VALVOLINE INC, 10-Q filed on 2/8/2018
Quarterly Report
Document Entity Information
3 Months Ended
Dec. 31, 2017
Feb. 1, 2018
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, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--09-30 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
200,065,752 
Document Fiscal Year Focus
2018 
 
Document Fiscal Period Focus
Q1 
 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Net Income (Loss) Attributable to Parent [Abstract]
 
 
Sales
$ 545 
$ 489 
Cost of sales
350 
304 
Gross profit
195 
185 
Selling, general and administrative expenses
114 
95 
Separation costs
Equity and other income
(9)
(10)
Operating income
88 
94 
Net pension and other postretirement plan non-service income and remeasurement adjustments
(10)
(26)
Net interest and other financing expense
14 
10 
Income before income taxes
84 
110 
Income tax expense
94 
38 
Net (loss) income
(10)
72 
NET (LOSS) INCOME PER SHARE
 
 
Net (loss) income per share, basic (usd per share)
$ (0.05)
$ 0.35 
Net (loss) income per share, diluted (usd per share)
$ (0.05)
$ 0.35 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
Weighted average common shares outstanding, basic (shares)
202 
205 
Weighted average common shares outstanding, diluted (shares)
202 
205 
Dividends paid per common share (usd per share)
$ 0.07 
$ 0.05 
COMPREHENSIVE (LOSS) INCOME
 
 
Net (loss) income
(10)
72 
Other comprehensive income (loss), net of tax
 
 
Unrealized translation gain (loss)
(9)
Pension and other postretirement obligation adjustment
(2)
(2)
Other comprehensive loss
(1)
(11)
Comprehensive (loss) income
$ (11)
$ 61 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Sep. 30, 2017
Current assets
 
 
Cash and cash equivalents
$ 115 
$ 201 
Accounts receivable, net
418 
385 
Inventories, net
170 
175 
Other current assets
32 
29 
Total current assets
735 
790 
Noncurrent assets
 
 
Property, plant and equipment, net
384 
391 
Goodwill and intangibles, net
393 
335 
Equity method investments
33 
30 
Deferred income taxes
196 
281 
Other noncurrent assets
86 
88 
Total noncurrent assets
1,092 
1,125 
Total assets
1,827 
1,915 
Current liabilities
 
 
Short-term debt
75 
Current portion of long-term debt
19 
15 
Trade and other payables
141 
192 
Accrued expenses and other liabilities
208 
196 
Total current liabilities
368 
478 
Noncurrent liabilities
 
 
Long-term debt
1,147 
1,034 
Employee benefit obligations
331 
342 
Other noncurrent liabilities
175 
178 
Total noncurrent liabilities
1,653 
1,554 
Commitments and contingencies
   
   
Stockholders’ deficit
 
 
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
Common stock, par value $0.01 per share, 400 shares authorized; 201 and 203 shares issued and outstanding at December 31, 2017 and September 30, 2017
Paid-in capital
Retained deficit
(238)
(167)
Accumulated other comprehensive income
42 
43 
Total stockholders’ deficit
(194)
(117)
Total liabilities and stockholders’ deficit
$ 1,827 
$ 1,915 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Sep. 30, 2017
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)
201,000,000 
203,000,000 
Common stock outstanding (shares)
201,000,000 
203,000,000 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities
 
 
Net (loss) income
$ (10)
$ 72 
Adjustments to reconcile net income (loss) to cash flows from operating activities
 
 
Depreciation and amortization
11 
Debt issuance cost and discount amortization
Deferred income taxes
85 
Equity income from affiliates
(5)
(4)
Distributions from equity affiliates
Pension contributions
(3)
(3)
Gain on pension and other postretirement plan remeasurements
(8)
Stock-based compensation expense
Change in assets and liabilities
 
 
Accounts receivable
(34)1
10 1
Inventories
1
(2)1
Payables and accrued liabilities
(40)1
23 1
Other assets and liabilities
1
(11)1
Total cash provided by operating activities
20 
88 
Cash flows from investing activities
 
 
Additions to property, plant and equipment
(14)
(9)
Acquisitions, net of cash acquired
(60)
Other investing activities, net
(1)
Total cash used in investing activities
(74)
(10)
Cash flows from financing activities
 
 
Net transfers to Ashland
(2)
Proceeds from borrowings, net of issuance costs
44 
75 
Repayments on borrowings
(4)
(79)
Repurchase of common stock
(37)
Purchase of additional ownership in subsidiary
(15)
Cash dividends paid
(15)
(10)
Other financing activities
(4)
Total cash used in financing activities
(31)
(16)
Effect of currency exchange rate changes on cash and cash equivalents
(1)
(Decrease) increase in cash and cash equivalents
(86)
64 
Cash and cash equivalents - beginning of period
201 
172 
Cash and cash equivalents - end of period
$ 115 
$ 236 
Basis of Presentation and Significant Accounting Policies
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, 2017. 

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.

Recent accounting pronouncements

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 recent accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The following standards relevant to Valvoline were either issued or adopted in the current period, or are expected to have a meaningful impact on Valvoline in future periods.

Recently adopted

In the first fiscal quarter of 2018, Valvoline adopted the following:

In July 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance to simplify the subsequent measurement of certain inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in, first out (“LIFO”) and retail inventory methods. Valvoline adopted this guidance prospectively on October 1, 2017. Valvoline utilizes LIFO to value approximately 70% of its gross inventory and there were no material differences in the Company's previous valuation methodology for its remaining inventory using lower of cost or market to lower of cost or net realizable value.

In March 2017, the FASB issued accounting guidance that changed 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 as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost are presented separately outside of the operating income caption. Valvoline retrospectively adopted this guidance on October 1, 2017. Accordingly, Net pension and other postretirement plan non-service income and remeasurement adjustments has been reclassified to non-operating income for all periods presented within the Condensed Consolidated Statements of Comprehensive Income, which reduced previously reported operating income by $26 million for the three months ended December 31, 2016.

Issued but not yet adopted

In May 2014, the FASB issued accounting guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance. This guidance introduces a five-step model for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. The Company is evaluating the effect of adopting the new revenue guidance on its financial statements and does not currently expect it to have a material effect to net earnings. Based on an evaluation of current contracts and revenue streams to-date, Valvoline believes that most revenue transactions recorded under the new guidance will be substantially consistent with treatment under existing guidance, with certain reclassifications expected within the Condensed Consolidated Statements of Comprehensive Earnings and certain minimal changes to the timing of the recognition of revenues. The Company's revenue transactions generally consist of a single performance obligation to transfer promised goods and are not accounted for under industry-specific guidance. The Company anticipates expanded footnote disclosures under the new guidance.

Management will continue to complete its assessment of revenue streams and implementation plans, including monitoring developments, and plans to substantially complete the Company's implementation assessment in early 2018 and finalize conclusions by the fourth quarter of fiscal 2018. Valvoline will adopt this standard in the first quarter of fiscal 2019 and will provide updated disclosures of the anticipated impacts of adoption in future filings.

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. The Company expects to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While adoption is expected to lead to a material increase in the assets and liabilities recorded on the Condensed Consolidated Balance Sheet and an increase in footnote disclosures related to leases, the Company is in the process of developing assessment and implementation plans to determine the specific impacts, including those on the Condensed Consolidated Statements of Comprehensive Earnings.
Fair Value Measurements
Fair Value Measurements
FAIR VALUE MEASUREMENTS

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

 
December 31, 2017
 
September 30, 2017
 
 
 
Quoted prices in active markets for identical assets
 
 
 
Quoted prices in active markets for identical assets
(In millions)
Fair Value
 
Level 1
 
Fair Value
 
Level 1
Assets
 
 
 
 
 
 
 
Cash equivalents (a)
$
24

 
$
24

 
$
46

 
$
46

Foreign currency derivatives (b)
1

 
1

 
1

 
1

Non-qualified trust funds (c)
30

 
30

 
30

 
30

Total assets at fair value
$
55

 
$
55

 
$
77

 
$
77

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Foreign currency derivatives (d)
$
1

 
$
1

 
$
1

 
$
1

Total liabilities at fair value
$
1

 
$
1

 
$
1

 
$
1

 
 
 
 
 
 
 
 
(a) Included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets.
(b)
Included in Other current assets in the Condensed Consolidated Balance Sheets.
(c)
As of December 31, 2017, $2 million of this balance is included in Other current assets, with the remainder included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. As of September 30, 2017, this balance is included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.
(d)
Included in Accrued expense and other liabilities in the Condensed Consolidated Balance Sheets.

There were no Level 2 or 3 financial assets or liabilities that were accounted for at fair value on a recurring basis as of December 31, 2017 or September 30, 2017. Additionally, there were no transfers between levels of the fair value hierarchy during the three months ending December 31, 2017 or 2016.
Cash equivalents
A portion of the Company's excess cash is held in highly liquid investments with maturities of three months or less. Cash equivalents generate interest income and are measured at fair value using prevailing market rates.
Derivatives

The Company uses derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures and exchange one foreign currency for another for a fixed rate at a future date of twelve months or less. Gains and losses recognized for changes in the fair value of these instruments were not material during the three months ended December 31, 2017 and 2016 and are included in Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income to offset the gain or loss on the hedged item in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures. The Company had outstanding contracts with highly-rated financial institutions with notional values of $43 million and $47 million as of December 31, 2017 and September 30, 2017, respectively.
Non-qualified trust funds
The Company maintains a non-qualified trust to fund benefit payments for certain of its U.S. non-qualified pension plans, which primarily consists of highly liquid fixed income U.S. government bonds. Gains and losses related to these investments are immediately recognized within Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income.
Long-term debt
The Company's outstanding fixed rate senior notes consist of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes”) and 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes” and together with the 2024 Notes, “Senior Notes”).
The fair values shown in the table below are based on the prices at which the bonds have recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of coupon payments each year and the maturity dates. 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, 2017
 
September 30, 2017
(In millions)
Fair value
 
Carrying value
 
Unamortized discount and issuance costs
 
Fair value
 
Carrying value
 
Unamortized discount and issuance costs
2024 Notes
$
399

 
$
370

 
$
5

 
$
401

 
$
370

 
$
5

2025 Notes
404

 
395

 
5

 
408

 
394

 
6

Total
$
803

 
$
765

 
$
10

 
$
809

 
$
764

 
$
11


Refer to Note 7 for more information on the Senior Notes and Valvoline's other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value.
Acquisitions
Acquisitions
ACQUISITIONS

Henley Bluewater acquisition

On October 2, 2017, the Company completed the acquisition of 56 Quick Lubes franchise service centers from Henley Bluewater LLC for $60 million. These stores build on the infrastructure and talent base of the existing Company-owned operations in northern Ohio and adds Company-owned locations in Michigan.

Prior to the acquisition, Valvoline licensed the right to operate quick lube service centers, including use of the Company's trademarks and trade name, to the franchisee whose assets were acquired. In connection with the acquisition, Valvoline reacquired those rights and recognized a separate definite-lived intangible asset which was assigned a preliminary fair value of $22 million that will be amortized on a straight-line basis over the weighted average remaining term of approximately eight years. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market.

The acquisition resulted in $36 million of goodwill and the remainder of the purchase price was allocated to working capital and property, plant and equipment. Goodwill is primarily attributed to the potential growth of the business in the northern Ohio and Michigan markets, has been allocated to the Company's Quick Lubes reportable segment, and is expected to be deductible for income tax purposes.

Remaining ownership interest in subsidiary

Valvoline historically owned a 70% controlling interest and consolidated the financial results of its subsidiary in Thailand. In December 2017, Valvoline purchased the remaining 30% interest for total consideration of approximately $16 million, making it a wholly-owned subsidiary of the Company. This interest was not material to the current or prior period financial statements for presentation and disclosure as a noncontrolling interest, which was eliminated as a result of this purchase through a net charge to Paid-in capital and Retained deficit.
Accounts Receivable
Accounts Receivable
ACCOUNTS RECEIVABLE

The following summarizes Valvoline’s accounts receivable:

(In millions)
December 31
2017
 
September 30
2017
Trade and other accounts receivable
$
424

 
$
390

Less: Allowance for doubtful accounts
(6
)
 
(5
)
 
$
418

 
$
385



Prior to May 2017 when Valvoline's former parent company, Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to as “Ashland”), distributed its net investment in Valvoline (the “Distribution”), Ashland was 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 constituted 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 was to decrease the time accounts receivable was outstanding and increase cash flows as Ashland in turn remitted payment to Valvoline. During the three months ended December 31, 2016, $11 million of accounts receivable were sold to the financial institution under this agreement.

Following the Distribution, Valvoline became party to the arrangement to sell certain customer accounts receivable in the form of draft or bills of exchange to the financial institution. During the three months ended December 31, 2017, Valvoline did not sell accounts receivable to the financial institution.
Inventories
Inventories
INVENTORIES

Certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method. Remaining inventories are carried at the lower of cost or net realizable value using the weighted average cost method.

The following summarizes Valvoline’s inventories:
(In millions)
December 31
2017
 
September 30
2017
Finished products
$
178

 
$
180

Raw materials, supplies and work in process
28

 
31

LIFO reserves
(33
)
 
(33
)
Obsolete inventory reserves
(3
)
 
(3
)
 
$
170

 
$
175

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
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, 2017.
(In millions)
Core North America
 
Quick Lubes
 
International
 
Total
September 30, 2017
$
89

 
$
201

 
$
40

 
$
330

Acquisitions (a)

 
30

 

 
30

December 31, 2017
$
89

 
$
231

 
$
40

 
$
360

 
 
 
 
 
 
 
 
(a) Relates to the acquisition of Henley Bluewater LLC during the three months ended December 31, 2017 and adjustments related to prior year acquisitions.

Other Intangible Assets

Valvoline's purchased intangible assets were specifically identified when acquired and have finite lives. Intangible assets were $37 million in gross carrying amount, net of $4 million in accumulated amortization as of December 31, 2017 and were reported in Goodwill and intangibles, net on the Condensed Consolidated Balance Sheet. Amortization expense recognized on intangible assets during the three months ended December 31, 2017 and 2016 was not material. Amortization expense expected in the next five fiscal years is as follows:

(In millions)
 
 
Years ending September 30 (estimated)
  
 
2018
  
$
5

2019
  
$
5

2020
  
$
5

2021
  
$
4

2022
  
$
4

 
 
 
Debt Obligations
Debt Obligations
DEBT OBLIGATIONS

The following table summarizes Valvoline’s short-term borrowings and long-term debt:
(In millions)
December 31
2017
 
September 30 2017
2025 Notes
$
400

 
$
400

2024 Notes
375

 
375

Term Loans
281

 
285

Trade Receivables Facility
120

 
75

Revolver

 

Other (a)
(10
)
 
(11
)
Total debt
$
1,166

 
$
1,124

Short-term debt

 
75

Current portion of long-term debt
19

 
15

Long-term debt
$
1,147

 
$
1,034

 
 
 
 
(a) At December 31, 2017, Other includes $12 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. At September 30, 2017, Other included $13 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions.

Senior Notes

During August 2017, Valvoline completed the issuance of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million. The net proceeds from the offering of the 2025 Notes was $394 million (after deducting initial purchasers' discounts and debt issuance costs), which were used to make a voluntary contribution to the Company's qualified U.S. pension plan.

During July 2016, Valvoline completed the issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million. The net proceeds from the offering of the 2024 Notes was $370 million (after deducting initial purchasers’ discounts and debt issuance costs), which were transferred to Valvoline's former parent, Ashland.

The Senior Notes are subject to customary events of default for similar debt securities, which if triggered may accelerate payment of principal, premium, if any, and accrued but unpaid interest on the notes. Such events of default include non-payment of principal and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change of control repurchase event occurs, Valvoline may be required to offer to purchase the Senior Notes from the holders thereof. The Senior Notes are not otherwise required to be repaid prior to maturity, although they may be redeemed at the option of Valvoline at any time prior to their maturity in the manner specified in the indentures governing the notes. The notes are guaranteed by each of Valvoline's subsidiaries that guarantee obligations under the existing senior secured credit facility described below.

In December 2017, Valvoline completed registered exchange offers for the Senior Notes.

Senior Credit Agreement

The 2016 Senior Credit Agreement provides 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 facility (“Term Loans”), and (ii) a five-year $450 million revolving credit facility (including a $100 million letter of credit sublimit) (“Revolver”). At December 31, 2017 and September 30, 2017, the Term Loans had outstanding principal balances of $281 million and $285 million, respectively. At December 31, 2017 and September 30, 2017, there were no amounts outstanding under the Revolver. As of December 31, 2017, total borrowing capacity remaining under the Revolver was $439 million due to a reduction of $11 million for letters of credit outstanding.

The outstanding principal balance of the Term Loans is required to be repaid in quarterly installments of approximately $4 million for fiscal 2018, $8 million for fiscal 2019 and 2020, and $15 million for fiscal 2021 with the balance due at maturity. At Valvoline’s option, amounts outstanding under the 2016 Senior Credit Agreement bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate fluctuates between LIBOR plus 1.500% per annum and LIBOR plus 2.500% per annum (or between the alternate base rate plus 0.500% per annum and the alternate base rate plus 1.500% annum), based upon Valvoline’s corporate credit ratings or the consolidated first lien net leverage ratio (as defined in the 2016 Senior Credit Agreement).

The 2016 Credit Facilities are guaranteed by Valvoline’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, foreign subsidiaries and certain other subsidiaries), and are secured by a first-priority security interest in substantially all the personal property assets, and certain real property assets, of Valvoline and the guarantors, including all or a portion of the equity interests of certain of Valvoline’s domestic subsidiaries and first-tier foreign subsidiaries. The 2016 Credit Facilities may be prepaid at any time without premium.

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 December 31, 2017, Valvoline was in compliance with all covenants under the 2016 Senior Credit Agreement.

Trade Receivables Facility

On November 29, 2016, Valvoline entered into a $125 million, one-year revolving trade receivables securitization facility (“Trade Receivables Facility”) with certain financial institutions. On November 20, 2017, the Company amended the Trade Receivables Facility to extend the maturity date to November 19, 2020 and increase the maximum funding under the facility to $175 million based on the availability of eligible receivables and other customary factors and conditions.

Under the Trade Receivables Facility, Valvoline sells and/or transfers a majority of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary (in the form of cash or letters of credit) are secured by those trade receivables. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the Trade Receivables Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its condensed consolidated financial statements.

During the first fiscal quarter of 2017, Valvoline borrowed $75 million under the Trade Receivables Facility and used the net proceeds to repay an equal amount of the Term Loans. During the first fiscal quarter of 2018, Valvoline borrowed $45 million under the Trade Receivables Facility and used the proceeds to supplement the daily cash needs of the Company's operations. The Company accounts for the Trade Receivables Facility as secured borrowings. Based upon the maturity dates in place in each respective period, as of December 31, 2017, the $120 million balance outstanding was classified as Long-term debt and the $75 million balance outstanding as of September 30, 2017 was classified as Short-term debt in the Condensed Consolidated Balance Sheets. Based on the availability of eligible receivables, the total borrowing capacity remaining under the Trade Receivables Facility at December 31, 2017 was $39 million. The financing subsidiary owned $253 million and $247 million of outstanding accounts receivable as of December 31, 2017 and September 30, 2017, respectively, and these amounts are included in Accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.

The financing subsidiary pays customary fees to the lenders, and advances by a lender under the Trade Receivables Facility accrue interest for which the weighted average interest rates were 2.2% and 1.5% for the three months ended December 31, 2017 and 2016, respectively. The Trade Receivables Facility contains various customary affirmative and negative covenants and default and termination provisions, which provide for acceleration of amounts owed under the Trade Receivables Facility in circumstances including, but not limited to, the failure to pay interest or other amounts when due, defaults on certain other indebtedness, certain insolvency events, and breach of representation.
Income Taxes
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, 2017 was $94 million, an effective tax rate of 111.9% compared to expense of $38 million and an effective tax rate of 34.5% for the three months ended December 31, 2016. The increase 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 that more than offset benefits related to the reduction in the estimated annual effective tax rate for fiscal 2018.

U.S. tax reform legislation

On December 22, 2017, the President of the United States signed into law tax reform legislation (the “Act”), which is generally effective January 1, 2018. The Act includes a number of provisions, including lowering the U.S. corporate federal income tax rate from a maximum of 35% to 21% and changing or limiting certain tax deductions. While the Company expects this rate reduction will ultimately benefit Valvoline, the Act also includes provisions that are expected to offset some of the benefit of the rate reduction, including the repeal of the deduction for domestic production activities and the expansion of the limitation on the deduction of certain executive compensation. In addition, the Act alters the landscape of taxation of non-U.S. operations and provides immediate deductions for certain new investments, among other provisions. Based on the Company's provisional estimates of the impacts of the Act, the Company expects the Act will result in a lower estimated annual effective tax rate for Valvoline in fiscal 2018 and beyond and decrease the Company's cash taxes, particularly in years beyond fiscal 2018.

During the three months ended December 31, 2017, enactment of the Act resulted in the following provisional impacts on income tax expense, which are described further below:

The remeasurement of net deferred tax assets at the lower enacted corporate tax rate resulted in a net $67 million increase in income tax expense;
The deemed repatriation tax on unremitted non-U.S. earnings and profits resulted in a $4 million increase in income tax expense; and
The remeasurement of net indemnity liabilities associated with the Tax Matters Agreement increased pre-tax expense by $7 million and generated a $3 million tax benefit primarily related to the higher expected utilization of tax attributes payable to Ashland.

The estimated impacts of the Act recorded during the three months ended December 31, 2017 are provisional in nature, and the Company will continue to assess the impact of the Act and will record adjustments through the income tax provision in the relevant period as amounts are known and reasonably estimable during the measurement period. Accordingly, the impact of the Act may differ from the Company's provisional estimates due to and among other factors, information currently not available, changes in interpretations and the issuance of additional guidance, as well as changes in assumptions the Company has currently made, including actions the Company may take in future periods as a result of the Act.

In particular, there is currently a lack of clarity regarding the application of the executive compensation deduction limitations and state tax implications as a result of the Act. The Company currently estimates that the effect of the Act on executive compensation deduction limitations will primarily be effective in future periods. With regard to state tax implications, the Company generally expects taxable state income will increase as a result of deduction limitations associated with the Act, though the impact is not currently reasonably estimable as most U.S. state tax jurisdictions have not responded to the specific effects of the Act. The Company will make relevant updates to management's estimates and assumptions as additional information becomes available.

Given the effective date of the rate reduction in the Act, the Company's statutory federal corporate tax rate for fiscal 2018 will be a blended rate of 24.5% and will decline to 21% for fiscal 2019 and beyond.

Deferred tax remeasurement

The Company's net deferred income taxes represent benefits that will be used to reduce corporate taxes expected to be paid as well as differences between the tax bases and carrying amounts of assets and liabilities that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates occur, deferred tax assets and liabilities are adjusted in the period changes are enacted through income tax expense.

The Company’s net deferred tax assets of $281 million were determined at September 30, 2017 based on the then-current enacted income tax rates prior to the passage of the Act. As a result of the reduction in the federal corporate income tax rate from 35% to 21% under the Act, the Company revalued its net deferred tax assets as of December 31, 2017, which resulted in a reduction in the value of net deferred tax assets of approximately $67 million that was recorded as additional income tax expense in the Company’s Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2017.

Deemed repatriation

The Act implements a new territorial tax system that imposes a one-time transition tax, or deemed repatriation, on unremitted earnings of certain non-U.S. subsidiaries that is based in part on the amount of these earnings held in cash and other specified assets. The mandatory deemed repatriation resulted in a $22 million gross liability, but allows for the realization of $18 million of previously unrecognized foreign tax credits related to taxes previously paid in relevant local jurisdictions. The net result was $4 million of income tax expense which was recognized during the three months ended December 31, 2017.

The Company has historically intended to indefinitely reinvest undistributed earnings of its non-U.S. subsidiaries. As undistributed earnings of the Company's non-U.S. subsidiaries were subject to the one-time deemed repatriation tax, the Company began to reevaluate its intentions to indefinitely reinvest its non-U.S. undistributed earnings. The Company now plans to repatriate up to $45 million of previously undistributed earnings of certain non-U.S. subsidiaries where the withholding tax implications are expected to be minimal. The Company is presently not aware of any significant restrictions on the repatriation of these funds and additional taxes and other costs that may arise between the deemed and actual distribution dates are not estimated to be material.

The Company's intent is to continue to indefinitely reinvest the remainder of its undistributed earnings of non-U.S. subsidiaries. Upon any future determination to distribute these earnings, the Company would be subject to certain income and withholding taxes, the amount of which is not practicable to determine given the complexities associated with such a hypothetical calculation, including dependencies on income tax laws and other circumstances in place at the time amounts are distributed.

Tax Matters Agreement

Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement were $67 million and $62 million at December 31, 2017 and September 30, 2017, respectively. At December 31, 2017 and September 30, 2017, $1 million was recorded in Accrued expenses and other liabilities, and $66 million and $61 million was recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheets as of December 31, 2017 and September 30, 2017, respectively.

Under the Tax Matters Agreement, Valvoline has net indemnification obligations for a number of tax matters, including certain taxes that arise upon audit or examination related to the periods prior to Distribution and Valvoline's utilization of legacy tax attributes contributed as part of the separation from Ashland. During the three months ended December 31, 2017, Valvoline recognized $7 million of expense in Selling, general and administrative expenses for the estimated increase in net amounts due. The estimated increase in net amounts due was a result of the reduction in the federal tax rate primarily related to the reduced federal benefit of state tax deductions, which drove increases in estimated taxes payable upon audit or examination as well as the expected utilization of legacy tax attributes, which also resulted in an income tax benefit of $3 million during the period.

Uncertainties in income taxes

The Company records reserves related to its uncertain tax positions when it is more likely than not that the tax position may not be sustained on examination by the taxing authorities. As of December 31, 2017, the Condensed Consolidated Balance Sheet includes a $10 million liability for uncertain income tax positions, and during the three months ended December 31, 2017, there were no significant changes in Valvoline's uncertain tax positions or related reserves. As tax examinations are completed or settled, statutes of limitations expire, or other new information becomes available, the Company will adjust its liabilities for uncertain tax positions in the respective period through payment or through the income tax provision. The Company has provided adequate reserves for its income tax uncertainties in all open tax years based on the recognition and measurement considerations in the relevant accounting principles and any adjustments are not expected to have a material effect on its condensed consolidated financial statements at this time; however, it is reasonably possible that there could be changes to the Company's reserves related to its uncertain tax positions due to activities of the taxing authorities, resolution of examination issues, or reassessment of existing uncertain tax positions.

Although the timing and nature of the resolution and/or closure of examinations cannot be predicted with certainty, management estimates that it is reasonably possible that reserves related to uncertain tax positions may decrease by as much as $3 million from the resolution of tax examinations in U.S. jurisdictions during the next twelve months.
Employee Benefit Plans
Employee Benefit Plans
EMPLOYEE BENEFIT PLANS

The total pension and other postretirement benefit income was $10 million and $25 million during the three months ended December 31, 2017 and 2016, respectively.

Contributions to the U.S. non-qualified and non-U.S. pension plans during the three months ended December 31, 2017 were $3 million. For the remainder of fiscal 2018, Valvoline expects to contribute approximately $11 million to these plans, for a total of $14 million in fiscal 2018.

Components of net periodic benefit 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 below operating income within Net pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.

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 during the three months ended December 31, 2016 as shown in the table below. 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)
 
2017
 
2016
 
2017
 
2016
Service cost
 
$

 
$
1

 
$

 
$

Interest cost
 
19

 
21

 

 

Expected return on plan assets
 
(26
)
 
(36
)
 

 

Amortization of prior service credit
 

 

 
(3
)
 
(3
)
Actuarial gain
 

 

 

 
(8
)
Net periodic benefit income
 
$
(7
)
 
$
(14
)

$
(3
)
 
$
(11
)
Commitments and Contingencies
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES

From time to time, Valvoline is involved in claims and legal actions that arise in the ordinary course of business. While Valvoline cannot predict with certainty the outcome, costs recognized with respect to such actions were immaterial during the three months ended December 31, 2017. Valvoline does not have any currently pending claims or litigation which Valvoline believes, individually or in the aggregate, will have a material adverse effect on its financial position, results of operations, liquidity or capital resources. While Valvoline cannot predict with certainty the outcome of such matters, where appropriate, adequate reserves have been recorded, which were not material as of December 31, 2017 and September 30, 2017. There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these matters; 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 EPS for the three months ended December 31, 2017 and 2016. EPS is reported under the treasury stock method.

 
 
Three months ended
 
 
December 31
(In millions except per share data)
 
2017
 
2016
Numerator
 
 
 
 
Net (loss) income
 
$
(10
)
 
$
72

Denominator
 
 
 
 
Weighted average shares used to compute basic EPS
 
202

 
205

Effect of dilutive securities (a)
 

 

Weighted average shares used to compute diluted EPS
 
202

 
205

 
 
 
 
 
(Loss) earnings per share
 
 
 
 
Basic
 
$
(0.05
)
 
$
0.35

Diluted
 
$
(0.05
)
 
$
0.35

 
 
 
 
 
(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. During the three months ended December 31, 2016, there was not a significant dilutive impact from potential common shares.
Stockholders' Deficit
Stockholders' Deficit
STOCKHOLDERS’ DEFICIT

Changes in stockholders' deficit in the three months ended December 31, 2017 were as follows:
 
(In millions)
 
Balance as of September 30, 2017
$
(117
)
 
 
 
 
Net loss
(10
)
 
Repurchases of common stock (a)
(39
)
 
Stock-based compensation plans
2

 
Dividends paid, $0.0745 per common share
(15
)
 
Purchase of remaining ownership interest in subsidiary (b)
(14
)
 
Accumulated other comprehensive income, net of tax:
 
 
Unrealized currency translation gain
1

 
Amortization of pension and other postretirement prior service credits in income (c)
(2
)
 
 
 
Balance as of December 31, 2017
$
(194
)
 
 
 
(a)
     During the three months ended December 31, 2017, the Company repurchased approximately 2 million shares of its common stock for $39 million. Upon repurchase, shares are retired.
(b)
Refer to Note 3 for details regarding the Company's purchase of the remaining ownership interest in a controlled and consolidated subsidiary during the three months ended December 31, 2017.
(c)
Amortization of unrecognized prior service credits is included in net periodic benefit income within Net pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.
Related Party Transactions
Related Party Transactions
RELATED PARTY TRANSACTIONS

At December 31, 2017, Valvoline had total net obligations due to Ashland of $81 million, of which $3 million was recorded in Accrued expenses and other liabilities and the remainder was primarily recorded and Other noncurrent liabilities in the Condensed Consolidated Balance Sheets.

At September 30, 2017, Valvoline had total net obligations due to Ashland of $74 million, of which $2 million was recorded in Accrued expenses and other liabilities and the remainder was primarily recorded and Other noncurrent liabilities in the Condensed Consolidated Balance Sheets.

These liabilities generally relate to net obligations due to Ashland under the Tax Matters Agreement as well as reimbursements payable to Ashland for certain other contractual obligations, including those related to transition services and other obligations that are intended to transfer to Valvoline as part of the Distribution of Ashland's remaining interest in Valvoline. The increase in total net obligations due to Ashland from September 30, 2017 is primarily related to the change in obligations estimated as due under the Tax Matters Agreement related to the enactment of U.S. tax reform legislation in December 2017. Refer to Note 8 for additional details regarding the Tax Matters Agreement and related obligations.
Reportable Segment Information
Reportable Segment Information
REPORTABLE SEGMENT INFORMATION

Valvoline manages and reports within the following three segments: 

Core North America - sells Valvoline and other branded products and solutions in the United States and Canada to heavy-duty customers and retailers for consumers to perform their own automotive and engine maintenance, as well as to installer customers who use Valvoline products to service vehicles.
Quick Lubes - services the passenger car and light truck quick lube market through: Company-owned and franchised Valvoline Instant Oil Change (“VIOC”) retail quick lube service stores; and its Express Care stores for independent operators to purchase Valvoline motor oil and other products and display Valvoline branded signage.
International - sells Valvoline and other branded 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 measures evaluated in assessing each reportable segment’s financial performance. Intersegment sales are not material, and assets are not regularly 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
2017
 
2016
Sales
 
 
 
Core North America
$
251

 
$
237

Quick Lubes
154

 
127

International
140

 
125

Consolidated sales
$
545

 
$
489

 
 
 
 
Operating income (loss)
 
 
 
Core North America
$
43

 
$
51

Quick Lubes
35

 
29

International
19

 
20

Total operating segments
$
97

 
$
100

Unallocated and other (a)
(9
)
 
(6
)
Consolidated operating income
$
88

 
$
94

 
 
 
 
(a)
Unallocated and other includes $7 million of expense in the three months ended December 31, 2017 related to adjustments associated with Ashland tax indemnities driven by tax reform legislation, as well as separation costs of $2 million and $6 million for the three months ending December 31, 2017 and 2016, respectively.
Guarantor Financial Information
Guarantor Financial Information
GUARANTOR FINANCIAL INFORMATION

The Senior Notes 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. Under the terms of the indentures, Valvoline Inc. and the Guarantor Subsidiaries each fully and unconditionally, jointly and severally, guarantee the payment of interest, principal and premium, if any, on each of the notes included in the Senior Notes. Refer to Note 7 for additional information.

The Guarantor Subsidiaries are subject to release in certain circumstances, including (i) the sale of all of the capital stock of the subsidiary, (ii) the designation of the subsidiary as an “Unrestricted Subsidiary” under the indentures governing the Senior Notes; or (iii) the release of the subsidiary as a guarantor from the Company's 2016 Senior Credit Agreement described further in Note 7.

In connection with the registered exchange offers for the Senior Notes completed in December 2017, the Company is required to comply with Rule 3-10 of SEC Regulation S-X (“Rule 3-10”), and has therefore included the accompanying condensed consolidating financial statements in accordance with Rule 3-10(f) of SEC Regulation S-X.

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, 2017
 
 
 
 
 
 
 
 
(In millions)
Valvoline Inc.
(Parent Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$

 
$
422

 
$
134

 
$
(11
)
 
$
545

Cost of sales

 
263

 
98

 
(11
)
 
350

Gross profit

 
159

 
36

 

 
195

 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expense
9

 
83

 
22

 

 
114

Separation costs
1

 
1

 

 

 
2

Equity and other (income) expenses

 
(12
)
 
3

 

 
(9
)
Operating (loss) income
(10
)
 
87

 
11

 

 
88

Net pension and other postretirement plan non-service income and remeasurement adjustments

 
(10
)
 

 

 
(10
)
Net interest and other financing expense
12

 
1

 
1

 

 
14

(Loss) income before income taxes
(22
)
 
96

 
10

 

 
84

Income tax expense
21

 
70

 
3

 

 
94

Equity in net income of subsidiaries
33

 
7

 

 
(40
)
 

Net (loss) income
$
(10
)
 
$
33

 
$
7

 
$
(40
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
$
(11
)
 
$
32

 
$
8

 
$
(40
)
 
$
(11
)
Condensed Consolidating Statements of Comprehensive Income
 
 
 
 
 
 
For the three months ended December 31, 2016
 
 
 
 
 
 
 
 
(In millions)
Valvoline Inc.
(Parent Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$

 
$
377

 
$
124

 
$
(12
)
 
$
489

Cost of sales

 
224

 
92

 
(12
)
 
304

Gross profit

 
153

 
32

 

 
185

 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expense
2

 
69

 
24

 

 
95

Separation costs

 
6

 

 

 
6

Equity and other (income) expenses

 
(13
)
 
3

 

 
(10
)
Operating (loss) income
(2
)
 
91

 
5

 

 
94

Net pension and other postretirement plan non-service income and remeasurement adjustments

 
(26
)
 

 

 
(26
)
Net interest and other financing expense
9

 
1

 

 

 
10

(Loss) income before income taxes
(11
)
 
116

 
5

 

 
110

Income tax (benefit) expense
(4
)
 
38

 
4

 

 
38

Equity in net income of subsidiaries
79

 
1

 

 
(80
)
 

Net income (loss)
$
72

 
$
79

 
$
1

 
$
(80
)
 
$
72

 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
61

 
$
68

 
$
(7
)
 
$
(61
)
 
$
61


Condensed Consolidating Balance Sheets
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
(In millions)
 
Valvoline Inc.
(Parent Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
18

 
$
97

 
$

 
$
115

Accounts receivable, net
 

 
84

 
435

 
(101
)
 
418

Inventories, net
 

 
94

 
76

 

 
170

Other current assets
 

 
29

 
3

 

 
32

Total current assets
 

 
225

 
611

 
(101
)
 
735

Noncurrent assets
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 

 
346

 
38

 

 
384

Goodwill and intangibles, net
 

 
391

 
2

 

 
393

Equity method investments
 

 
33

 

 

 
33

Investment in subsidiaries
 
622

 
444

 

 
(1,066
)
 

Deferred income taxes
 
127

 
55

 
14

 

 
196

Other noncurrent assets
 
254

 
78

 
6

 
(252
)
 
86

Total noncurrent assets
 
1,003

 
1,347

 
60

 
(1,318
)
 
1,092

Total assets
 
$
1,003

 
$
1,572

 
$
671

 
$
(1,419
)
 
$
1,827

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Deficit
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
19

 
$

 
$

 
$

 
$
19

Trade and other payables
 

 
192

 
50

 
(101
)
 
141

Accrued expenses and other liabilities
 
119

 
55

 
34

 

 
208

Total current liabilities
 
138

 
247

 
84

 
(101
)
 
368

Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
1,025

 
2

 
120

 

 
1,147

Employee benefit obligations
 

 
309

 
22

 

 
331

Other noncurrent liabilities
 
34

 
392

 
1

 
(252
)
 
175

Total noncurrent liabilities
 
1,059

 
703

 
143

 
(252
)
 
1,653

Commitments and contingencies
 

 

 

 

 

Stockholders' (deficit) equity
 
(194
)
 
622

 
444

 
(1,066
)
 
(194
)
Total liabilities and stockholders' deficit/equity
 
$
1,003

 
$
1,572

 
$
671

 
$
(1,419
)
 
$
1,827


Condensed Consolidating Balance Sheets
 
 
 
 
 
 
 
 
As of September 30, 2017
 
 
 
 
 
 
 
 
(In millions)
 
Valvoline Inc.
(Parent Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
99

 
$
102

 
$

 
$
201

Accounts receivable, net
 

 
57

 
389

 
(61
)
 
385

Inventories, net
 

 
94

 
81

 

 
175

Other current assets
 

 
25

 
4

 

 
29

Total current assets
 

 
275

 
576

 
(61
)
 
790

Noncurrent assets
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 

 
353

 
38

 

 
391

Goodwill and intangibles, net
 

 
333

 
2

 

 
335

Equity method investments
 

 
30

 

 

 
30

Investment in subsidiaries
 
606

 
447

 

 
(1,053
)
 

Deferred income taxes
 
145

 
122

 
14

 

 
281

Other noncurrent assets
 
314

 
80

 
6

 
(312
)
 
88

Total noncurrent assets
 
1,065

 
1,365

 
60

 
(1,365
)
 
1,125

Total assets
 
$
1,065

 
$
1,640

 
$
636

 
$
(1,426
)
 
$
1,915

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Deficit
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
$

 
$

 
$
75

 
$

 
$
75

Current portion of long-term debt
 
15

 

 

 

 
15

Trade and other payables
 
2

 
198

 
53

 
(61
)
 
192

Accrued expenses and other liabilities
 
103

 
60

 
33

 

 
196

Total current liabilities
 
120

 
258

 
161

 
(61
)
 
478

Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
1,032

 
2

 

 

 
1,034

Employee benefit obligations
 

 
321

 
21

 

 
342

Other noncurrent liabilities
 
30

 
453

 
7

 
(312
)
 
178

Total noncurrent liabilities
 
1,062

 
776

 
28

 
(312
)
 
1,554

Commitments and contingencies
 

 

 

 

 

Stockholders' (deficit) equity
 
(117
)
 
606

 
447

 
(1,053
)
 
(117
)
Total liabilities and stockholders' deficit/equity
 
$
1,065

 
$
1,640

 
$
636

 
$
(1,426
)
 
$
1,915



Condensed Consolidating Statements of Cash Flows
 
 
 
 
 
 
For the three months ended December 31, 2017
 
 
 
 
 
 
 
 
(In millions)
Valvoline Inc.
(Parent Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash flow provided by (used in) operating activities
$
(2
)
 
$
52

 
$
(30
)
 
$

 
$
20

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Additions to property, plant and equipment

 
(13
)
 
(1
)
 

 
(14
)
Acquisitions, net of cash required

 
(60
)
 

 

 
(60
)
Return of advance from subsidiary
60

 

 

 
(60
)
 

Total cash provided by (used in) investing activities
60

 
(73
)
 
(1
)
 
(60
)
 
(74
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings, net of issuance costs of $1

 

 
44

 

 
44

Repayments on borrowings
(4
)
 

 

 

 
(4
)
Repurchase of common stock
(37
)
 

 

 

 
(37
)
Purchase of additional ownership in subsidiary

 

 
(15
)
 

 
(15
)
Cash dividends paid
(15
)
 

 

 

 
(15
)
Other financing activities
(2
)
 

 
(2
)
 

 
(4
)
Other intercompany activity, net

 
(60
)
 

 
60

 

Total cash (used in) provided by financing activities
(58
)
 
(60
)
 
27

 
60

 
(31
)
Effect of currency exchange rate changes on cash and cash equivalents

 

 
(1
)
 

 
(1
)
Decrease in cash and cash equivalents

 
(81
)
 
(5
)
 

 
(86
)
Cash and cash equivalents - beginning of year

 
99

 
102

 

 
201

Cash and cash equivalents - end of period
$

 
$
18

 
$
97

 
$

 
$
115

 
 
 
 
 
 
 
 
 
 

Condensed Consolidating Statements of Cash Flows
 
 
 
 
 
 
For the three months ended December 31, 2016
 
 
 
 
 
 
 
 
(In millions)
Valvoline Inc.
(Parent Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash flows provided by (used in) operating activities
$
89

 
$
75

 
$
(76
)
 
$

 
$
88

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Additions to property, plant and equipment

 
(9
)
 

 

 
(9
)
Other investing activities, net

 
(1
)
 

 

 
(1
)
Total cash used in investing activities

 
(10
)
 

 

 
(10
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Net transfers to Ashland
(2
)
 

 

 

 
(2
)
Proceeds from borrowings

 

 
75

 

 
75

Repayments on borrowings
(79
)
 

 

 

 
(79
)
Cash dividends paid
(10
)
 

 

 

 
(10
)
Other intercompany activity, net
2

 
(2
)
 

 

 

Total cash (used in) provided by financing activities
(89
)
 
(2
)
 
75

 

 
(16
)
Effect of currency exchange rate changes on cash and cash equivalents

 

 
2

 

 
2

Increase in cash and cash equivalents

 
63

 
1

 

 
64

Cash and cash equivalents - beginning of year

 
94

 
78

 

 
172

Cash and cash equivalents - end of period
$

 
$
157

 
$
79

 
$

 
$
236

Subsequent Events
Subsequent Events
SUBSEQUENT EVENTS

Dividend declared

On January 31, 2018, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.0745 per share on Valvoline common stock. The dividend is payable on March 15, 2018 to shareholders of record on March 1, 2018.

Share repurchases

The Company repurchased over 1 million shares for an aggregate amount of $29 million in the period from January 1, 2018 through February 6, 2018. The Company has $32 million in aggregate share repurchase authorization remaining under the $150 million share repurchase authorization approved by the Board of Directors on April 24, 2017 (the “2017 Share Repurchase Authorization”).

In addition, on January 31, 2018, the Board of Directors of Valvoline authorized the Company to repurchase up to $300 million of its common stock through September 30, 2020, which amount is in addition to the amount remaining under the 2017 Share Repurchase Authorization. The timing and amount of any purchases of shares of common stock will be based on available liquidity, general business and market conditions and other factors, including alternative investment opportunities.
Basis of Presentation and Significant Accounting Policies (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, 2017. 

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.

Recent accounting pronouncements

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 recent accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The following standards relevant to Valvoline were either issued or adopted in the current period, or are expected to have a meaningful impact on Valvoline in future periods.

Recently adopted

In the first fiscal quarter of 2018, Valvoline adopted the following:

In July 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance to simplify the subsequent measurement of certain inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in, first out (“LIFO”) and retail inventory methods. Valvoline adopted this guidance prospectively on October 1, 2017. Valvoline utilizes LIFO to value approximately 70% of its gross inventory and there were no material differences in the Company's previous valuation methodology for its remaining inventory using lower of cost or market to lower of cost or net realizable value.

In March 2017, the FASB issued accounting guidance that changed 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 as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost are presented separately outside of the operating income caption. Valvoline retrospectively adopted this guidance on October 1, 2017. Accordingly, Net pension and other postretirement plan non-service income and remeasurement adjustments has been reclassified to non-operating income for all periods presented within the Condensed Consolidated Statements of Comprehensive Income, which reduced previously reported operating income by $26 million for the three months ended December 31, 2016.

Issued but not yet adopted

In May 2014, the FASB issued accounting guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance. This guidance introduces a five-step model for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. The Company is evaluating the effect of adopting the new revenue guidance on its financial statements and does not currently expect it to have a material effect to net earnings. Based on an evaluation of current contracts and revenue streams to-date, Valvoline believes that most revenue transactions recorded under the new guidance will be substantially consistent with treatment under existing guidance, with certain reclassifications expected within the Condensed Consolidated Statements of Comprehensive Earnings and certain minimal changes to the timing of the recognition of revenues. The Company's revenue transactions generally consist of a single performance obligation to transfer promised goods and are not accounted for under industry-specific guidance. The Company anticipates expanded footnote disclosures under the new guidance.

Management will continue to complete its assessment of revenue streams and implementation plans, including monitoring developments, and plans to substantially complete the Company's implementation assessment in early 2018 and finalize conclusions by the fourth quarter of fiscal 2018. Valvoline will adopt this standard in the first quarter of fiscal 2019 and will provide updated disclosures of the anticipated impacts of adoption in future filings.

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. The Company expects to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While adoption is expected to lead to a material increase in the assets and liabilities recorded on the Condensed Consolidated Balance Sheet and an increase in footnote disclosures related to leases, the Company is in the process of developing assessment and implementation plans to determine the specific impacts, including those on the Condensed Consolidated Statements of Comprehensive Earnings.
INVENTORIES

Certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method. Remaining inventories are carried at the lower of cost or net realizable value using the weighted average cost method.
EPS is reported under the treasury stock method.
Fair Value Measurements (Tables)
The following table sets forth, by level within the fair value hierarchy, the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis:

 
December 31, 2017
 
September 30, 2017
 
 
 
Quoted prices in active markets for identical assets
 
 
 
Quoted prices in active markets for identical assets
(In millions)
Fair Value
 
Level 1
 
Fair Value
 
Level 1
Assets
 
 
 
 
 
 
 
Cash equivalents (a)
$
24

 
$
24

 
$
46

 
$
46

Foreign currency derivatives (b)
1

 
1

 
1

 
1

Non-qualified trust funds (c)
30

 
30

 
30

 
30

Total assets at fair value
$
55

 
$
55

 
$
77

 
$
77