VALVOLINE INC, 10-Q filed on 8/4/2020
Quarterly Report
v3.20.2
Cover Page - shares
9 Months Ended
Jun. 30, 2020
Jul. 31, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2020  
Document Transition Report false  
Entity File Number 001-37884  
Entity Registrant Name VALVOLINE INC.  
Entity Incorporation, State or Country Code KY  
Entity Tax Identification Number 30-0939371  
Entity Address, Address Line One 100 Valvoline Way  
Entity Address, City or Town Lexington  
Entity Address, State or Province KY  
Entity Address, Postal Zip Code 40509  
City Area Code 859  
Local Phone Number 357-7777  
Title of 12(b) Security Common stock, par value $0.01 per share  
Trading Symbol VVV  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Smaller Reporting Company false  
Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   185,035,286
Entity Central Index Key 0001674910  
Amendment Flag false  
Current Fiscal Year End Date --09-30  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
v3.20.2
Condensed Consolidated Statements of Comprehensive Income - USD ($)
shares in Millions, $ in Millions
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Net Income (Loss) Attributable to Parent [Abstract]        
Sales $ 516 $ 613 $ 1,701 $ 1,761
Cost of sales 329 406 1,096 1,168
Gross profit 187 207 605 593
Selling, general and administrative expenses 106 116 319 334
Net legacy and separation-related expenses 1 0 0 3
Equity and other income, net (8) (11) (23) (29)
Operating income 88 102 309 285
Net pension and other postretirement plan income (9) (2) (27) (7)
Net interest and other financing expenses 19 19 73 55
Income before income taxes 78 85 263 237
Income tax expense 19 20 68 56
Net income $ 59 $ 65 $ 195 $ 181
NET EARNINGS PER SHARE        
Basic (usd per share) $ 0.32 $ 0.34 $ 1.04 $ 0.96
Diluted (usd per share) $ 0.32 $ 0.34 $ 1.04 $ 0.96
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING        
Basic (shares) 186 189 187 189
Diluted (shares) 186 189 188 189
COMPREHENSIVE INCOME        
Net income $ 59 $ 65 $ 195 $ 181
Other comprehensive income (loss), net of tax        
Currency translation adjustments 10 1 (3) (1)
Amortization of pension and other postretirement plan prior service credit (3) (3) (7) (7)
Other comprehensive income (loss) 7 (2) (10) (8)
Comprehensive income $ 66 $ 63 $ 185 $ 173
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Jun. 30, 2020
Sep. 30, 2019
Assets, Current [Abstract]    
Cash and cash equivalents $ 751 $ 159
Receivables, Net, Current 396 401
Inventories, net 189 194
Prepaid expenses and other current assets 43 43
Total current assets 1,379 797
Noncurrent assets    
Property, plant and equipment, net 559 498
Operating lease assets 261 0
Goodwill and intangibles, net 510 504
Equity method investments 39 34
Deferred income taxes 82 123
Other noncurrent assets 133 108
Total noncurrent assets 1,584 1,267
Total assets 2,963 2,064
Current liabilities    
Current portion of long-term debt 0 15
Trade and other payables 178 171
Accrued expenses and other liabilities 254 237
Total current liabilities 432 423
Noncurrent liabilities    
Long-term debt 1,953 1,327
Employee benefit obligations 350 387
Operating lease liabilities, noncurrent 231 0
Other noncurrent liabilities 185 185
Total noncurrent liabilities 2,719 1,899
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; 185 and 188 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively 2 2
Paid-in capital 20 13
Retained deficit (211) (284)
Accumulated other comprehensive income 1 11
Total stockholders’ deficit (188) (258)
Total liabilities and stockholders’ deficit $ 2,963 $ 2,064
v3.20.2
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Jun. 30, 2020
Sep. 30, 2019
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) 185,000,000 188,000,000
Common stock outstanding (shares) 185,000,000 188,000,000
v3.20.2
Condensed Consolidated Statements of Stockholders' Deficit - USD ($)
shares in Millions, $ in Millions
Total
Cumulative Effect, Period of Adoption, Adjustment
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Retained Earnings [Member]
Cumulative Effect, Period of Adoption, Adjustment
AOCI Attributable to Parent [Member]
Common stock outstanding, at beginning of period (shares) at Sep. 30, 2018     188        
Balance at beginning of period at Sep. 30, 2018 $ (358) $ (13) $ 2 $ 7 $ (399) $ (13) $ 32
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 53       53    
Dividends paid (20)       (20)    
Stock-based compensation, net of issuances 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        
Balance at end of period at Dec. 31, 2018 $ (343)   $ 2 8 (379)   26
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Dividends paid per common share (usd per share) $ 0.106            
Common stock outstanding, at beginning of period (shares) at Sep. 30, 2018     188        
Balance at beginning of period at Sep. 30, 2018 $ (358) (13) $ 2 7 (399) (13) 32
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 181            
Repurchases of common stock 0            
Currency translation adjustments (1)            
Amortization of pension and other postretirement prior service credits in income, net of tax (7)            
Common stock outstanding, at end of period (shares) at Jun. 30, 2019     188        
Balance at end of period at Jun. 30, 2019 (252)   $ 2 13 (291)   24
Common stock outstanding, at beginning of period (shares) at Dec. 31, 2018     188        
Balance at beginning of period at Dec. 31, 2018 (343)   $ 2 8 (379)   26
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 63       63    
Dividends paid (20)       (20)    
Stock-based compensation, net of issuances 2     2 0    
Currency translation adjustments 2           2
Amortization of pension and other postretirement prior service credits in income, net of tax (2)           (2)
Balance at end of period at Mar. 31, 2019 $ (298)   $ 2 10 (336)   26
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Dividends paid per common share (usd per share) $ 0.106            
Net income $ 65       65    
Dividends paid (20)       (20)    
Stock-based compensation, net of issuances 3     3      
Currency translation adjustments 1           1
Amortization of pension and other postretirement prior service credits in income, net of tax (3)           (3)
Common stock outstanding, at end of period (shares) at Jun. 30, 2019     188        
Balance at end of period at Jun. 30, 2019 $ (252)   $ 2 13 (291)   24
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Dividends paid per common share (usd per share) $ 0.106            
Common stock outstanding, at beginning of period (shares) at Sep. 30, 2019 188   188        
Balance at beginning of period at Sep. 30, 2019 $ (258) 1 $ 2 13 (284) 1 11
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 73       73    
Dividends paid (21)       (21)    
Stock-based compensation, net of issuances 3     3      
Currency translation adjustments 8           8
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, 2019     188        
Balance at end of period at Dec. 31, 2019 $ (196)   $ 2 16 (231)   17
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Dividends paid per common share (usd per share) $ 0.113            
Common stock outstanding, at beginning of period (shares) at Sep. 30, 2019 188   188        
Balance at beginning of period at Sep. 30, 2019 $ (258) $ 1 $ 2 13 (284) $ 1 11
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 195            
Repurchases of common stock (60)            
Currency translation adjustments (3)            
Amortization of pension and other postretirement prior service credits in income, net of tax $ (7)            
Common stock outstanding, at end of period (shares) at Jun. 30, 2020 185   185        
Balance at end of period at Jun. 30, 2020 $ (188)   $ 2 20 (211)   1
Common stock outstanding, at beginning of period (shares) at Dec. 31, 2019     188        
Balance at beginning of period at Dec. 31, 2019 (196)   $ 2 16 (231)   17
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income 63       63    
Dividends paid (21)       (21)    
Repurchases of common stock (in shares)     (3)        
Repurchases of common stock (60)       (60)    
Currency translation adjustments (21)           (21)
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 Mar. 31, 2020     185        
Balance at end of period at Mar. 31, 2020 $ (237)   $ 2 16 (249)   (6)
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Dividends paid per common share (usd per share) $ 0.113            
Net income $ 59       59    
Dividends paid (21)       (21)    
Stock-based compensation, net of issuances 4     4      
Currency translation adjustments 10           10
Amortization of pension and other postretirement prior service credits in income, net of tax $ (3)           (3)
Common stock outstanding, at end of period (shares) at Jun. 30, 2020 185   185        
Balance at end of period at Jun. 30, 2020 $ (188)   $ 2 $ 20 $ (211)   $ 1
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Dividends paid per common share (usd per share) $ 0.113            
v3.20.2
Condensed Consolidated Statements of Stockholders' Deficit (Parenthetical) - $ / shares
3 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Dec. 31, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Statement of Stockholders' Equity [Abstract]            
Dividends paid per common share (usd per share) $ 0.113 $ 0.113 $ 0.113 $ 0.106 $ 0.106 $ 0.106
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Cash flows from operating activities    
Net income $ 195 $ 181
Adjustments to reconcile net income to cash flows from operating activities    
Gain (loss) on extinguishment of debt 19 0
Depreciation and amortization 48 43
Equity income from unconsolidated affiliates, net of distributions (3) (4)
Pension contributions (9) (7)
Stock-based compensation expense 8 8
Other, net 4 2
Change in assets and liabilities    
Increase (Decrease) in Receivables (13) 48
Inventories 3 (11)
Payables and accrued liabilities (10) 34
Other assets and liabilities 3 16
Total cash provided by operating activities 271 214
Cash flows from investing activities    
Additions to property, plant and equipment (94) (73)
Notes receivable, net (31) (2)
Acquisitions of business (18) (50)
Other investing activities, net 0 1
Total cash used in investing activities (143) (124)
Cash flows from financing activities    
Proceeds from borrowings 1,547 745
Payments of debt issuance costs and discounts (16) (2)
Repayments on borrowings (925) (727)
Repurchases of common stock (60) 0
Payment for debt extinguishment or debt prepayment cost 15 0
Cash dividends paid (63) (60)
Other financing activities (3) (5)
Total cash provided by (used in) financing activities 465 (49)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash (1) 0
Increase (decrease) in cash, cash equivalents, and restricted cash 592 41
Cash, cash equivalents, and restricted cash - beginning of period 159 96
Cash, cash equivalents, and restricted cash - end of period $ 751 $ 137
v3.20.2
Basis of Presentation and Significant Accounting Policies
9 Months Ended
Jun. 30, 2020
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 of America (“U.S. GAAP”) and Securities and Exchange Commission (“SEC”) regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Certain prior period amounts have been reclassified to conform to the current presentation.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for interim periods are not necessarily indicative of those to be expected for the entire year, particularly in light of the novel coronavirus ("COVID-19") global pandemic and its effects on Valvoline and global economies.

In late December 2019, COVID-19 was identified in Wuhan, China and since that time it has continued to spread globally, including to the United States, leading the World Health Organization to declare a global pandemic and recommend containment and mitigation actions worldwide in March 2020. Since March 31, 2020, the COVID-19 pandemic has continued, and various governments have issued or extended shelter-in-place orders. As of the date of this filing, restrictions are in various phases of being reduced and re-implemented with the resulting impacts being monitored. Valvoline has substantially maintained its operations during the pandemic, and precautionary measures have been taken to protect the Company's employees and customers, maintain liquidity and manage the impacts of reduced volumes.

The COVID-19 pandemic adversely affected Valvoline's results of operations for the three and nine months ended June 30, 2020. Adverse impacts from COVID-19 are expected in future periods, and the extent of certain future impacts cannot be reasonably estimated at this time due to numerous uncertainties, including the duration and severity of the pandemic.

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 February 2016, the Financial Accounting Standards Board ("FASB") issued accounting guidance, which outlined a comprehensive lease accounting model that requires lessees to recognize a right-of-use asset and a corresponding lease liability on the balance sheet and superseded previous lease accounting guidance. Valvoline adopted this new lease accounting guidance on October 1, 2019 using the optional transition approach. Under this approach, the new lease accounting 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. Lease expense is recognized similar to prior accounting guidance with operating leases resulting in straight-line expense and finance leases resulting in accelerated expense recognition similar to the prior accounting for capital leases. The accounting for lessor arrangements is not significantly changed by the new guidance.
Valvoline elected certain practical expedients permitted by the new guidance, including the package of practical expedients that allows for previous accounting conclusions regarding lease identification and classification to be carried forward for leases which commenced prior to adoption, as well as the practical expedient to not separate lease and non-lease components and account for them as a single lease component. The Company did not elect the hindsight or short-term lease practical expedients.

As a result of adoption, the Company recognized operating lease assets and liabilities inclusive of a reclassified build-to-suit arrangement, derecognized assets and liabilities related to the build-to-suit arrangement, and carried forward existing capital leases as finance lease assets and liabilities. This resulted in a material impact on the Condensed Consolidated Balance Sheet and the recognition of total incremental lease assets, inclusive of prepaid lease balances and deferred rent liabilities, of $219 million and incremental lease liabilities of $214 million, with an immaterial cumulative effect adjustment to reduce Retained deficit as a result of the build-to-suit lease transition requirements. The impact of adoption was not material to the Condensed Consolidated Statements of Comprehensive Income, Cash Flows, or Stockholders’ Deficit, and did not impact the Company's compliance with any of its existing debt covenants. Refer to Note 2 for additional information regarding Valvoline's adoption of this new guidance.

In August 2017, the FASB issued accounting guidance, which reduced the complexity of and simplified the application of hedge accounting. The guidance refines and expands hedge accounting for both financial and nonfinancial risk components, eliminates the need to separately measure and report hedge ineffectiveness, and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also eases documentation and assessment requirements and modifies certain disclosure requirements. This guidance did not have a material impact on the Company’s condensed consolidated financial statements in the nine months ended June 30, 2020 as Valvoline did not have any existing hedging relationships at adoption on October 1, 2019. Refer to Note 3 for additional information regarding the interest rate swap agreements the Company entered into during the third quarter of fiscal 2020.

Issued but not yet adopted

In June 2016, the FASB issued updated guidance that introduces a forward-looking approach based on expected losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments including trade and other receivables. The new guidance will require entities to incorporate historical, current, and forecasted information into their estimates of expected credit losses. This guidance also includes expanded disclosure requirements about significant estimates and credit quality and will become effective for Valvoline on October 1, 2020. The Company is evaluating the effects of adopting this new accounting guidance, including developing models to estimate expected credit losses, assessing appropriate assumptions, designing changes to its related processes, and evaluating the effects on the condensed consolidated financial statements, which are not currently expected to be material. The impact of adoption will be largely dependent on the credit quality of the Company's receivables outstanding at adoption. The Company evaluates creditworthiness when negotiating contracts, and as the Company's receivables are generally short-term in nature, the timing and amount of credit loss recognized under existing guidance and the new guidance is not expected to differ materially.

The FASB issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on Valvoline’s condensed consolidated financial statements, and therefore, is not described above.
v3.20.2
Leasing
9 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Leasing LEASING
As described in Note 1, Valvoline adopted new lease accounting guidance effective October 1, 2019 and changed its policy for lease accounting prospectively for lease agreements entered into or reassessed from the date of adoption as described herein.

Lessee arrangements

Certain of the properties Valvoline utilizes, including quick-lube service center stores, offices, blending and warehouse facilities, in addition to certain equipment, are leased. Valvoline determines if an arrangement contains a lease at inception primarily based on whether or not the Company has the right to control the asset during the contract period. For all agreements where it is determined that a lease exists, including those with an initial term of 12 months or less, the related lease assets and liabilities are recognized on the Condensed Consolidated Balance Sheet as either operating or finance leases at the commencement date. The lease liability is measured at the present value of future lease payments over the lease term, and the right-of-use asset is measured at the lease liability amount, adjusted for prepaid lease payments, lease incentives and the lessee’s initial direct costs (e.g., commissions). The lease term includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

Fixed payments, including variable payments based on a rate or index, are included in the determination of the lease liability, while other variable payments are recognized in the Condensed Consolidated Statements of Comprehensive Income in the period in which the obligation for those payments is incurred. Many leases contain lease components requiring rental payments and other components that require payment for taxes, insurance, operating expenses and maintenance. In instances where these other components are fixed, they are included in the measurement of the lease liability due to Valvoline's election to combine lease and non-lease components. Otherwise, these other components are expensed as incurred and comprise the majority of Valvoline's variable lease costs.

As most leases do not provide the rate implicit in the lease, the Company estimates its incremental borrowing rate to best approximate the rate of interest that Valvoline would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Valvoline applies the incremental borrowing rate to groups of leases with similar lease terms in determining the present value of future payments. In determining the incremental borrowing rate, the Company considers information available at commencement date, including lease term, interest rate yields for specific interest rate environments and the Company's credit spread.
The following table presents the Company's lease balances:

(In millions)Location in Condensed Consolidated Balance SheetJune 30, 2020
Assets
Operating lease assetsOperating lease assets$261  
Finance lease assets Property, plant and equipment, net66  
Amortization of finance lease assetsProperty, plant and equipment, net(8) 
Total leased assets$319  
Liabilities
Current:
Operating lease liabilitiesAccrued expenses and other liabilities$32  
Finance lease liabilitiesAccrued expenses and other liabilities 
Noncurrent:
Operating lease liabilitiesOperating lease liabilities231  
Finance lease liabilitiesOther noncurrent liabilities60  
Total lease liabilities$326  

The following table presents the components of total lease costs:

(In millions)Location in Condensed Consolidated Statements of Comprehensive IncomeThree months ended June 30, 2020Nine months ended June 30, 2020
Operating lease cost
Cost of sales and Selling, general and administrative expenses (a)
$11  $33  
Finance lease costs
Amortization of lease assets
Cost of sales (a)
  
Interest on lease liabilitiesNet interest and other financing expenses  
Variable lease cost
Cost of sales and Selling, general and administrative expenses (a)
  
Sublease incomeEquity and other income, net(1) (4) 
Total lease cost$13  $37  
(a) Supply chain and retail-related amounts are included in Cost of sales.
Other information related to the Company's leases follows:

(In millions)Three months ended June 30, 2020Nine months ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (a)
$11  $32  
Operating cash flows from finance leases$—  $ 
Financing cash flow from finance leases$ $ 
Lease assets obtained in exchange for lease obligations:
Operating leases$14  $42  
Finance leases$20  $38  
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statement of Cash Flows offset by noncash operating lease asset amortization and liability accretion.

The following table reconciles the undiscounted cash flows for the next five fiscal years ended September 30 and thereafter to the operating and finance lease liabilities recorded on the Condensed Consolidated Balance Sheet as of June 30, 2020:

(In millions) Operating leasesFinance leases
Remainder of 2020$11  $ 
202141   
202239   
202335   
202431   
Thereafter166  67  
Total future lease payments323  96  
Imputed interest60  33  
Present value of lease liabilities$263  $63  

As of June 30, 2020, Valvoline has additional leases primarily related to its quick lube service center stores that have not yet commenced with approximately $52 million in undiscounted future lease payments that are not included in the table above. These leases are expected to commence over the next twelve months and generally have lease terms of 15 years.

In accordance with the previous lease accounting guidance, Valvoline's lease arrangements were previously classified as either capital, operating, or financing obligations. Previously classified capital leases are now considered finance leases under the new lease accounting guidance, while previous financing obligations have been derecognized and reclassified as operating leases. The classification of operating leases remains substantially unchanged under the new lease accounting guidance.

The future minimum lease payments by fiscal year as determined prior to the adoption of the new lease accounting guidance under the previously designated capital, financing and operating leases as of the fiscal year ended September 30, 2019, were as follows:
(In millions)Operating leasesCapital leases and financing obligations
2020$36  $ 
202132   
202229   
202327   
202423   
Thereafter120  50  
Total future lease payments (a)
$267  84  
Imputed interest29  
Present value of lease liabilities$55  
(a) Future lease payments do not include fixed payments for executory costs, such as taxes, insurance, maintenance and operating expenses.

The following table presents the weighted average remaining lease term and interest rate as of June 30, 2020:

Operating LeasesFinancing Leases
Weighted average remaining lease term (in years)9.713.3
Weighted average discount rate4.09 %7.45 %
Leasing LEASING
As described in Note 1, Valvoline adopted new lease accounting guidance effective October 1, 2019 and changed its policy for lease accounting prospectively for lease agreements entered into or reassessed from the date of adoption as described herein.

Lessee arrangements

Certain of the properties Valvoline utilizes, including quick-lube service center stores, offices, blending and warehouse facilities, in addition to certain equipment, are leased. Valvoline determines if an arrangement contains a lease at inception primarily based on whether or not the Company has the right to control the asset during the contract period. For all agreements where it is determined that a lease exists, including those with an initial term of 12 months or less, the related lease assets and liabilities are recognized on the Condensed Consolidated Balance Sheet as either operating or finance leases at the commencement date. The lease liability is measured at the present value of future lease payments over the lease term, and the right-of-use asset is measured at the lease liability amount, adjusted for prepaid lease payments, lease incentives and the lessee’s initial direct costs (e.g., commissions). The lease term includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

Fixed payments, including variable payments based on a rate or index, are included in the determination of the lease liability, while other variable payments are recognized in the Condensed Consolidated Statements of Comprehensive Income in the period in which the obligation for those payments is incurred. Many leases contain lease components requiring rental payments and other components that require payment for taxes, insurance, operating expenses and maintenance. In instances where these other components are fixed, they are included in the measurement of the lease liability due to Valvoline's election to combine lease and non-lease components. Otherwise, these other components are expensed as incurred and comprise the majority of Valvoline's variable lease costs.

As most leases do not provide the rate implicit in the lease, the Company estimates its incremental borrowing rate to best approximate the rate of interest that Valvoline would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Valvoline applies the incremental borrowing rate to groups of leases with similar lease terms in determining the present value of future payments. In determining the incremental borrowing rate, the Company considers information available at commencement date, including lease term, interest rate yields for specific interest rate environments and the Company's credit spread.
The following table presents the Company's lease balances:

(In millions)Location in Condensed Consolidated Balance SheetJune 30, 2020
Assets
Operating lease assetsOperating lease assets$261  
Finance lease assets Property, plant and equipment, net66  
Amortization of finance lease assetsProperty, plant and equipment, net(8) 
Total leased assets$319  
Liabilities
Current:
Operating lease liabilitiesAccrued expenses and other liabilities$32  
Finance lease liabilitiesAccrued expenses and other liabilities 
Noncurrent:
Operating lease liabilitiesOperating lease liabilities231  
Finance lease liabilitiesOther noncurrent liabilities60  
Total lease liabilities$326  

The following table presents the components of total lease costs:

(In millions)Location in Condensed Consolidated Statements of Comprehensive IncomeThree months ended June 30, 2020Nine months ended June 30, 2020
Operating lease cost
Cost of sales and Selling, general and administrative expenses (a)
$11  $33  
Finance lease costs
Amortization of lease assets
Cost of sales (a)
  
Interest on lease liabilitiesNet interest and other financing expenses  
Variable lease cost
Cost of sales and Selling, general and administrative expenses (a)
  
Sublease incomeEquity and other income, net(1) (4) 
Total lease cost$13  $37  
(a) Supply chain and retail-related amounts are included in Cost of sales.
Other information related to the Company's leases follows:

(In millions)Three months ended June 30, 2020Nine months ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (a)
$11  $32  
Operating cash flows from finance leases$—  $ 
Financing cash flow from finance leases$ $ 
Lease assets obtained in exchange for lease obligations:
Operating leases$14  $42  
Finance leases$20  $38  
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statement of Cash Flows offset by noncash operating lease asset amortization and liability accretion.

The following table reconciles the undiscounted cash flows for the next five fiscal years ended September 30 and thereafter to the operating and finance lease liabilities recorded on the Condensed Consolidated Balance Sheet as of June 30, 2020:

(In millions) Operating leasesFinance leases
Remainder of 2020$11  $ 
202141   
202239   
202335   
202431   
Thereafter166  67  
Total future lease payments323  96  
Imputed interest60  33  
Present value of lease liabilities$263  $63  

As of June 30, 2020, Valvoline has additional leases primarily related to its quick lube service center stores that have not yet commenced with approximately $52 million in undiscounted future lease payments that are not included in the table above. These leases are expected to commence over the next twelve months and generally have lease terms of 15 years.

In accordance with the previous lease accounting guidance, Valvoline's lease arrangements were previously classified as either capital, operating, or financing obligations. Previously classified capital leases are now considered finance leases under the new lease accounting guidance, while previous financing obligations have been derecognized and reclassified as operating leases. The classification of operating leases remains substantially unchanged under the new lease accounting guidance.

The future minimum lease payments by fiscal year as determined prior to the adoption of the new lease accounting guidance under the previously designated capital, financing and operating leases as of the fiscal year ended September 30, 2019, were as follows:
(In millions)Operating leasesCapital leases and financing obligations
2020$36  $ 
202132   
202229   
202327   
202423   
Thereafter120  50  
Total future lease payments (a)
$267  84  
Imputed interest29  
Present value of lease liabilities$55  
(a) Future lease payments do not include fixed payments for executory costs, such as taxes, insurance, maintenance and operating expenses.

The following table presents the weighted average remaining lease term and interest rate as of June 30, 2020:

Operating LeasesFinancing Leases
Weighted average remaining lease term (in years)9.713.3
Weighted average discount rate4.09 %7.45 %
v3.20.2
Fair Value Measurements
9 Months Ended
Jun. 30, 2020
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:

(In millions)Fair Value HierarchyJune 30
2020
September 30
2019
Cash and cash equivalents
Money market fundsLevel 1$294  $—  
Time depositsLevel 2159  59  
Prepaid expenses and other current assets
Currency derivatives (a)
Level 2 —  
Other noncurrent assets
Non-qualified trust fundsLevel 117  20  
Total assets at fair value$473  $79  
Accrued expenses and other liabilities
Currency derivatives (a)
Level 2$ $—  
Interest rate swap agreements (b)
Level 2—  —  
Total liabilities at fair value$ $—  
(a)The Company had outstanding contracts with notional values of $125 million and $111 million as of June 30, 2020 and September 30, 2019, respectively.
(b)As of June 30, 2020, the Company’s interest rate swap agreements were in net liability positions with a combined fair value less than $1 million.

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 at September 30, 2019, other than the agreements noted below, which were entered into during the three and nine months ended June 30, 2020. There were no material gains or losses recognized in earnings during the three and nine months ended June 30, 2020 or 2019 related to these assets and liabilities.

Interest rate swap agreements

In June 2020, the Company entered into two interest rate swap agreements with three-year maturities to exchange interest rate payments on $175 million of variable rate term loan borrowings to fixed interest rates. The interest rate swap agreements had fair values of zero at inception and have been designated as cash flow hedges with the unrealized gains or losses recorded in Accumulated other comprehensive income and reclassified into earnings within Net interest and other financing expenses as the underlying payment transactions occur. The Company expects these hedges to be highly effective and based on interest rates as of June 30, 2020, estimates that there will not be material reclassifications into earnings over the next twelve months.

The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. The Company utilizes Level 2 observable inputs such as interest rate yield curves to estimate fair value for the interest rate swap agreements.

Long-term debt

The fair values of the Company’s outstanding fixed rate senior notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. Long-term debt is included in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore
excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.
June 30, 2020September 30, 2019
(In millions)Fair valueCarrying valueUnamortized discount and
issuance costs
Fair valueCarrying valueUnamortized
discount and
issuance costs
2024 Notes$—  $—  $—  $390  $371  $(4) 
2025 Notes806  789  (11) 407  395  (5) 
2030 Notes597  592  (8) —  —  —  
Total$1,403  $1,381  $(19) $797  $766  $(9) 

Refer to Note 7 for more information on Valvoline’s other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value.
v3.20.2
Goodwill and Other Intangibles
9 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangibles INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill by reportable segment and in total during the nine months ended June 30, 2020:
(In millions)Quick LubesCore North AmericaInternationalTotal
Balance at September 30, 2019$301  $89  $40  $430  
Acquisitions (a)
 —  —   
Currency translation(1) —  —  (1) 
Dispositions (a)
(3) —  —  (3) 
Balance at June 30, 2020$305  $89  $40  $434  
(a) Refer to Note 4 for details regarding acquisitions and dispositions completed during the nine months ended June 30, 2020.
v3.20.2
Restructuring Activities
9 Months Ended
Jun. 30, 2020
Restructuring and Related Activities [Abstract]  
Restructuring Activities RESTRUCTURING ACTIVITIES
During the second quarter of fiscal 2019, Valvoline outlined a broad-based restructuring and cost-savings program to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. Part of this program included employee separation actions, which were generally completed during 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020.

Since program inception, Valvoline has recognized cumulative costs of $13 million, including $1 million during the nine months ended June 30, 2020 and $4 million and $10 million during the three and nine months ended June 30, 2019, respectively. These costs are for employee termination benefits, which include severance and other benefits provided to employees pursuant to the restructuring program. These expenses were recognized in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income. The Company does not expect to incur material remaining costs from these actions.

The results by segment, as disclosed in Note 12, do not include these restructuring expenses, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses are included in Unallocated and other.

The following table presents the expenses recognized related to employee termination benefits during the nine months ended June 30, 2020 and the estimated remaining liability, which is included in the Condensed Consolidated Balance Sheet within Accrued expenses and other liabilities:
(In millions)Employee termination benefits
Balance at September 30, 2019$ 
Expenses recognized during the period 
Payments (6) 
Balance at June 30, 2020$ 
v3.20.2
Debt
9 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Debt DEBT
The following table summarizes Valvoline’s total debt:

(In millions)June 30
2020
September 30 2019
2030 Notes$600  $—  
2025 Notes800  400  
2024 Notes—  375  
Term Loan475  575  
Trade Receivables Facility90  —  
Other (a)
  
Debt issuance costs and discounts(20) (9) 
Total debt$1,953  $1,342  
Current portion of long-term debt—  15  
Long-term debt$1,953  $1,327  
 
(a) Other includes borrowings under the China construction credit facility of $7 million as of June 30, 2020. In addition, other includes debt acquired through acquisitions of $1 million as of June 30, 2020 and September 30, 2019.

Senior Notes
The Company's outstanding fixed rate senior notes as of June 30, 2020 consist of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800 million (the “2025 Notes") and 4.250% senior unsecured notes due 2030 with an aggregate principal amount of $600 million (the "2030 Notes," and collectively, the "Senior Notes"). 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. 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 maturity in the manner specified in the governing indentures. The Senior Notes are guaranteed by each of Valvoline's subsidiaries that guarantee obligations under its Senior Credit Agreement.

2025 Notes

The 2025 Notes are comprised of two issuances of 4.375% senior unsecured notes due 2025 each with an aggregate principal amount of $400 million, one issuance that was completed in August 2017 (the "Existing 2025 Notes") and the other that was completed in May 2020 (the "Additional 2025 Notes"), except that the Existing 2025 Notes are registered under the Securities Act of 1933, as amended (the “Securities Act”), and certain transfer restrictions, registration rights and additional interest provisions that apply to the Additional 2025 Notes do not apply to the Existing 2025 Notes. The Additional 2025 Notes were issued in a private offering at 99.5% of their principal amount, resulting in an original issue discount of $2 million. The net proceeds from the offering of $393
million (after deducting initial purchasers' discounts and debt issuance costs), together with cash and cash equivalents on hand, were used to repay $450 million in borrowings under the $475 million senior secured revolving credit facility (the “Revolver”).

2030 Notes

In February 2020, Valvoline issued the 2030 Notes in a private offering for net proceeds of $592 million (after deducting initial purchasers’ discounts and debt issuance costs). A portion of the net proceeds were used to redeem in full Valvoline's 5.500% senior unsecured notes due 2024 at the aggregate principal amount of $375 million (the "2024 Notes"), plus an early redemption premium of $15 million, accrued and unpaid interest, as well as related fees and expenses for an aggregate redemption price of $394 million. A loss on extinguishment of the 2024 Notes of $19 million was recognized in Net interest and other financing expenses in the Condensed Consolidated Statements of Comprehensive Income for the nine months ended June 30, 2020, comprised of the early redemption premium and the write-off of related unamortized debt issuance costs and discounts.

A portion of the net proceeds from the offering of the 2030 Notes were also utilized to prepay $100 million of indebtedness from the term loan facility (the "Term Loan") under the Senior Credit Agreement, with the remainder of the net proceeds to be used for general corporate purposes, which may include acquisitions, repayment of indebtedness, working capital and capital expenditures. In response to the COVID-19 pandemic, the Company is utilizing the remaining net proceeds to preserve cash and cash equivalents and maintain liquidity.

Senior Credit Agreement

During the nine months ended June 30, 2020, the Company made a principal prepayment of $100 million on its Term Loan using a portion of the net proceeds from the offering of the 2030 Notes, resulting in an outstanding principal balance of $475 million as of June 30, 2020 from the $575 million outstanding as of September 30, 2019.

During the nine months ended June 30, 2020, the Company borrowed and repaid $450 million from its Revolver under the Senior Credit Agreement. The initial borrowings under the Revolver were a precautionary measure to further strengthen the Company's liquidity position and provide additional financial flexibility in response to the COVID-19 pandemic and were subsequently repaid using proceeds provided by the offering of the Additional 2025 Notes and existing cash and cash equivalents on hand. As of June 30, 2020 and September 30, 2019 there were no amounts outstanding under the Revolver. As of June 30, 2020, the total borrowing capacity remaining under the Revolver was $468 million due to a reduction of $7 million for letters of credit outstanding.

As of June 30, 2020, Valvoline was in compliance with all covenants under the Senior Credit Agreement.

Trade Receivables Facility
In January 2020, the Company amended its $175 million trade receivables securitization facility (the “Trade Receivables Facility”), which extended the maturity to November 2021. In April 2020, Valvoline further amended the Trade Receivables Facility to modify the eligibility requirements for certain receivables, which had the effect of increasing the Company’s remaining eligible borrowing capacity. This amendment also requires the Company to maintain an amount outstanding equal to the lesser of 50 percent of the unchanged total borrowing capacity and the borrowing base from the availability of eligible receivables. Other relevant terms and conditions of Trade Receivables Facility were substantially unchanged under these amendments.

During the nine months ended June 30, 2020, Valvoline borrowed $90 million under the Trade Receivables Facility to proactively increase its cash position and enhance financial agility in light of the uncertainty resulting from the COVID-19 pandemic. As of June 30, 2020, $90 million remained outstanding and no amounts were outstanding as of September 30, 2019.

Based on the availability of eligible receivables, the remaining borrowing capacity of the Trade Receivables Facility as of June 30, 2020 was $85 million. The financing subsidiary owned $267 million and $259 million of
outstanding accounts receivable as of June 30, 2020 and September 30, 2019, respectively, which are included in Accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.

China Credit Facility
In May 2020, the Company entered into a five-year credit agreement (the “China Credit Facility”) for approximately $40 million to finance the completion of construction of the blending and packaging plant in China. Borrowings will bear interest at the local prime rate less the applicable interest rate margin and will be secured by the assets underlying the project. The proceeds from the China Credit Facility are restricted for capital expenditures directly related to the construction of the blending and packaging plant in China. As of June 30, 2020, there was $7 million outstanding on the China Credit Facility, which is reflected in the Other line in the table above and had total borrowing capacity remaining of approximately $33 million.
v3.20.2
Income Taxes
9 Months Ended
Jun. 30, 2020
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 discrete items related specifically to interim periods. The following summarizes income tax expense and the effective tax rate in each interim period:

Three months endedNine months ended
June 30June 30
(In millions)2020201920202019
Income tax expense$19  $20  $68  $56  
Effective tax rate percentage24.4 %23.5 %25.9 %23.6 %

The increase in effective tax rates for the three and nine months ended June 30, 2020 compared to the prior year periods was attributed to the mix shift of projected annual pre-tax earnings to jurisdictions with higher statutory tax rates. The increase in income tax expense and the effective tax rate for the nine months ended June 30, 2020 was also related to tax reform, which resulted in unfavorable discrete activity in the current year period due to legislation enacted in India, while the clarification of certain provisions of Kentucky tax reform regulations drove favorable discrete activity in the prior year period. Higher pre-tax earnings also led to increased income tax expense in the current year-to-date period.
v3.20.2
Employee Benefit Plans
9 Months Ended
Jun. 30, 2020
Retirement Benefits [Abstract]  
Employee Benefit Plans EMPLOYEE BENEFIT PLANS
The following table summarizes the components of pension and other postretirement benefit (income) cost:

Other postretirement benefits
Pension benefits
(In millions)2020201920202019
Three months ended June 30
Service cost$ $—  $—  $—  
Interest cost15  21  —  —  
Expected return on plan assets(21) (20) —  —  
Amortization of prior service credit—  —  (3) (3) 
Net periodic benefit (income) cost$(5) $ $(3) $(3) 
Nine months ended June 30
Service cost$ $ $—  $—  
Interest cost46  61    
Expected return on plan assets(65) (60) —  —  
Amortization of prior service credit—  —  (9) (9) 
Net periodic benefit (income) cost$(17) $ $(8) $(8) 
v3.20.2
Litigation, Claims and Contingencies
9 Months Ended
Jun. 30, 2020
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 not material 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.
v3.20.2
Earnings Per Share
9 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Earnings Per Share EARNINGS PER SHARE
The following table summarizes basic and diluted earnings per share:

Three months endedNine months ended
June 30June 30
(In millions, except per share amounts)2020 201920202019
Numerator 
Net income $59  $65  $195  $181  
Denominator 
Weighted average common shares outstanding186   189  187  189  
Effect of potentially dilutive securities (a)
—   —   —  
Weighted average diluted shares outstanding186  189  188  189  
  
Earnings per share 
Basic$0.32   $0.34  $1.04  $0.96  
Diluted$0.32   $0.34  $1.04  $0.96  
(a)Outstanding securities, primarily stock appreciation rights, were not included in the computation of diluted earnings per share because their effect would have been antidilutive. There were approximately 2 million and 1 million antidilutive outstanding securities in the three and nine months ended June 30, 2020, respectively, and there were approximately 1 million and 2 million in the three and nine months ended June 30, 2019, respectively.
v3.20.2
Reportable Segment Information
9 Months Ended
Jun. 30, 2020
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 through company-owned and independent franchised retail quick lube service center stores and independent Express Care stores that service vehicles with Valvoline products, as well as through investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.

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

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

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

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

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



(In millions)
Three months endedNine months ended
June 30
June 30
2020201920202019
Sales
Quick Lubes$199  $211  $629  $600  
Core North America207  260  693  735  
International110  142  379  426  
Consolidated sales$516  $613  $1,701  $1,761  
Operating income
Quick Lubes$36  $48  $114  $130  
Core North America51  38  144  109  
International12  20  50  61  
Total operating segments99  106  308  300  
Unallocated and other (a)
(11) (4)  (15) 
Consolidated operating income$88  $102  $309  $285  
(a) Unallocated and other includes net legacy and separation-related expenses/income and corporate costs not allocated to the reportable segments, including certain acquisition and divestiture-related costs, restructuring and related expenses, and certain current year incentive compensation adjustments.

Disaggregation of revenue

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

Three months endedNine months ended
June 30June 30
(In millions)2020201920202019
Quick Lubes
Company-owned operations$139  $136  $421  $388  
Non-company owned operations60  75  208  212  
Total Quick Lubes199  211  629  600  
Core North America
Retail137  143  407  399  
Installer and other70  117  286  336  
Total Core North America207  260  693  735  
International110  142  379  426  
Consolidated sales$516  $613  $1,701  $1,761  
Sales by reportable segment disaggregated by geographic market follows:

Quick LubesCore North AmericaInternationalTotal
(In millions)20202019202020192020201920202019
Three months ended June 30