VALVOLINE INC, 10-Q filed on 2/7/2019
Quarterly Report
v3.10.0.1
Document Entity Information - shares
3 Months Ended
Dec. 31, 2018
Jan. 31, 2019
Document and Entity Information [Abstract]    
Entity Registrant Name VALVOLINE INC  
Entity Central Index Key 0001674910  
Document Type 10-Q  
Document Period End Date Dec. 31, 2018  
Amendment Flag false  
Current Fiscal Year End Date --09-30  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   188,180,577
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Smaller Reporting Company false  
Emerging Growth Company false  
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Net Income (Loss) Attributable to Parent [Abstract]    
Sales $ 557 $ 545
Cost of sales 374 350
Gross profit 183 195
Selling, general and administrative expenses 105 107
Legacy and separation-related expenses, net 0 9
Equity and other income, net (9) (9)
Operating income 87 88
Net pension and other postretirement plan income (2) (10)
Net interest and other financing expenses 17 14
Income before income taxes 72 84
Income tax expense 19 94
Net income (loss) $ 53 $ (10)
NET INCOME (LOSS) PER SHARE    
Basic (usd per share) $ 0.28 $ (0.05)
Diluted (usd per share) $ 0.28 $ (0.05)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING    
Basic (shares) 188 202
Diluted (shares) 189 202
COMPREHENSIVE INCOME (LOSS)    
Net income (loss) $ 53 $ (10)
Other comprehensive (loss) income, net of tax    
Currency translation adjustments (4) 1
Amortization of pension and other postretirement plan prior service credit (2) (2)
Other comprehensive loss (6) (1)
Comprehensive income (loss) $ 47 $ (11)
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Dec. 31, 2018
Sep. 30, 2018
Current assets    
Cash and cash equivalents $ 99 $ 96
Accounts receivable, net 331 409
Inventories, net 200 176
Prepaid expenses and other current assets 38 44
Total current assets 668 725
Noncurrent assets    
Property, plant and equipment, net 428 420
Goodwill and intangibles, net 473 448
Equity method investments 32 31
Deferred income taxes 134 138
Other noncurrent assets 97 92
Total noncurrent assets 1,164 1,129
Total assets 1,832 1,854
Current liabilities    
Current portion of long-term debt 30 30
Trade and other payables 152 178
Accrued expenses and other liabilities 198 203
Total current liabilities 380 411
Noncurrent liabilities    
Long-term debt 1,291 1,292
Employee benefit obligations 330 333
Other noncurrent liabilities 174 176
Total noncurrent liabilities 1,795 1,801
Commitments and contingencies
Stockholders’ deficit    
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding 0 0
Common stock, par value $0.01 per share, 400 shares authorized; 188 shares issued and outstanding at December 31, 2018 and September 30, 2018 2 2
Paid-in capital 8 7
Retained deficit (379) (399)
Accumulated other comprehensive income 26 32
Total stockholders’ deficit (343) (358)
Total liabilities and stockholders’ deficit $ 1,832 $ 1,854
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2018
Sep. 30, 2018
Statement of Financial Position [Abstract]    
Preferred stock authorized (shares) 40,000,000 40,000,000
Preferred stock issued (shares) 0 0
Preferred stock outstanding (shares) 0 0
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) 188,000,000 188,000,000
Common stock outstanding (shares) 188,000,000 188,000,000
v3.10.0.1
Condensed Consolidated Statements of Stockholders' Deficit - USD ($)
shares in Millions, $ in Millions
Total
Common Stock
Paid-in Capital
Retained deficit
Accumulated other comprehensive income
Common stock outstanding, at beginning of period (shares) at Sep. 30, 2017   203      
Balance at beginning of period at Sep. 30, 2017 $ (117) $ 2 $ 5 $ (167) $ 43
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net income (loss) (10)     (10)  
Dividends paid (15)     (15)  
Stock-based compensation 2   2    
Repurchase of common stock (shares)   (2)      
Repurchases of common stock (39)     (39)  
Purchase of remaining ownership interest in subsidiary (14)   (7) (7)  
Currency translation adjustments 1       1
Amortization of pension and other postretirement prior service credits in income, net of tax (2)       (2)
Common stock outstanding, at end of period (shares) at Dec. 31, 2017   201      
Balance at end of period at Dec. 31, 2017 $ (194) $ 2 0 (238) 42
Common stock outstanding, at beginning of period (shares) at Sep. 30, 2018 188 188      
Balance at beginning of period at Sep. 30, 2018 $ (358) $ 2 7 (399) 32
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net income (loss) 53     53  
Dividends paid (20)     (20)  
Stock-based compensation 1   1    
Currency translation adjustments (4)       (4)
Amortization of pension and other postretirement prior service credits in income, net of tax $ (2)       (2)
Common stock outstanding, at end of period (shares) at Dec. 31, 2018 188 188      
Balance at end of period at Dec. 31, 2018 $ (343) $ 2 $ 8 $ (379) $ 26
v3.10.0.1
Condensed Consolidated Statements of Stockholders' Deficit (Parenthetical) - $ / shares
3 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Statement of Stockholders' Equity [Abstract]    
Dividends paid per common share (usd per share) $ 0.106 $ 0.0745
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities    
Net income (loss) $ 53 $ (10)
Adjustments to reconcile net income (loss) to cash flows from operating activities    
Depreciation and amortization 14 11
Debt issuance cost and discount amortization 0 1
Deferred income taxes 0 85
Equity income from unconsolidated affiliates, net of distributions 0 (2)
Pension contributions (2) (3)
Stock-based compensation expense 3 4
Change in assets and liabilities    
Accounts receivable [1] 43 (34)
Inventories [1] (13) 7
Payables and accrued liabilities [1] (19) (40)
Other assets and liabilities [1] 6 1
Total cash provided by operating activities 85 20
Cash flows from investing activities    
Additions to property, plant and equipment (27) (14)
Acquisitions, net of cash acquired (30) (60)
Other investing activities, net 1 0
Total cash used in investing activities (56) (74)
Cash flows from financing activities    
Proceeds from borrowings, net of issuance costs 100 44
Repayments on borrowings (101) (4)
Repurchases of common stock 0 (37)
Payments for purchase of additional ownership in subsidiary (1) (15)
Cash dividends paid (20) (15)
Other financing activities (3) (4)
Total cash used in financing activities (25) (31)
Effect of currency exchange rate changes on cash and cash equivalents (1) (1)
Increase (decrease) in cash and cash equivalents 3 (86)
Cash and cash equivalents - beginning of period 96 201
Cash and cash equivalents - end of period $ 99 $ 115
[1] Excludes changes resulting from operations acquired.
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Basis of Presentation and Significant Accounting Policies
3 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Basis of Presentation and Significant Accounting Policies 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 months ended December 31, 2018 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 of these 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 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 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 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 related to lease transactions. The primary objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. This new guidance is effective for the Company in the first quarter of fiscal 2020 using a modified retrospective approach. The Company has begun its assessment and implementation process, including completing its process to identify all forms of its leases globally, identify changes necessary to internal controls, as well as analyzing the practical expedients and specific impacts on its condensed consolidated financial statements. 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 the majority of the Company’s operating leases are expected to be recognized as right of use assets and associated lease liabilities. The Company also anticipates expanded footnote disclosures related to its leases under the new guidance.
v3.10.0.1
Revenue Recognition
3 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue Recognition 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 reportedAdjustments Balances at October 1, 2018
Accounts receivable, net$409 $(33)$376 
Inventories, net$176 $14 $190 
Deferred income taxes$138 $$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 Statement of Comprehensive Income as of and for the three months ended December 31, 2018:

December 31, 2018
Impact of Changes to Condensed Consolidated Balance SheetAs reported 
Adjustments (a) 
Under prior guidance 
(In millions)
Accounts receivable, net$331 $29 $360 
Inventories, net$200 $(12)$188 
Deferred income taxes$134 $(6)$128 
Accrued expenses and other liabilities$198 $$199 
Retained deficit$379 $(12)$367 
(a) Adjustments include the opening retained deficit adjustments as detailed in the table above.


Three months ended December 31, 2018 
Impact of Changes to Condensed Consolidated Statement of Comprehensive IncomeAs reported Adjustments Under prior guidance 
(In millions)
Sales$557 $(15)$542 
Cost of sales374 (15)359 
Gross profit$183 $— $183 
Selling, general and administrative expenses$105 $$107 
Operating income$87 $(2)$85 
Income before income taxes$72 $(2)$70 
Income tax expense$19 $(1)$18 
Net income$53 $(1)$52 
Basic earnings per share$0.28 $(0.01)$0.27 
Diluted earnings per share$0.28 $(0.01)$0.27 
Disaggregation of revenue

The following summarizes sales by primary customer channel for the Companys reportable segments for the three months ended December 31, 2018:  

(In millions) 
Quick Lubes 
Company-owned operations $124 
Non-company owned operations 65 
Total Quick Lubes 189 
Core North America 
Retail  116 
Installer and other 116 
Total Core North America 232 
International 136 
Consolidated sales $557 

Sales by reportable segment disaggregated by geographic market follows for the three months ended December 31, 2018:
(In millions) Quick Lubes Core North America International Totals 
Primary geographic markets 
North America (a)
$189 $232 $— $421 
Europe, Middle East and Africa (EMEA) — — 44 44 
Asia Pacific — — 67 67 
Latin America (a)
— — 25 25 
Totals $189 $232 $136 $557 
(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 Companys sales by timing of revenue recognized for the three months ended December 31, 2018:

(In millions) 
Timing of revenue recognized 
Sales at a point in time $547 
Franchised revenues transferred over time 10 
Consolidated sales $557 

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; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; 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. 

While payment terms with customers 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 December 31, 2018. 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.
v3.10.0.1
Fair Value Measurements
3 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements 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 HierarchyDecember 31
2018
September 30
2018
Cash and cash equivalents
Money market fundsLevel 1 $$
Time depositsLevel 2 25 22 
Prepaid expenses and other current assets
Currency derivatives (a)
Level 2 
Other noncurrent assets
Non-qualified trust fundsLevel 1 23 25 
Total assets at fair value$55 $53 
Accrued expenses and other liabilities
Currency derivatives (a)
Level 2 $— $
Total liabilities at fair value$— $
(a) The Company had outstanding contracts with notional values of $69 million and $74 million as of December 31, 2018 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 months ended December 31, 2018 or 2017 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.
December 31, 2018September 30, 2018
(In millions)Fair valueCarrying valueUnamortized discount and
issuance costs
Fair valueCarrying valueUnamortized
discount and
issuance costs
2024 Notes$366 $370 $$376 $370 $
2025 Notes374 395 376 395 
Total$740 $765 $10 $752 $765 $10 

Refer to Note 8 for more information on Valvoline’s other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value.
v3.10.0.1
Acquisitions and Divestitures
3 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Acquisitions and Divestitures ACQUISITIONS AND DIVESTITURES
During the three months ended December 31, 2018, the Company acquired 35 service center stores for a total of $30 million. These acquisitions included 31 franchise service center stores, which were acquired from Oil Changers Inc. on October 31, 2018, and 4 former franchise service centers stores acquired in single and multi-store transactions. During the three months ended December 31, 2017, the Company acquired 56 former franchise service center stores for $60 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 three months ended December 31:

(In millions)20182017
Inventories$— $
Property, plant and equipment
Goodwill21 36 
Intangible assets (a)
Reacquired franchise rights22 
Customer relationships— 
Trademarks and trade names— 
Net assets acquired$30 $60 
(a)  Intangible assets acquired during the three months ended December 31, 2018 have a weighted average amortization period of 12 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.
v3.10.0.1
Accounts Receivable
3 Months Ended
Dec. 31, 2018
Receivables [Abstract]  
Accounts Receivable ACCOUNTS RECEIVABLE
The following summarizes Valvoline’s accounts receivable:

(In millions)December 31
2018
September 30
2018
Trade$320 $390 
Other20 26 
Accounts receivable, gross340 416 
Allowance for doubtful accounts(9)(7)
Total accounts receivable, net $331 $409 
During the three months ended December 31, 2018, Valvoline sold $28 million of accounts receivable to a financial institution. Valvoline did not sell accounts receivable during the three months ended December 31, 2017.
v3.10.0.1
Inventories
3 Months Ended
Dec. 31, 2018
Inventory Disclosure [Abstract]  
Inventories 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:

(In millions)December 31
2018
September 30
2018
Finished products$211 $189 
Raw materials, supplies and work in process33 30 
Reserve for LIFO cost valuation(41)(40)
Excess and obsolete inventory reserves(3)(3)
Total inventories, net $200 $176 
v3.10.0.1
Goodwill and Other Intangibles
3 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangibles 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 three months ended December 31, 2018:

(In millions)Quick LubesCore North AmericaInternationalTotal
Balance at September 30, 2018$252 $89 $40 $381 
Acquisitions (a)
21 — — 21 
Currency translation (2)— — (2)
Balance at December 31, 2018$271 $89 $40 $400 
(a) Refer to Note 4 for details regarding the acquisitions during the three months ended December 31, 2018.

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:
December 31, 2018 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 (5)31 32 (4)28 
Customer relationships 17 (3)14 14 (3)11 
Other intangible assets — — 
Total definite-lived intangible assets $84 $(11)$73 $76 $(9)$67 
v3.10.0.1
Debt
3 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Debt DEBT
The following table summarizes Valvoline’s total debt as of:

(In millions)December 31
2018
September 30 2018 
2025 Notes$400 $400 
2024 Notes375 375 
Term Loans262 270 
Revolver164 147 
Trade Receivables Facility130 140 
Other (a)
(10)(10)
Total debt$1,321 $1,322 
Current portion of long-term debt30 30 
Long-term debt$1,291 $1,292 
 
(a) As of December 31, 2018 and 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 December 31, 2018 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 $262 million and $270 million, respectively. Consistent with the payment schedule, during the three months ended December 31, 2018, the Company made principal payments of $8 million on the Term Loans.

As of December 31, 2018 and September 30, 2018, there was $164 million and $147 million, respectively, outstanding under the $450 million revolving credit facility (“Revolver”) under the Senior Credit Agreement. During the three months ended December 31, 2018, Valvoline borrowed $57 million and made payments of $40 million on the Revolver. As of December 31, 2018, the total borrowing capacity remaining under the Revolver was $277 million due to a reduction of $9 million for letters of credit outstanding.
As of December 31, 2018, Valvoline was in compliance with all covenants under the Senior Credit Agreement.

Trade Receivables Facility

As of December 31, 2018 and September 30, 2018, there was $130 million and $140 million, respectively, outstanding under the $175 million trade receivables securitization facility (“Trade Receivables Facility”). During the three months ended December 31, 2018, Valvoline made payments of $53 million and borrowed $43 million under the Trade Receivables Facility, using the proceeds to supplement the Company’s daily cash needs.

Based on the availability of eligible receivables, the total borrowing capacity remaining under the Trade Receivables Facility at December 31, 2018 was approximately $12 million. The financing subsidiary owned $222 million and $275 million of outstanding accounts receivable as of December 31, 2018 and September 30, 2018, respectively, and these amounts are included in Accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
v3.10.0.1
Income Taxes
3 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes 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 December 31, 2018 was $19 million, an effective tax rate of 26.4%, compared to expense of $94 million, an effective tax rate of 111.9%, for the three months ended December 31, 2017. The decrease in income tax expense and the effective tax rate was principally driven by the enactment of tax reform legislation in the U.S. in December 2017, which resulted in a net increase in income tax expense of approximately $68 million during the three months ended December 31, 2017 and a lower federal corporate statutory income tax rate of 21% in fiscal 2019 from the blended rate of 24.5% in the prior year.

The Company finalized its provisional estimates of the impacts of U.S. tax reform legislation, which resulted in no significant adjustments during the three months ended December 31, 2018.
v3.10.0.1
Employee Benefit Plans
3 Months Ended
Dec. 31, 2018
Retirement Benefits [Abstract]  
Employee Benefit Plans EMPLOYEE BENEFIT PLANS
The following table summarizes the components of pension and other postretirement benefit income for the three months ended December 31:

Other postretirement benefits
Pension benefits
(In millions) 2018201720182017
Interest cost $20 $19 $$— 
Expected return on plan assets (20)(26)— — 
Amortization of prior service credit— — (3)(3)
Net periodic benefit income$— $(7)$(2)$(3)
v3.10.0.1
Litigation, Claims and Contingencies
3 Months Ended
Dec. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
Litigation, Claims and Contingencies 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.
v3.10.0.1
Earnings Per Share
3 Months Ended
Dec. 31, 2018
Earnings Per Share [Abstract]  
Earnings Per Share EARNINGS PER SHARE
The following summarizes basic and diluted earnings per share for the three months ended December 31:

(In millions, except per share data) 20182017
Numerator 
Net income (loss)$53 $(10)
Denominator 
Weighted average common shares outstanding188 202 
Effect of potentially dilutive securities (a)
— 
Weighted average diluted shares outstanding189 202 
  
Earnings (loss) per share
Basic$0.28 $(0.05)
Diluted $0.28 $(0.05)
(a) For the three months ended December 31, 2017, due to the net loss attributable to Valvoline common stockholders, potential common shares primarily related to stock-based compensation plans of approximately 1 million were excluded from the diluted share count because their effect would have been anti-dilutive.
v3.10.0.1
Reportable Segment Information
3 Months Ended
Dec. 31, 2018
Segment Reporting [Abstract]  
Reportable Segment Information REPORTABLE SEGMENT INFORMATION
Valvoline manages and reports within the following three segments: 

Quick Lubes - services the passenger car and light truck quick lube market in the United States and Canada through company-owned and independent franchised retail quick lube service stores, as well as Express Care stores where independent operators service vehicles with Valvoline products.

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 segments 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 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:



(In millions)
Three months ended
December 31 
20182017
Sales
Quick Lubes
$189 $154 
Core North America
232 251 
International
136 140 
Consolidated sales$557 $545 
Operating income
Quick Lubes
$38 $35 
Core North America
31 43 
International
18 19 
Total operating segments
$87 $97 
Unallocated and other (a)
— (9)
Consolidated operating income$87 $88 
(a) Unallocated and other includes Legacy and separation-related expenses, net.
v3.10.0.1
Guarantor Financial Information
3 Months Ended
Dec. 31, 2018
Condensed Financial Information Disclosure [Abstract]  
Guarantor Financial Information GUARANTOR FINANCIAL INFORMATION
The Senior Notes detailed in Note 8 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 December 31, 2018 
(In millions)Valvoline Inc.
(Parent Issuer)
Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$— $440 $132 $(15)$557 
Cost of sales— 293 96 (15)374 
Gross profit— 147 36 — 183 
Selling, general and administrative expenses81 21 — 105 
Equity and other (income) expenses, net— (13)— (9)
Operating (loss) income(3)79 11 — 87 
Net pension and other postretirement plan income — (2)— — (2)
Net interest and other financing expenses15 — 17 
(Loss) income before income taxes (18)80 10 — 72 
Income tax (benefit) expense (5)20 — 19 
Equity in net income of subsidiaries(66)(6)— 72 — 
Net income $53 $66 $$(72)$53 
Total comprehensive income$47 $60 $$(62)$47 
Condensed Consolidating Statements of Comprehensive Income 
For the three months ended December 31, 2017 
(In millions)Valvoline Inc.
(Parent Issuer)
Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$— $422 $134 $(11)$545 
Cost of sales— 263 98 (11)350 
Gross profit— 159 36 — 195 
Selling, general and administrative expenses76 22 — 107 
Legacy and separation-related expenses, net— — 
Equity and other (income) expenses, net— (12)— (9)
Operating (loss) income (10)87 11 — 88 
Net pension and other postretirement plan income — (10)— — (10)
Net interest and other financing expenses12 — 14 
(Loss) income before income taxes (22)96 10 — 84 
Income tax expense21 70 — 94 
Equity in net income of subsidiaries(33)(7)— 40 — 
Net (loss) income $(10)$33 $$(40)$(10)
Total comprehensive (loss) income$(11)$32 $$(40)$(11)
Condensed Consolidating Balance Sheets 
As of December 31, 2018 
(In millions)Valvoline Inc.
(Parent Issuer)
Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Assets 
Current assets 
Cash and cash equivalents$— $21 $78 $— $99 
Accounts receivable, net— 27 399 (95)331 
Inventories, net— 117 83 — 200 
Prepaid expenses and other current assets— 33 — 38 
Total current assets— 198 565 (95)668 
Noncurrent assets 
Property, plant and equipment, net— 387 41 — 428 
Goodwill and intangibles, net— 401 72 — 473 
Equity method investments— 32 — — 32 
Investment in subsidiaries832 468 — (1,300)— 
Deferred income taxes67 54 13 — 134 
Other noncurrent assets90 — 97 
Total noncurrent assets901 1,432 131 (1,300)1,164 
Total assets $901 $1,630 $696 $(1,395)$1,832 
Liabilities and Stockholders’ Deficit 
Current liabilities 
Current portion of long-term debt$30 $— $— $— $30 
Trade and other payables188 56 (95)152 
Accrued expenses and other liabilities17 156 25 — 198 
Total current liabilities50 344 81 (95)380 
Noncurrent liabilities 
Long-term debt1,160 130 — 1,291 
Employee benefit obligations— 313 17 — 330 
Other noncurrent liabilities34 140 — — 174 
Total noncurrent liabilities1,194 454 147 — 1,795 
Commitments and contingencies
Stockholders’ (deficit) equity (343)832 468 (1,300)(343)
Total liabilities and stockholders’ deficit/equity $901 $1,630 $696 $(1,395)$1,832 
Condensed Consolidating Balance Sheets 
As of September 30, 2018 
(In millions)Valvoline Inc.
(Parent Issuer)
Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Assets 
Current assets 
Cash and cash equivalents$— $20 $76 $— $96 
Accounts receivable, net— 48 480 (119)409 
Inventories, net— 95 81 — 176 
Prepaid expenses and other current assets38 — 44 
Total current assets201 642 (119)725 
Noncurrent assets 
Property, plant and equipment, net— 384 36 — 420 
Goodwill and intangibles, net— 396 52 — 448 
Equity method investments— 31 — — 31 
Investment in subsidiaries801 509 — (1,310)— 
Deferred income taxes62 63 13 — 138 
Other noncurrent assets85 — 92 
Total noncurrent assets865 1,468 106 (1,310)1,129 
Total assets $866 $1,669 $748 $(1,429)$1,854 
Liabilities and Stockholders’ Deficit 
Current liabilities 
Current portion of long-term debt$30 $— $— $— $30 
Trade and other payables241 53 (119)178 
Accrued expenses and other liabilities168 28 — 203 
Total current liabilities40 409 81 (119)411 
Noncurrent liabilities 
Long-term debt1,151 140 — 1,292 
Employee benefit obligations— 317 16 — 333 
Other noncurrent liabilities33 141 — 176 
Total noncurrent liabilities1,184 459 158 — 1,801 
Commitments and contingencies
Stockholders’ (deficit) equity (358)801 509 (1,310)(358)
Total liabilities and stockholders’ deficit/equity $866 $1,669 $748 $(1,429)$1,854 
Condensed Consolidating Statements of Cash Flows 
For the three months ended December 31, 2018 
(In millions)Valvoline Inc.
(Parent Issuer)
Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Cash flows provided by operating activities$13 $29 $43 $— $85 
Cash flows from investing activities 
Additions to property, plant and equipment— (20)(7)— (27)
Acquisitions, net of cash required— (8)(22)— (30)
Other investing activities, net— — — 
Cash flows used in investing activities— (27)(29)— (56)
Cash flows from financing activities 
Proceeds from borrowings, net of issuance costs57 — 43 — 100 
Repayments on borrowings(48)— (53)— (101)
Payments for purchase of additional ownership in subsidiary— — (1)— (1)
Cash dividends paid(20)— — — (20)
Other financing activities(2)(1)— — (3)
Cash flows used in financing activities(13)(1)(11)— (25)
Effect of currency exchange rate changes on cash and cash equivalents— — (1)— (1)
Increase in cash and cash equivalents  — — 
Cash and cash equivalents - beginning of year— 20 76 — 96 
Cash and cash equivalents - end of period $— $21 $78 $— $99 
Condensed Consolidating Statements of Cash Flows 
For the three months ended December 31, 2017