENT INFORMATION

Valvoline’s business is managed within reportable segments based on how operations are managed internally for the products and services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining resource allocation methodologies used for reportable segments. Valvoline’s operating segments are identical to its reportable segments. Operating income is the primary measure reviewed by the chief operating decision maker in assessing each reportable segment’s financial performance. Valvoline’s businesses are managed within three reportable operating segments:  Core North America, Quick Lubes, and International. Additionally, to reconcile to total consolidated Operating income, certain corporate and other non-operational costs are included in Unallocated and other.
Reportable segment business descriptions

The Core North America business segment sells Valvoline™ and other branded products in the United States and Canada to both consumers who perform their own automotive maintenance, referred to as “Do-It-Yourself” or “DIY” consumers, as well as to installer customers who use Valvoline products to service vehicles owned by “Do-It-For Me” or “DIFM” consumers. Valvoline sells to its DIY consumers through national retail auto parts stores, leading mass merchandisers and independent auto part stores. Valvoline sells to its DIFM consumers through installers in the United States and Canada. Installer customers include car dealers, general repair shops, and third-party quick lube chains. Valvoline directly serves these customers as well as through a network of distributors. Valvoline’s installer channel also sells products and solutions to heavy duty customers such as original equipment manufacturers, on-highway fleets and construction companies.

Through its Quick Lubes business segment, Valvoline operates Valvoline Instant Oil Change (“VIOC”), a quick-lube service chain involving both Company-owned and franchised stores. Valvoline also sells its products and provides Valvoline branded signage to independent quick lube operators through its Express Care program.

The International business segment sells Valvoline™ and Valvoline’s other branded products in approximately 140 countries outside of the United States and Canada. Valvoline’s key international markets include China, India, EMEA, Latin America and Australia Pacific. The International business segment sells products for both consumer and commercial vehicles and equipment, and is served by company-owned plants in the United States, Australia and the Netherlands, a joint venture-owned plant in India and third-party warehouses and toll manufacturers in other regions. In most of the countries where Valvoline’s products are sold, Valvoline goes to market via independent distributors.
Unallocated and other generally includes items such as components of pension and other postretirement benefit plan expenses (excluding service costs, which are allocated to the reportable segments), certain significant company-wide restructuring activities and legacy costs or adjustments that relate to divested businesses, including $6 million and $12 million of separation costs during the three and six months ended March 31, 2017, respectively.

Reportable segment results

Results of Valvoline’s reportable segments are presented based on how operations are managed internally for the products and services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining resource allocation methodologies used for reportable segments.  The structure and practices are specific to Valvoline; therefore, the financial results of Valvoline’s reportable segments are not necessarily comparable with similar information for other companies.  Valvoline allocates all costs to its reportable segments except for certain significant company-wide restructuring activities, such as the restructuring plans and/or other costs or adjustments that relate to former businesses that Valvoline no longer operates. The service cost component of pension and other postretirement benefits costs has historically been allocated to each reportable segment on a ratable basis (going forward the only plans with ongoing service costs will be international plans within the International reportable segment), while the remaining components of pension and other postretirement benefits costs are recorded to Unallocated and other.  



The following table presents various financial information for each reportable segment:



(In millions)
Three months ended March 31
 
Six months ended March 31
2017
 
2016
 
2017
 
2016
Sales
 
 
 
 
 
 
 
Core North America
$
253

 
$
248

 
$
490

 
$
489

Quick Lubes
128

 
113

 
255

 
213

International
133

 
119

 
258

 
234

 
$
514

 
$
480

 
$
1,003

 
$
936

Operating Income
 
 
 
 
 
 
 
Core North America
$
57

 
$
59

 
$
108

 
$
112

Quick Lubes
31

 
29

 
60

 
52

International
18

 
17

 
38

 
33

Total operating segments
$
106

 
$
105

 
$
206

 
$
197

Unallocated and other (a)
11

 
(1
)
 
31

 
3

 
$
117

 
$
104

 
$
237

 
$
200

 
 
 
 
 
 
 
 
(a)
Unallocated and other includes a gain of $8 million during the six months ended March 31, 2017 and a loss of $5 million during three and six months ended March 31, 2016 related to pension and other postretirement plan actuarial remeasurements. Unallocated and other also includes separation costs of $6 million and $12 million for the three and six months ending March 31, 2017, respectively.
Subsequent Events
Subsequent Events
SUBSEQUENT EVENTS

Quick Lubes acquisition

On April 19, 2017, Valvoline completed the acquisition of nine Quick Lubes franchise locations in San Antonio, Texas.

Share repurchase

On April 24, 2017, Valvoline’s Board of Directors authorized a share repurchase program, under which Valvoline may repurchase up to $150 million of its common stock through December 31, 2019. Purchases will be made in accordance with all applicable securities laws and regulations and will be funded from available liquidity.

Separation

Subject to the conditions described below, in April 2017, the Ashland Board of Directors authorized the distribution to Ashland stockholders of all 170 million shares of Valvoline common stock on May 12, 2017 as a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017. The actual distribution ratio for the Valvoline common stock to be distributed per share of Ashland common stock will be determined based on the number of shares of Ashland common stock outstanding on the record date.
The Distribution is subject to certain conditions, including receipt of a customary tax opinion and confirmation of sufficient capital adequacy and surplus to make the Distribution. All of these conditions are expected to be satisfied on the distribution date.

Dividend declared

On April 27, 2017, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.049 per share on Valvoline common stock. The dividend is payable on June 15, 2017 to shareholders of record on June 1, 2017.
Basis of Presentation (Policies)
BASIS OF PRESENTATION

Valvoline Inc. (“Valvoline” or the “Company”) is a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to as “Ashland” or “Parent”). On September 22, 2015, Ashland announced that its Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the Valvoline business and Ashland's specialty chemicals business (the “Separation”). Following a series of restructuring steps, Valvoline was incorporated in May 2016, and prior to the completion of the Company’s initial public offering (“IPO”) on September 28, 2016, substantially all of the historical Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities, were transferred to Valvoline. After completing the IPO, Ashland owns approximately 83% of the total outstanding shares of Valvoline’s common stock. In April 2017, the Ashland Board of Directors authorized the distribution of all of its remaining interest in Valvoline to Ashland stockholders (the "Distribution") and determined the related record and distribution dates. Refer to Note 14, "Subsequent Events" for further details.

The contribution of the Valvoline business by Ashland to Valvoline was treated as a reorganization of entities under common Ashland control. As a result, Valvoline is retrospectively presenting the condensed consolidated financial statements of Valvoline and its subsidiaries for periods presented prior to the completion of the IPO, which have been prepared on a stand-alone basis and derived from Ashland’s consolidated financial statements and accounting records using the historical results of operations, and assets and liabilities attributed to Valvoline’s operations, as well as allocations of expenses from Ashland. The condensed consolidated financial statements for periods presented subsequent to the completion of the IPO reflect the consolidated operations of Valvoline and its majority-owned subsidiaries as a separate, stand-alone entity.

For periods prior to the completion of the IPO, transactions between Valvoline and Ashland were considered to be effectively settled for cash at the time the transactions were recorded. These transactions and net cash transfers to and from Ashland’s centralized cash management system are reflected as a component of Parent company investment in the Condensed Consolidated Balance Sheets and as a financing activity within the accompanying Condensed Consolidated Statements of Cash Flows. The Parent company investment on the Condensed Consolidated Balance Sheets represents the cumulative net investment by Ashland in Valvoline, including net income through the completion of the IPO and net cash transfers to and from Ashland.

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and Securities and Exchange Commission 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, 2016. Certain prior period amounts have been reclassified to conform to current presentation.

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, all adjustments considered necessary for a fair presentation have been included herein, and the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable.  The results for the interim periods are not necessarily indicative of results to be expected for the entire year.

New accounting standards

A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of all new accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The following standards relevant to Valvoline were either issued or adopted in the current period.

In April 2015, the FASB issued accounting guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Cloud computing arrangements represent the delivery of hosted services over the internet which includes software, platforms, infrastructure and other hosting arrangements. Under the guidance, customers that gain access to software in a cloud computing arrangement account for the software as internal-use software only if the arrangement includes a software license. Valvoline adopted this standard on a prospective basis on October 1, 2016. As a result, certain costs related to these arrangements will be expensed when incurred.

In January 2017, the FASB issued accounting guidance which simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The guidance instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2020. Valvoline is currently evaluating the impact this guidance may have on Valvoline’s condensed consolidated financial statements.

In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Condensed Consolidated Statements of Comprehensive Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This guidance must be applied retrospectively and will become effective for Valvoline on October 1, 2018, with early adoption being optional. Valvoline currently intends to early adopt this guidance on October 1, 2017 and expects this guidance will have a significant impact on the presentation of the Condensed Consolidated Statements of Comprehensive Income as it will result in a reclassification of Pension and other postretirement plan non-service income and remeasurement adjustments, net from within operating income to non-operating income.
INVENTORIES

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

Valvoline reviews goodwill for impairment annually or when events and circumstances indicate an impairment may have occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current carrying value.
Earnings per share is reported under the treasury stock method.
Derivative instruments

Until the IPO, Valvoline participated in Ashland’s centralized derivative programs that engage in certain hedging activities, which Ashland used to manage its exposure to fluctuations in foreign currencies. Gains and losses related to a hedge were either recognized in Ashland’s income immediately, to offset the gain or loss on the hedged item, or deferred and recorded in the equity section of Ashland’s balance sheet as a component of accumulated other comprehensive loss and subsequently recognized in Ashland’s income when the underlying hedged item was recognized in earnings. As a result, gains or losses on hedges during the three and six months ended March 31, 2016 were not material and are reflected in Valvoline’s Condensed Consolidated Statements of Comprehensive Income through allocation from Ashland in Selling, general and administrative expense.  

Valvoline began its own hedging program in late September 2016 to manage exposure to fluctuations in foreign currency with an outstanding notional contract value of $30 million as of March 31, 2017. All derivative instruments are recognized as either assets or liabilities on the Condensed Consolidated Balance Sheets and are measured at fair value. As of March 31, 2017 and September 30, 2016, these balances were not material. Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders’ equity section of the Condensed Consolidated Balance Sheets as a component of accumulated other comprehensive income and subsequently recognized in the Condensed Consolidated Statements of Comprehensive Income when the hedged item affects net income. The ineffective portion of the change in fair value of a hedge is recognized in income immediately. Gains and losses recognized during the three six months ended March 31, 2017 were not material and were recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income.

Accounts Receivable (Tables)
Summary of Accounts Receivable
The following summarizes Valvoline’s accounts receivable as of the Condensed Consolidated Balance Sheet dates:

(In millions)
March 31
2017
 
September 30
2016
Trade and other accounts receivable
$
409

 
$
368

Less: Allowance for doubtful accounts
(4
)
 
(5
)
 
$
405

 
$
363

Inventories (Tables)
Summary of Inventory
The following summarizes Valvoline’s inventories as of the Condensed Consolidated Balance Sheet dates:
(In millions)
March 31
2017
 
September 30
2016
Finished products
$
159

 
$
149

Raw materials, supplies and work in process
27

 
21

LIFO reserves
(27
)
 
(29
)
Obsolete inventory reserves
(3
)
 
(2
)
 
$
156

 
$
139

Goodwill (Tables)
Schedule of Goodwill
The following is a progression of goodwill by reportable segment for the six months ended March 31, 2017.

(In millions)
Core North America
 
Quick Lubes
 
International
 
Total
September 30, 2016
$
89

 
$
135

 
$
40

 
$
264

Acquisitions (a)

 
48

 

 
48

March 31, 2017
$
89

 
$
183

 
$
40

 
$
312

 
 
 
 
 
 
 
 
(a) Relates to $44 million for the acquisition of Time-It Lube and $4 million for the acquisition of five locations within the Quick Lubes reportable segment during the six months ended March 31, 2017. See Note 2 for more information on the acquisition of Time-It Lube.

Debt (Tables)
Schedule of Long-term Debt
The following table summarizes Valvoline’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets:
(In millions)
March 31 2017
 
September 30 2016
Senior Notes
$
375

 
$
375

Term Loan A
293

 
375

Accounts Receivable Securitization
75

 

Revolver

 

Other (a)
(6
)
 
(7
)
Total debt
$
737

 
$
743

Short-term debt
75

 

Current portion of long-term debt
16

 
19

Long-term debt
$
646

 
$
724

 
 
 
 
(a) At March 31, 2017, Other includes $8 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. At September 30, 2016, Other included $9 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions.
Employee Benefit Plans (Tables)
Components of Benefit Costs
The following table summarizes the components of pension and other postretirement benefit income. For the three and six months ended March 31, 2016, these amounts were generally related to allocations to Valvoline under a multi-employer plan.
 
 
 
 
 
 
Other postretirement benefits
 
 
Pension benefits
 
(In millions)
 
2017
 
2016
 
2017
 
2016
Three months ended March 31
 
 
 
 
 
 
 
 
Service cost
 
$

 
$
2

 
$

 
$

Interest cost
 
22

 
6

 

 

Expected return on plan assets
 
(36
)
 
(9
)
 

 

Amortization of prior service credit
 

 

 
(3
)
 
(1
)
Curtailment gain
 

 
(12
)
 

 
(6
)
Actuarial loss
 

 
22

 

 
1

Net periodic benefit (income) costs
 
$
(14
)

$
9


$
(3
)
 
$
(6
)
 
 
 
 
 
 
 
 
 
Six months ended March 31
 
 
 
 
 
 
 
 
Service cost
 
$
1

 
$
4

 
$

 
$

Interest cost
 
43

 
12

 

 
1

Expected return on plan assets
 
(72
)
 
(18
)
 

 

Amortization of prior service credit
 

 

 
(6
)
 
(2
)
Curtailment gain
 

 
(12
)
 

 
(6
)
Actuarial loss (gain)
 

 
22

 
(8
)
 
1

Net periodic benefit (income) costs
 
$
(28
)
 
$
8

 
$
(14
)
 
$
(6
)
Earnings Per Share (Tables)
Schedule of Earnings Per Share, Basic and Diluted
The following is the computation of basic and diluted earnings per share (“EPS”). Earnings per share is reported under the treasury stock method.

 
 
Three months ended
 
Six months ended
 
 
March 31
 
March 31
(In millions except per share data)
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
71

 
$
68

 
$
143

 
$
133

Denominator
 
 
 
 
 
 
 
 
Weighted-average shares used to compute basic EPS
 
205

 
205

 
205

 
205

Effect of dilutive securities (a)
 

 

 

 

Weighted-average shares used to compute diluted EPS
 
205


205

 
205

 
205

 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.35

 
$
0.33

 
$
0.70

 
$
0.65

Diluted
 
$
0.35

 
$
0.33

 
$
0.70

 
$
0.65

 
 
 
 
 
 
 
 
 
(a) During the six months ended March 31, 2017, the Company issued share-based awards to six non-employee directors. These awards had no material impact on earnings per share.
Stockholders' Equity (Tables)
The Company's dividend activity during the six months ended March 31, 2017 was as follows:
 
 
 
 
 
 
Common Stock
Declaration Date
 
Record Date
 
Payment Date
 
Dividend Per Share

 
Cash Outlay
 
Cash Paid to Parent
November 15, 2016
 
December 5, 2016
 
December 20, 2016
 
$
0.049

 
$
10

 
$
8

January 24, 2017
 
March 1, 2017
 
March 15, 2017
 
$
0.049

 
$
10

 
$
8

Components of other comprehensive income (loss) recorded in the Condensed Consolidated Statements of Comprehensive Income are presented in the following table, before tax and net of tax effects.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
(In millions)
Before tax
 
Tax benefit (expense)
 
Net of tax
 
Before tax
 
Tax benefit (expense)
 
Net of tax
Three months ended March 31
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation gain
$
6

 
$

 
$
6

 
$
10

 
$
(1
)
 
$
9

Pension and other postretirement obligation adjustment:
 
 
 
 


 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(3
)
 
1

 
(2
)
 

 

 

Total other comprehensive income
$
3

 
$
1

 
$
4

 
$
10

 
$
(1
)
 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended March 31
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation (loss) gain
$
(3
)
 
$

 
$
(3
)
 
$
5

 
$

 
$
5

Pension and other postretirement obligation adjustment:
 
 
 
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(6
)
 
2

 
(4
)
 

 

 

Total other comprehensive (loss) income
$
(9
)
 
$
2

 
$
(7
)
 
$
5

 
$

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 (a) Amortization of unrecognized prior service credits are included in net periodic benefit income for pension and other postretirement plans and are included in Pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.
Related Party Transactions (Tables)
Summary of Allocated Centralized and Administrative Support Costs
The following table summarizes the centralized and administrative support costs of Ashland that were allocated to Valvoline for the three and six months ended March 31, 2016.

 
 
Three months ended March 31
 
Six months ended March 31
(In millions)
 
2016
 
2016
Information technology
 
$
5

 
$
10

Financial and accounting
 
3

 
6

Building services
 
3

 
6

Legal and environmental
 
1

 
3

Human resources
 
1

 
2

Shared services
 

 
1

Other general and administrative
 
7

 
13

Total
 
$
20

 
$
41

Reportable Segment Information (Tables)
Schedule of Segment Reporting Information
The following table presents various financial information for each reportable segment:



(In millions)
Three months ended March 31
 
Six months ended March 31
2017
 
2016
 
2017
 
2016
Sales
 
 
 
 
 
 
 
Core North America
$
253

 
$
248

 
$
490

 
$
489

Quick Lubes
128

 
113

 
255

 
213

International
133

 
119

 
258

 
234

 
$
514

 
$
480

 
$
1,003

 
$
936

Operating Income
 
 
 
 
 
 
 
Core North America
$
57

 
$
59

 
$
108

 
$
112

Quick Lubes
31

 
29

 
60

 
52

International
18

 
17

 
38

 
33

Total operating segments
$
106

 
$
105

 
$
206

 
$
197

Unallocated and other (a)
11

 
(1
)
 
31

 
3

 
$
117

 
$
104

 
$
237

 
$
200

 
 
 
 
 
 
 
 
(a)
Unallocated and other includes a gain of $8 million during the six months ended March 31, 2017 and a loss of $5 million during three and six months ended March 31, 2016 related to pension and other postretirement plan actuarial remeasurements. Unallocated and other also includes separation costs of $6 million and $12 million for the three and six months ending March 31, 2017, respectively.
Basis of Presentation (Details) (Ashland)
Mar. 31, 2017
Ashland
 
Related Party Transaction [Line Items]
 
Ashland ownership percentage
83.00% 
Acquisitions (Details) (USD $)
In Millions, unless otherwise specified
0 Months Ended 0 Months Ended 0 Months Ended 6 Months Ended
Mar. 31, 2017
Sep. 30, 2016
Mar. 31, 2017
Quick Lubes
Sep. 30, 2016
Quick Lubes
Jan. 31, 2017
Time-It Lube
store
Jan. 31, 2017
Time-It Lube
Feb. 1, 2016
Oil Can Henry's
Ashland
Feb. 1, 2016
Oil Can Henry's
Ashland
Feb. 1, 2016
Oil Can Henry's
franchise
store
vehicle
Mar. 31, 2017
Acquisition of Quick-Lube Locations
Quick Lubes
location
Business Acquisition [Line Items]
 
 
 
 
 
 
 
 
 
 
Number of stores in which business assets are acquired (store)
 
 
 
 
28 
 
 
 
 
 
Consideration for acquisition
 
 
 
 
$ 48 
 
$ 62 
 
 
 
Goodwill
312 
264 
183 
135 
 
44 
 
83 
 
 
Number of vehicles serviced (vehicle)
 
 
 
 
 
 
 
 
1,000,000 
 
Number of quick-lube stores (store)
 
 
 
 
 
 
 
 
89 
 
Number of company-owned stores (store)
 
 
 
 
 
 
 
 
47 
 
Number of franchise locations (franchise)
 
 
 
 
 
 
 
 
42 
 
Assets
 
 
 
 
 
 
 
10 
 
 
Debt
 
 
 
 
 
 
 
11 
 
 
Current liabilities
 
 
 
 
 
 
 
11 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
$ 9 
 
 
Number of locations acquired
 
 
 
 
 
 
 
 
 
Accounts Receivable (Details) (USD $)
In Millions, unless otherwise specified
Mar. 31, 2017
Sep. 30, 2016
Receivables [Abstract]
 
 
Trade and other accounts receivable
$ 409 
$ 368 
Less: Allowance for doubtful accounts
(4)
(5)
Accounts receivable
$ 405 
$ 363 
Inventories (Details) (USD $)
In Millions, unless otherwise specified
Mar. 31, 2017
Sep. 30, 2016
Inventory Disclosure [Abstract]
 
 
Finished products
$ 159 
$ 149 
Raw materials, supplies and work in process
27 
21 
LIFO reserves
(27)
(29)
Obsolete inventory reserves
(3)
(2)
Inventories
$ 156 
$ 139 
Goodwill (Details) (USD $)
6 Months Ended 12 Months Ended 6 Months Ended 6 Months Ended
Mar. 31, 2017
Sep. 30, 2016
Mar. 31, 2017
Time-It Lube
Jan. 31, 2017
Time-It Lube
Mar. 31, 2017
Core North America
Mar. 31, 2017
Quick Lubes
Mar. 31, 2017
Quick Lubes
Acquisition of Quick-Lube Locations
location
Mar. 31, 2017
International
Goodwill [Roll Forward]
 
 
 
 
 
 
 
 
Goodwill, beginning balance
$ 264,000,000 
 
 
$ 44,000,000 
$ 89,000,000 
$ 135,000,000 
 
$ 40,000,000 
Acquisitions
48,000,000 
 
44,000,000 
 
48,000,000 
4,000,000 
Goodwill, ending balance
312,000,000 
264,000,000 
 
44,000,000 
89,000,000 
183,000,000 
 
40,000,000 
Goodwill impairment
 
$ 0 
 
 
 
 
 
 
Number of locations acquired
 
 
 
 
 
 
 
Debt - Schedule of Long Term Debt (Details) (USD $)
Mar. 31, 2017
Sep. 30, 2016
Debt Instrument [Line Items]
 
 
Debt gross
$ 670,000,000 
$ 752,000,000 
Short-term debt
75,000,000 
Other
(6,000,000)
(7,000,000)
Total debt
737,000,000 
743,000,000 
Current portion of long-term debt
16,000,000 
19,000,000 
Long-term debt
646,000,000 
724,000,000 
Debt issuance cost discounts
8,000,000 
9,000,000 
Debt acquired through acquisitions
2,000,000 
2,000,000 
Line of Credit |
Revolver
 
 
Debt Instrument [Line Items]
 
 
Debt gross
 
Short-term debt
2024 Notes |
Senior Notes
 
 
Debt Instrument [Line Items]
 
 
Debt gross
375,000,000 
375,000,000 
Term Loan A Facility |
Line of Credit |
Secured Debt
 
 
Debt Instrument [Line Items]
 
 
Debt gross
293,000,000 
375,000,000 
2017 Accounts Receivable Securitization Facility |
Line of Credit |
Secured Debt
 
 
Debt Instrument [Line Items]
 
 
Short-term debt
$ 75,000,000 
$ 0 
Debt (Details) (USD $)
6 Months Ended 3 Months Ended 1 Months Ended 6 Months Ended 6 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Sep. 30, 2016
Mar. 31, 2017
2024 Notes
Senior Notes
Sep. 30, 2016
2024 Notes
Senior Notes
Mar. 31, 2017
2016 Credit Facilities
Mar. 31, 2017
2016 Credit Facilities
Line of Credit
Dec. 31, 2016
Secured Debt
2017 Accounts Receivable Securitization Facility
Nov. 30, 2016
Secured Debt
2017 Accounts Receivable Securitization Facility
Nov. 30, 2016
Secured Debt
2017 Accounts Receivable Securitization Facility
Line of Credit
Mar. 31, 2017
Secured Debt
2017 Accounts Receivable Securitization Facility
Line of Credit
Sep. 30, 2016
Secured Debt
2017 Accounts Receivable Securitization Facility
Line of Credit
Mar. 31, 2017
Secured Debt
Term Loan A Facility
Mar. 31, 2017
Secured Debt
Term Loan A Facility
Line of Credit
Sep. 30, 2016
Secured Debt
Term Loan A Facility
Line of Credit
Mar. 31, 2017
Revolver
Mar. 31, 2017
Revolver
Line of Credit
Sep. 30, 2016
Revolver
Line of Credit
Mar. 31, 2017
Letter of Credit
Mar. 31, 2017
Letter of Credit
2016 Credit Facilities
Line of Credit
Debt Instrument [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt gross
$ 670,000,000 
 
$ 752,000,000 
$ 375,000,000 
$ 375,000,000 
 
 
 
 
 
 
 
 
$ 293,000,000 
$ 375,000,000 
 
$ 0 
 
 
 
Long-term debt, fair value
689,000,000 
 
771,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate of debt
 
 
 
5.50% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal amount of line of credit
 
 
 
 
 
1,325,000,000 
 
 
125,000,000 
 
 
 
875,000,000 
 
 
450,000,000 
 
 
100,000,000 
 
Term of debt
 
 
 
 
 
 
 
 
 
1 year 
 
 
 
5 years 
 
 
5 years 
 
 
 
Proceeds from borrowings
75,000,000 
 
 
 
 
 
75,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
75,000,000 
 
 
 
 
 
 
 
 
75,000,000