VALVOLINE INC, 10-K filed on 11/24/2020
Annual Report
v3.20.2
Cover Page - USD ($)
$ in Billions
12 Months Ended
Sep. 30, 2020
Nov. 17, 2020
Mar. 31, 2020
Cover [Abstract]      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Sep. 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 Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
ICFR Auditor Attestation Flag true    
Entity Shell Company false    
Entity Public Float     $ 2.4
Entity Common Stock, Shares Outstanding   185,265,028  
Amendment Flag false    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Entity Central Index Key 0001674910    
Current Fiscal Year End Date --09-30    
Documents Incorporated by Reference Portions of the Registrant’s definitive proxy statement (“Proxy Statement”) for its 2021 Annual Meeting of Shareholders, which will be filed within 120 days of the Registrant’s fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.    
v3.20.2
Consolidated Statements of Comprehensive Income - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2018
Net Income (Loss) Attributable to Parent [Abstract]      
Sales $ 2,353 $ 2,390 $ 2,285
Cost of sales 1,490 1,580 1,479
Gross profit 863 810 806
Selling, general and administrative expenses 442 449 430
Net legacy and separation-related (income) expenses (30) 3 14
Equity and other income, net (34) (40) (33)
Operating income 485 398 395
Net pension and other postretirement plan (income) expenses (59) 60 0
Net interest and other financing expenses 93 73 63
Income before income taxes 451 265 332
Income tax expense 134 57 166
Net income $ 317 $ 208 $ 166
NET EARNINGS PER SHARE      
Net income per share, basic (usd per share) $ 1.70 $ 1.10 $ 0.84
Net income per share, diluted (usd per share) $ 1.69 $ 1.10 $ 0.84
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING      
Weighted average common shares outstanding, basic (in shares) 187 189 197
Weighted average common shares outstanding, diluted (in shares) 188 189 197
COMPREHENSIVE INCOME      
Net income $ 317 $ 208 $ 166
Other comprehensive income (loss), net of tax      
Currency translation adjustments 7 (12) (10)
Amortization of pension and other postretirement plan prior service credits (9) (9) (9)
Other Comprehensive Income (Loss), Cash Flow Hedge, Gain (Loss), Reclassification, after Tax (1) 0 0
Other comprehensive loss (3) (21) (19)
Comprehensive income $ 314 $ 187 $ 147
v3.20.2
Consolidated Balance Sheets - USD ($)
shares in Millions, $ in Millions
Sep. 30, 2020
Sep. 30, 2019
Current assets    
Cash and cash equivalents $ 760 $ 159
Receivables, net 433 401
Inventories, net 199 194
Prepaid expenses and other current assets 46 43
Total current assets 1,438 797
Noncurrent assets    
Property, plant and equipment, net 613 498
Operating Lease, Right-of-Use Asset 261 0
Goodwill and intangibles, net 529 504
Equity method investments 44 34
Deferred income taxes 34 123
Other noncurrent assets 132 108
Total noncurrent assets 1,613 1,267
Total assets 3,051 2,064
Current liabilities    
Current portion of long-term debt 0 15
Trade and other payables 189 171
Accrued expenses and other liabilities 255 237
Total current liabilities 444 423
Noncurrent liabilities    
Long-term debt 1,962 1,327
Employee benefit obligations 317 387
Other noncurrent liabilities 173 185
Operating Lease, Liability, Noncurrent 231 0
Total noncurrent liabilities 2,683 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 September 30, 2020 and 2019, respectively 2 2
Paid-in capital 24 13
Retained deficit (110) (284)
Accumulated other comprehensive income 8 11
Total stockholders’ deficit (76) (258)
Total liabilities and stockholders’ deficit $ 3,051 $ 2,064
Common stock issued (in shares) 185 188
Common stock outstanding (in shares) 185 188
v3.20.2
Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2020
Sep. 30, 2019
Statement of Financial Position [Abstract]    
Preferred stock authorized (in shares) 40,000,000 40,000,000
Preferred stock issued (in shares) 0 0
Preferred stock outstanding (in shares) 0 0
Common stock, par value (usd per share) $ 0.01 $ 0.01
Common stock authorized (in shares) 400,000,000 400,000,000
Common stock issued (in shares) 185,000,000 188,000,000
Common stock outstanding (in shares) 185,000,000 188,000,000
v3.20.2
Consolidated Statements of Stockholders' Deficit - USD ($)
shares in Millions, $ in Millions
Total
Cumulative Effect, Period of Adoption, Adjustment [Member]
Common stock
Paid-in capital
Retained deficit
Retained deficit
Cumulative Effect, Period of Adoption, Adjustment [Member]
Accumulated other comprehensive income (loss)
Common stock outstanding, beginning balance (in shares) at Sep. 30, 2017     203        
Balance at beginning of period at Sep. 30, 2017 $ (117)   $ 2 $ 5 $ (167)   $ 43
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income $ 166       166    
Dividends paid per common share (usd per share) $ 0.298            
Dividends paid $ (58)       (58)    
Stock-based compensation, net of issuances 9     9      
Repurchase of common stock (in shares)     (15)        
Repurchase of common stock (325)       (325)    
Purchase of remaining ownership in subsidiary (14)     (7) (7)    
Reclassification of income tax effects of U.S. tax reform 0       (8)   8
Common stock outstanding, ending balance (in shares) at Sep. 30, 2018     188        
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent (19)   $ (19)       (19)
Balance at end of period at Sep. 30, 2018 (358)   $ 2 7 (399)   32
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income $ 208       208    
Dividends paid per common share (usd per share) $ 0.424            
Dividends paid $ (80)       (80)    
Stock-based compensation, net of issuances $ 6     6      
Common stock outstanding, ending balance (in shares) at Sep. 30, 2019 188   188        
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent $ (21)   $ (21)       (21)
Balance at end of period at Sep. 30, 2019 (258) $ (13) $ 2 13 (284) $ (13) 11
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net income $ 317       317    
Dividends paid per common share (usd per share) $ 0.452            
Dividends paid $ (84)       (84)    
Stock-based compensation, net of issuances 11     11      
Repurchase of common stock (in shares)     (3)        
Repurchase of common stock $ (60)       (60)    
Common stock outstanding, ending balance (in shares) at Sep. 30, 2020 185   185        
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent $ (3)           (3)
Balance at end of period at Sep. 30, 2020 $ (76) $ 1 $ 2 $ 24 $ (110) $ 1 $ 8
v3.20.2
Consolidated Statements of Stockholders' Deficit (Parenthetical) - $ / shares
12 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2018
Statement of Stockholders' Equity [Abstract]      
Dividends paid per common share (usd per share) $ 0.452 $ 0.424 $ 0.298
v3.20.2
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities      
Net income $ 317 $ 208 $ 166
Adjustments to reconcile to cash flows from operations      
Gain (Loss) on Extinguishment of Debt 19 0 0
Depreciation and amortization 66 61 54
Deferred income taxes 92 23 145
Equity income from unconsolidated affiliates, net of distributions (7) (3) (4)
Pension contributions (11) (10) (16)
(Gain) loss on pension and other postretirement plan remeasurements (22) 69 38
Stock-based compensation expense 12 9 12
Other, net 2 (2) 4
Change in assets and liabilities      
Receivables (11) (30) (38)
Inventories (1) (10) (4)
Payables and accrued liabilities (3) 37 (2)
Other assets and liabilities (81) (27) (35)
Total cash provided by operating activities 372 325 320
Cash flows from investing activities      
Additions to property, plant and equipment (151) (108) (93)
Notes receivable, net of repayments 31 2 0
Acquisitions of businesses (40) (78) (125)
Other investing activities, net 0 0 5
Total cash used in investing activities (222) (188) (213)
Cash flows from financing activities      
Payments of debt issuance costs (16) (2) (1)
Repayments on borrowings (929) (734) (108)
Premium paid to extinguish debt (15) 0 0
Repurchases of common stock (60) 0 (325)
Payments for purchase of additional ownership in subsidiary 0 (1) (15)
Cash dividends paid (84) (80) (58)
Other financing activities (4) (6) (7)
Total cash provided by (used in) financing activities 450 (71) (209)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash 2 (3) (3)
Increase (decrease) in cash, cash equivalents, and restricted cash 602 63 (105)
Cash, cash equivalents, and restricted cash - beginning of year 159 96 201
Cash, cash equivalents, and restricted cash - end of year 761 159 96
Interest paid 65 67 53
Income taxes paid 44 25 26
Proceeds from Issuance of Debt $ 1,558 $ 752 $ 305
v3.20.2
Description of Business and Basis of Presentation
12 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Description of Business and Basis of Presentation DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of business

Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide marketer and supplier of engine and automotive maintenance products and services. Valvoline is one of the most recognized premium consumer brands in the global automotive lubricant and preventative maintenance industry, known for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed name recognition across multiple product and service channels.

Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and U.S. Securities and Exchange Commission (“SEC”) regulations. The financial statements are presented on a consolidated basis for all periods presented and include the operations of the Company and its majority-owned and controlled subsidiaries. All intercompany transactions and balances within Valvoline have been eliminated in consolidation. 
Certain prior period amounts have been reclassified in the accompanying consolidated financial statements and notes thereto to conform to the current period presentation.
v3.20.2
Significant Accounting Policies
12 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Significant Accounting Policies SIGNIFICANT ACCOUNTING POLICIES
Valvoline’s significant accounting policies, which conform to U.S. GAAP and are applied on a consistent basis in all periods presented, except when otherwise disclosed, are described below.

Use of estimates, risks and uncertainties

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent matters. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including intangible assets and goodwill), customer incentives, employee benefit obligations and income taxes. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

In late December 2019, coronavirus ("COVID-19") was identified in Wuhan, China and since that time it has continued to spread, 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. The Company has substantially maintained its operations during the pandemic to-date, and precautionary measures have been taken to protect the Company's employees and customers, maintain liquidity, support its franchisees, and manage through currently known impacts of the pandemic. Given the unprecedented nature of the pandemic, the extent of future impacts cannot be reasonably estimated at this time due to numerous uncertainties, including the duration and severity of the pandemic.

Cash and cash equivalents

All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents.

Receivables and allowance for doubtful accounts

Valvoline invoices customers once or as performance obligations are satisfied, at which point payment becomes unconditional. As the majority of the Company’s performance obligations are satisfied at a point in time and customers typically do not make material payments in advance, nor does Valvoline have a right to consideration in advance of control transfer, the Company has no contract assets or contract liabilities. The Company recognizes a
receivable on its Consolidated Balance Sheets when the Company performs a service or transfers a product in advance of receiving consideration and its right to consideration is unconditional and only the passage of time is required before payment of that consideration is due.

Receivables are recorded at net realizable value, and Valvoline records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses. Valvoline estimates the allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, past transaction history with the customer, and changes in customer payment terms. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible receivables against the allowance when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.

Inventories

Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method to provide matching of revenues with current costs. Costs include materials, labor and manufacturing overhead related to the purchase and production of inventories. The Company regularly reviews inventory quantities on hand and the estimated utilization of inventory. Excess and obsolete reserves are established when inventory is estimated to not be usable based on forecasted usage, product demand and life cycle, as well as utility.

Property, plant and equipment

Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated principally over 10 to 25 years and machinery and equipment is generally depreciated over 5 to 30 years. Building and leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from which the date the assets are placed in service to the end of the lease term, as appropriate. Property, plant and equipment is relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired. Gains or losses on the dispositions of property, plant and equipment are included in the Consolidated Statements of Comprehensive Income and generally reported in Equity and other income, net.

Property, plant and equipment carrying values are evaluated for recoverability when impairment indicators are present and are conducted at the lowest level of identifiable cash flows. Such indicators could include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of property, plant and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).

Leases

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, the related lease assets and liabilities are recognized on the 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). Valvoline includes leases with an initial term of 12 months or less in the measurement of its right-of-use asset and lease liability balances, which generally have terms ranging from less than one year to more than 20 years. 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 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 and account for them as a single lease component. 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 the commencement date, including lease term, interest rate yields for specific interest rate environments and the Company's credit spread.

Lessor arrangements

Valvoline is the lessor in arrangements to sublease and lease certain properties and equipment. Activity associated with these leases is not material.

Business combinations

The Company allocates the purchase consideration to the identifiable assets acquired and liabilities assumed in business combinations based on their acquisition-date fair values. The excess of the purchase consideration over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded. Factors giving rise to goodwill generally include operational synergies that are anticipated as a result of the business combination and growth expected to result in economic benefits from access to new customers and markets. The fair values of identifiable intangible assets acquired in business combinations are generally determined using an income approach, requiring financial forecasts and estimates as well as market participant assumptions.

The incremental financial results of the businesses that Valvoline has acquired are included in the Company’s consolidated financial results from the respective dates of each acquisition.

Goodwill and other intangible assets

Valvoline tests goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current carrying value. Valvoline’s reporting units are Quick Lubes, Core North America, and International.

In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative "step zero" assessment to determine whether further impairment testing is necessary or to perform a quantitative "step one" assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others.

Under the step one assessment, if the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured under "step two" of the impairment analysis. In step two of the analysis, an impairment loss will be recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate, weighted average cost of capital, terminal
values and working capital changes. Several of these assumptions vary among reporting units, and the cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies method which is based on earnings multiple data. The Company also performs a reconciliation between market capitalization and the estimate of the aggregate fair value of the reporting units, including consideration of a control premium.

Valvoline elected to perform a qualitative assessment during fiscal 2020 and determined that it is not more likely than not that the fair values of Valvoline’s reporting units are less than carrying amounts.

Acquired finite-lived intangible assets principally consist of certain trademarks and trade names, reacquired franchise rights and customer relationships. Intangible assets acquired in an asset acquisition are carried at cost, less accumulated amortization. For intangible assets acquired in a business combination, the estimated fair values of the assets acquired are used to establish the carrying values, which are determined using assumptions from the perspective of a market participant and generally an income approach. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Valvoline evaluates finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, and any assets not expected to be recovered through undiscounted future net cash flows are written down to current fair value.

Equity method investments

Investments in companies, including joint ventures, where Valvoline has the ability to exert significant influence over, but not control, operating and financial policies of the investee are accounted for using the equity method of accounting. Judgment regarding the level of influence over each investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, and participation in policy-making decisions. The Company’s proportionate share of the net income or loss of these companies is included within Equity and other income, net in the Consolidated Statements of Comprehensive Income.

The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time and extent to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.

Pension and other postretirement benefit plans

Valvoline sponsors defined benefit pension and other postretirement plans in the U.S and in certain countries outside the U.S. Valvoline recognizes the funded status of each applicable plan on the Consolidated Balance Sheets whereby each underfunded plan is recognized as a liability. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation. Changes in the fair value of plan assets and net actuarial gains or losses are recognized upon remeasurement as of September 30, the annual measurement date, and whenever a remeasurement is triggered. The remaining components of pension and other postretirement benefits expense / income are recorded ratably on a quarterly basis. The fair value of plan assets represents the current market value of assets held by irrevocable trust funds for the sole benefit of participants, and the benefit obligation is the actuarial present value of the benefits expected to be paid upon retirement, death, or other distributable event based on estimates. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain key assumptions that require significant judgment, including, but not limited to, estimates of discount rates, rate of compensation increases, interest rates and mortality rates. Actuarial gains and losses may be related to actual results that differ from assumptions as well as changes in assumptions, which may occur each year.

Due to the freeze of U.S. pension benefits effective September 30, 2016, continuing service costs are limited to certain international pension plans, and are reported in the same caption of the Consolidated Statements of Comprehensive Income as the related employee payroll expenses. All components of net periodic benefit cost / income other than service cost are recognized below operating income within Net pension and other postretirement plan expense / income in the Consolidated Statements of Comprehensive Income.
Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income. 

Revenue recognition

Revenue is recognized for the amount that reflects the consideration the Company is expected to be entitled to receive based on when control of the promised good or service is transferred to the customer. Revenue recognition is evaluated through the following five steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligation(s) in the contract(s); (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation(s) in the contract(s); and (v) recognition of revenue when or as a performance obligation is satisfied.

Nature of goods and services

Valvoline generates all revenues from contracts with customers, primarily as a result of the sale and service delivery of engine and automotive maintenance products to customers. Valvoline derives its sales from its broad line of products and complementary services through the following three principal activities managed across its three reportable segments: (i) engine and automotive maintenance products, (ii) company-owned quick-lube operations, and (iii) franchised quick-lube operations. Valvoline’s sales are generally to retail, installer, industrial, distributor, franchise, and end consumers to facilitate vehicle and equipment service and maintenance.

Valvoline's sales are predominantly comprised of products and services sold at a point in time with approximately 98% recognized either through ship-and-bill performance obligations or company-owned quick-lube operations. The remainder of the Company's sales generally relate to franchise fees transferred over time. The following table summarizes Valvoline's sales by timing of revenue recognized for the fiscal years ended September 30:

(In millions)202020192018
Sales at a point in time$2,313 $2,346 $2,256 
Franchised revenues transferred over time40 44 29 
Total consolidated sales$2,353 $2,390 $2,285 

Below is a summary of the key considerations for Valvoline's material revenue-generating activities:

Engine and automotive maintenance products

Engine and automotive maintenance products primarily include lubricants, antifreeze, chemicals, filters, and other complementary products for use across a wide array of vehicles and engines. The Company’s customers typically enter into a sales agreement which outlines a framework of terms and conditions that apply to all current and future purchase orders for the customer submitted under such sales agreement. In these situations, the Company’s contract with the customer is the sales agreement combined with the customer purchase order as specific products and quantities are not indicated until a purchase order is submitted. As the Company’s contract with the customer is typically for a single purchase order under the supply agreement to be delivered at a point in time, the duration of the contract is almost always one year or less. The Company’s products are distinct and separately identifiable on customer purchase orders, with each product sale representing a separate performance obligation that is generally delivered simultaneously. Valvoline is the principal to these contracts as the Company has control of the products prior to transfer to the customer. Accordingly, revenue is recognized on a gross basis.

The Company determines the point in time at which control is transferred and the performance obligation is satisfied by considering when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product, which generally coincides with the transfer of title and risk of loss to the customer and is typically determined based on delivery terms within the underlying contract.
Customer payment terms vary by region and customer and are generally 30 to 60 days after delivery. Valvoline does not provide extended payment terms greater than one year.

Company-owned quick-lube operations

Performance obligations related to company-owned quick-lube operations primarily include the sale of engine and automotive maintenance products and related services. These performance obligations are distinct and are delivered simultaneously at a point in time. Accordingly, revenue from company-owned quick-lube operations is recognized when payment is tendered at the point of sale, which coincides with the completion of product and service delivery and the transfer of control and benefits from the performance obligations to the customer.

Franchised quick-lube operations

The primary performance obligations related to franchised quick-lube operations include product sales as described above and the license of intellectual property, which provides access to the Valvoline brand and proprietary information to operate service center stores over the term of a franchise agreement. Other franchise performance obligations do not result in material revenue. Each performance obligation is distinct, and franchisees generally receive and consume the benefits provided by the Company’s performance over the course of the franchise agreement, which typically ranges from 10 to 15 years. Billings and payments occur monthly.

In exchange for the license of Valvoline intellectual property, franchisees generally remit initial fees upon opening a service center store and royalties at a contractual rate of the applicable service center store sales over the term of the franchise agreement. The license provides access to the intellectual property over the term of the franchise agreement and is considered a right-to-access license of symbolic intellectual property as substantially all of its utility is derived from association with the Company’s past and ongoing activities. The license granted to operate each franchised service center store is the predominant item to which the royalties relate and represents a distinct performance obligation which is recognized over time as the underlying sales occur, as this is the most appropriate measure of progress toward complete satisfaction of the performance obligation.

Variable consideration

The Company only offers an assurance-type warranty with regard to the intended functionality of products sold, which does not represent a distinct performance obligation within the context of the contract. Product returns and refunds are generally not material and are not accepted unless the item is defective as manufactured. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which Valvoline expects to receive.

The nature of Valvoline’s contracts with customers often give rise to variable consideration consisting primarily of promotional rebates and customer pricing discounts based on achieving certain levels of sales activity that generally decrease the transaction price. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration, or amounts payable to the customer when there is a basis to reasonably estimate the amount and it is probable there will not be a significant reversal. Variable consideration is recorded as a reduction of the transaction price at the time of sale and is primarily estimated utilizing the most likely amount method that is expected to be earned as the Company is able to estimate the anticipated discounts within a sufficiently narrow range of possible outcomes based on its extensive historical experience with certain customers, similar programs and management’s judgment with respect to estimating customer participation and performance levels. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.

The reduction of transaction price due to customer incentives was $332 million, $346 million, and $357 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2020, 2019, and 2018, respectively. Reserves for these customer programs and incentives were $64 million and $72 million as of September 30, 2020 and 2019, respectively, and are recorded within Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Allocation of transaction price

In each contract with multiple performance obligations, Valvoline allocates the transaction price, including variable consideration, to each performance obligation on a relative standalone selling price basis, which is generally determined based on the directly observable data of the Company’s standalone sales of the performance obligations in similar circumstances to similar customers. In the absence of directly observable standalone prices, the Company may utilize prices charged by competitors selling similar products or use an expected cost-plus margin approach. The amount allocated to each performance obligation is recognized as revenue as control is transferred to the customer.

Policy elections

Sales and use-based taxes - The Company excludes taxes collected from customers from sales. These amounts are, however, reflected in accrued expenses until remitted to the appropriate governmental authority.

Shipping and handling costs - Valvoline elected to account for shipping and handling activities that occur after the customer has obtained control as fulfillment activities (i.e., an expense) rather than as a performance obligation. Accordingly, amounts billed for shipping and handling are a component of the transaction price included in net sales, while costs incurred are included in cost of sales. Shipping and handling costs recorded in sales were $9 million in fiscal 2020 and $10 million both fiscal 2019 and 2018.

Significant financing component - Valvoline does not adjust the promised amount of consideration for the effects of a significant financing component as the period between transfer of a promised product or service to a customer and when the customer pays for that product or service is expected to be one year or less.

Remaining performance obligations - The Company elected to omit disclosures of remaining performance obligations for contracts which have an initial expected term of one year or less. In addition, the Company has elected to not disclose remaining performance obligations for its franchise agreements with variable consideration based on service center store sales.

Incremental costs of obtaining a contract - The Company expenses incremental direct costs of obtaining a contract, primarily sales commissions, when incurred due to the short-term nature of individual contracts, which would result in amortization periods of one year or less. These costs are not material and are recorded in Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income.

Expense recognition

Cost of sales are expensed as incurred and include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, and all other distribution network costs. Selling, general and administrative expenses are expensed as incurred and include sales and marketing costs, research and development costs, advertising, customer support, and administrative costs. Advertising costs were $72 million in fiscal 2020, $73 million in fiscal 2019 and $63 million in fiscal 2018, and research and development costs were $13 million in both fiscal 2020 and 2019 and $14 million in fiscal 2018.

Stock-based compensation

Stock-based compensation expense is recognized within Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income and is principally based on the grant date fair value of new or modified awards over the requisite vesting period. The Company’s outstanding stock-based compensation awards are primarily classified as equity, with certain liability-classified awards based on award terms and conditions. Valvoline accounts for forfeitures when they occur.
Restructuring

The timing of recognition and related measurement of an employee termination benefit liability associated with a non-recurring benefit arrangement depends on whether employees are required to render service beyond a minimum retention period until they are terminated in order to receive the termination benefits. For employees who are not required to render service until they are terminated or provide service beyond the minimum retention period in order to receive the termination benefits, the Company records a liability for the termination benefits at the communication date. If employees are required to render service beyond the minimum retention period until they are terminated in order to receive the termination benefits, the Company measures the liability for termination benefits at the communication date and recognizes the expense and liability ratably over the future service period.

Income taxes

Income tax expense is provided based on income before income taxes. The Company estimates its tax expense based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about the recognition and realization of deferred tax assets and liabilities resulting from the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the 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. Valvoline records valuation allowances related to its deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being sustained upon examination by authorities. Interest and penalties related to unrecognized tax benefits are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law and until such time that the related tax benefits are recognized. Interest and penalties were not material to any of the periods presented herein.

Derivatives

Valvoline’s derivative instruments consist of currency exchange and interest rate swap agreements. The Company's currency exchange contracts are not designated as hedging instruments and are accounted for as either assets or liabilities in the Consolidated Balance Sheets at fair value with the resulting gains or losses recognized as adjustments to earnings. The Company classifies its cash flows related to currency exchange contracts as investing activities in the Consolidated Statements of Cash Flows.

Valvoline's interest rate swap agreements qualify and are designated as cash flow hedges. To the extent the hedging relationship is highly effective, the gain or loss on the swap is recorded in the Consolidated Statements of Comprehensive Income in Other comprehensive income and reclassified into Interest expense in the same period during which the hedged transactions affect earnings. Effectiveness of the cash flow hedges is assessed at inception and quarterly thereafter. The Company classifies its cash flows related to interest rate swap agreements as operating activities in the Consolidated Statements of Cash Flows.

The fair values of the interest rate swaps are reflected as an asset or liability in the Consolidated Balance Sheets and the change in fair value is reported in Accumulated other comprehensive income. The fair values of the interest rate swaps are estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date. The Company does not offset fair value amounts recognized for derivative instruments in its balance sheet for presentation purposes.

The interest rate swap agreements effectively modify the Company’s exposure to interest rate risk by converting the Company’s floating rate debt to a fixed rate basis for the term of the swap agreements, thus reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.
Fair value measurements

Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance prioritizes the inputs used to measure fair value into the following three-tier fair value hierarchy for which an instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement:

Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Valvoline's assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which may include the Company's own financial data, such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination requires significant management judgment.

Certain investments which measure fair value using the net asset value (“NAV”) per share practical expedient are not classified within the fair value hierarchy and are separately disclosed.

Valvoline measures its financial assets and financial liabilities at fair value based on one or more of the following three valuation techniques:

Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost)

Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option pricing and excess earnings models)

The Company generally uses a market approach, when practicable, in valuing financial instruments. In certain instances, when observable market data is lacking, the Company uses valuation techniques consistent with the income approach whereby future cash flows are converted to a single discounted amount. The Company uses multiple sources of pricing as well as trading and other market data in its process of reporting fair values.

The fair values of accounts receivables and accounts payable approximate their carrying values due to the relatively short-term nature of the instruments. Valvoline's notes receivable primarily consist of variable-rate interest term loans extended to franchisees to provide financial assistance as a response to the COVID-19 pandemic. These notes bear interest comparable with the market rates within Valvoline's variable rate borrowings, and accordingly, their carrying amounts approximate fair value.

The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Currency translation

Operations outside the United States are measured primarily using the local currency as the functional currency. Upon consolidation, the results of operations of the subsidiaries and affiliates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates for the year while assets and liabilities are translated at year-end exchange rates. Adjustments to translate assets and liabilities into U.S. dollars are recorded in the stockholders’ equity section of the Consolidated Balance Sheets as a component of Accumulated other comprehensive income and are included in net earnings only upon sale or substantial liquidation of the underlying non-U.S. subsidiary or affiliated company.

Earnings per share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted-average number of common shares outstanding during the reported period. Diluted EPS is calculated similar to basic EPS, except that the weighted-average number of shares outstanding includes the number of shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock appreciation rights and nonvested stock-based awards. Nonvested market and performance-based share awards are included in the weighted-average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.

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

During fiscal 2020, Valvoline adopted the following:

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. The Company did not elect the hindsight practical 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 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 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 3 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 consolidated financial statements in the twelve months ended September 30, 2020 as Valvoline did not have any existing hedging relationships at adoption on October 1, 2019. Refer to Note 4 for additional information regarding the interest rate swap agreements the Company entered into during the third and fourth quarters of fiscal 2020.

In March 2020, the SEC adopted amendments that reduce and simplify the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well for affiliates whose securities collateralize a registrant’s securities. The amendments allow for abbreviated financial and non-financial disclosures subject to meeting certain criteria, and reduce the burden of providing consolidating financial information that includes separate columnar information about the issuers and guarantors, including other subsidiaries of the parent company on a consolidated basis, consolidating adjustments and the total consolidated amounts. Valvoline adopted this guidance in the fourth quarter of fiscal 2020 and accordingly, condensed consolidating financial statements are no longer required to be disclosed.

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 loses, to estimate credit losses on certain types of financial instruments including trade and other receivables. The new guidance requires 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 became effective for Valvoline on October 1, 2020. The Company has substantially completed its assessment and implementation efforts, including developing models to estimate expected credit losses, assessing appropriate assumptions, designing changes to its related processes, and evaluating the effects on the consolidated financial statements, which have been determined to not be material. 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 does not differ materially.

In March 2020, the FASB issued guidance regarding the effects of reference rate reform on financial reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance for certain contract modifications and hedging arrangements to ease financial reporting burdens as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates. The guidance is available for prospective application upon its issuance and can generally be applied to contract modifications and hedging relationships entered into through December 31, 2022. The Company has interest rate swap hedging arrangements and long-term debt as described in Notes 4 and 9 to the Consolidated Financial Statements, respectively, for which existing payments are based on LIBOR. The Company anticipates that it will utilize amendments to its existing debt and interest rate swap agreements that will allow modification of the reference rates without the application of contract modification accounting guidance. The Company will adopt the guidance when LIBOR is discontinued or earlier depending on when amendments to its current agreements are initiated. Currently, the Company does not expect the adoption of this guidance to have material impact on its consolidated financial statements.

The FASB issued other accounting guidance during the period that is not currently applicable or not expected to have a material impact on Valvoline’s financial statements, and therefore, is not described above.
v3.20.2
Lease Commitments
12 Months Ended
Sep. 30, 2020
Leases [Abstract]  
Lease Commitments LEASE COMMITMENTS
As described in Note 2, 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.

The following table presents the Company's lease balances:

(In millions)Location in Consolidated Balance SheetsSeptember 30, 2020
Assets
Operating lease assetsOperating lease assets$261 
Finance lease assets Property, plant and equipment, net77 
Amortization of finance lease assetsProperty, plant and equipment, net(10)
Total leased assets$328 
Liabilities
Current:
Operating lease liabilitiesAccrued expenses and other liabilities$33 
Finance lease liabilitiesAccrued expenses and other liabilities
Noncurrent:
Operating lease liabilitiesOperating lease liabilities231 
Finance lease liabilitiesOther noncurrent liabilities70 
Total lease liabilities$337 

The following table presents the components of total lease costs:

(In millions)Location in Consolidated Statements of Comprehensive IncomeYear ended September 30, 2020
Operating lease cost
Cost of sales and Selling, general and administrative expenses (a)
$45 
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(6)
Total lease cost$52 
(a) Supply chain and retail-related amounts are included in Cost of sales.
Other information related to the Company's leases follows:

(In millions)Year ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (a)
$43 
Operating cash flows from finance leases$
Financing cash flows from finance leases$
Lease assets obtained in exchange for lease obligations:
Operating leases$49 
Finance leases$49 
(a) Included within the change in Other assets and liabilities within the 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 within the Consolidated Balance Sheet as of September 30, 2020:

(In millions) Operating leasesFinance leases
2021$43 $
202240 
202337 
202432 
202529 
Thereafter142 68 
Total future lease payments323 108 
Imputed interest59 35 
Present value of lease liabilities$264 $73 

As of September 30, 2020, Valvoline has additional leases primarily related to its quick lube service center stores that have not yet commenced with approximately $59 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 leases
Capital leases and financing obligations
2020$36 $
202132 
202229 
202327 
202423 
Thereafter120 50 
Total future minimum lease payments (a)
$267 84 
Imputed interest29 
Present value of minimum lease payments$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 September 30, 2020:

Operating leasesFinance leases
Weighted average remaining lease term (in years)9.5 years13.3 years
Weighted average discount rate4.08 %6.99 %
Lease Commitments LEASE COMMITMENTS
As described in Note 2, 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.

The following table presents the Company's lease balances:

(In millions)Location in Consolidated Balance SheetsSeptember 30, 2020
Assets
Operating lease assetsOperating lease assets$261 
Finance lease assets Property, plant and equipment, net77 
Amortization of finance lease assetsProperty, plant and equipment, net(10)
Total leased assets$328 
Liabilities
Current:
Operating lease liabilitiesAccrued expenses and other liabilities$33 
Finance lease liabilitiesAccrued expenses and other liabilities
Noncurrent:
Operating lease liabilitiesOperating lease liabilities231 
Finance lease liabilitiesOther noncurrent liabilities70 
Total lease liabilities$337 

The following table presents the components of total lease costs:

(In millions)Location in Consolidated Statements of Comprehensive IncomeYear ended September 30, 2020
Operating lease cost
Cost of sales and Selling, general and administrative expenses (a)
$45 
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(6)
Total lease cost$52 
(a) Supply chain and retail-related amounts are included in Cost of sales.
Other information related to the Company's leases follows:

(In millions)Year ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (a)
$43 
Operating cash flows from finance leases$
Financing cash flows from finance leases$
Lease assets obtained in exchange for lease obligations:
Operating leases$49 
Finance leases$49 
(a) Included within the change in Other assets and liabilities within the 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 within the Consolidated Balance Sheet as of September 30, 2020:

(In millions) Operating leasesFinance leases
2021$43 $
202240 
202337 
202432 
202529 
Thereafter142 68 
Total future lease payments323 108 
Imputed interest59 35 
Present value of lease liabilities$264 $73 

As of September 30, 2020, Valvoline has additional leases primarily related to its quick lube service center stores that have not yet commenced with approximately $59 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 leases
Capital leases and financing obligations
2020$36 $
202132 
202229 
202327 
202423 
Thereafter120 50 
Total future minimum lease payments (a)
$267 84 
Imputed interest29 
Present value of minimum lease payments$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 September 30, 2020:

Operating leasesFinance leases
Weighted average remaining lease term (in years)9.5 years13.3 years
Weighted average discount rate4.08 %6.99 %
v3.20.2
Fair Value Measurements
12 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements FAIR VALUE MEASUREMENTS
Recurring fair value measurements

The following table sets forth the Company’s financial assets and liabilities accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30:

(In millions)Fair value hierarchy20202019
Cash and cash equivalents
Money market fundsLevel 1$296 $— 
Time depositsLevel 2139 59 
Prepaid expenses and other current assets
Currency derivativesLevel 2— 
Other noncurrent assets
Non-qualified trust fundsLevel 216 
Non-qualified trust funds
NAV (a)
Total assets at fair value$454 $79 
Accrued expenses and other liabilities
Currency derivativesLevel 2$$— 
Interest rate swap agreementsLevel 2— 
Other noncurrent liabilities
Deferred compensation obligations
NAV (a)
25 20 
Total liabilities at fair value$28 $20 
(a)Funds measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy.

Money market funds

Money market funds trade in an active market and are valued using quoted market prices, which are Level 1 inputs.

Time deposits

Time deposits are balances held with financial institutions at face value plus accrued interest, which approximates fair value and are categorized as Level 2.

Currency derivatives

The Company uses derivatives not designated as hedging instruments consisting of forward contracts to manage non-U.S. currency denominated balance sheet exposures and exchange one currency for another at a fixed rate on a future date of one year or less. The Company had outstanding contracts with notional values of $149 million and $111 million as of September 30, 2020 and 2019, respectively. The fair value of these outstanding contracts are recorded as assets and liabilities on a gross basis measured using readily observable market inputs to estimate the fair value for similar derivative instruments and are classified as Level 2. Valvoline has entered into arrangements to mitigate losses in the event of nonperformance by counterparties that allow settlement on a net basis, the effect of which was not material to the recorded assets and liabilities as of September 30, 2020 or 2019.

Gains and losses on these instruments are recognized in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income as exchange rates change the fair value of these instruments and upon settlement to offset the remeasurement gain or loss on the related currency-denominated exposures in the same period. Gains and losses recognized related to these instruments were not material in any period presented herein.
Non-qualified trust funds

The Company maintains a non-qualified trust that is restricted to fund benefit payments for certain of its U.S. non-qualified pension plans. This trust is primarily invested in fixed income U.S. government bonds and mutual funds that are measured at fair value based upon Level 2 inputs corroborated by observable market data and using the NAV per share practical expedient, respectively. There were no significant redemption restrictions or unfunded commitments on these mutual fund investments as of September 30, 2020. Gains and losses related to these investments are immediately recognized within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income and were not material in any period presented herein.

Interest rate swap agreements

In the third and fourth quarters of fiscal 2020, the Company entered into four interest rate swap agreements with three to four year maturities to exchange interest rate payments on $350 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 payments occur. The Company expects these hedges to be highly effective and based on interest rates as of September 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.

Deferred compensation obligations

The Company has an unfunded deferred compensation plan that is valued based on the underlying participant-directed investments. The fair value of underlying investments in collective trust funds is determined using the NAV provided by the administrator of the fund as a practical expedient. The NAV is determined by each fund’s trustee based upon the fair value of the underlying assets owned by the fund, less its liabilities, divided by outstanding units. There were no significant redemption restrictions or unfunded commitments on these investments as of September 30, 2020. Changes in the fair values are recognized in the Consolidated Statements of Comprehensive Income within Selling, general and administrative expenses and were not material for the periods presented herein.     

Fair value of 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 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.
September 30, 2020September 30, 2019
(In millions)Fair valueCarrying valueUnamortized discount and issuance costsFair valueCarrying valueUnamortized discount and issuance costs
2024 Notes$— $— $— $390 $371 $(4)
2025 Notes827 790 (10)407 395 (5)
2030 Notes613 592 (8)— — — 
Total$1,440 $1,382 $(18)$797 $766 $(9)

Refer to Note 9 for details of these notes as well as Valvoline's other debt instruments that have variable interest rates with carrying amounts that approximate fair value.
v3.20.2
Acquisitions and Divestitures
12 Months Ended
Sep. 30, 2020
Business Combinations [Abstract]  
Acquisitions and Divestitures ACQUISITIONS AND DIVESTITURES
Acquisitions

Fiscal 2020 acquisitions

During fiscal 2020, Valvoline acquired 35 service center stores in single and multi-store transactions, including 23 former franchise service centers stores, for an aggregate purchase price of $40 million within the Quick Lubes reportable segment. These acquisitions provide an opportunity to expand Valvoline's Quick Lubes system within key markets.

Fiscal 2019 acquisitions

Valvoline acquired 60 service center stores and a lubricant production company during fiscal 2019 for an aggregate purchase price of $78 million. These acquisitions included 31 franchise service center stores in Canada acquired from Oil Changers Inc. on October 31, 2018, five former franchise service centers stores, and 24 service center stores acquired in single and multi-store transactions within the Quick Lubes reportable segment. The Company also acquired an Eastern European lubricant production company, including its manufacturing facility, within the International reportable segment. These acquisitions provided an opportunity to grow Valvoline's Quick Lubes system within key markets and expand Valvoline’s presence in Eastern Europe, including the Company’s regional supply chain capabilities.

Fiscal 2018 acquisitions

During fiscal 2018, the Company acquired 136 service center stores for an aggregate purchase price of $125 million within the Quick Lubes reportable segment. These acquisitions included 56 former franchise service center stores acquired from Henley Bluewater LLC for $60 million on October 2, 2017 and 73 franchise service center stores acquired from Great Canadian Oil Change Ltd. for $53 million on July 13, 2018. Fiscal 2018 acquisitions also included four former franchise service center stores and three service center stores acquired in single and multi-store transactions.

Summary

The following table summarizes the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the years ended September 30:

(In millions)202020192018
Inventories$$— $
Other current assets— — 
Property, plant and equipment19 
Operating lease assets— — 
Goodwill (a)
17 50 58 
Intangible assets (b)
Reacquired franchise rights (a) (c)
20 26 
Customer relationships— 
Trademarks and trade names— 27 
Other— — 
Other current liabilities(1)— — 
Other noncurrent liabilities(4)(1)— 
Net assets acquired40 82 125 
Bargain purchase gain (d)
— (4)— 
Consideration transferred$40 $78 $125 
(a)Goodwill is generally expected to be deductible for income tax purposes.
(b)Weighted average amortization period of intangible assets acquired in fiscal 2020 is 10 years.
(c)Prior to the acquisition of former franchise service center stores, Valvoline licensed the right to operate franchised quick lube service centers, including use of the Company’s trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately 10 years for the rights reacquired in fiscal 2020. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market.
(d)Recorded in Equity and other income, net within the Consolidated Statement of Comprehensive Income.

The fair values above are preliminary for up to one year from the date of acquisition as they are subject to measurement period adjustments as new information is obtained about facts and circumstances that existed as of the acquisition date. The Company does not expect any material changes to the preliminary purchase price allocations summarized above for acquisitions completed during the last twelve months.

Dispositions

Valvoline sold six service center stores to a franchisee within the Quick Lubes reportable segment and completed the liquidation of certain subsidiaries during fiscal 2020. Valvoline liquidated one of its subsidiaries in fiscal 2019, and in fiscal 2018, sold two service center stores to a franchisee within the Quick Lubes reportable segment and completed the liquidation of a subsidiary within the International reportable segment. These transactions resulted in a $1 million loss in fiscal 2020, a $1 million gain in fiscal 2019, and a $2 million net gain in fiscal 2018, each of which were reported in Equity and other income, net in the Consolidated Statements of Comprehensive Income.

Remaining ownership interest in subsidiary

During fiscal 2018, Valvoline purchased the remaining 30% interest in its Thailand subsidiary for total consideration of approximately $16 million. This purchase eliminated the immaterial noncontrolling interest and made the subsidiary wholly-owned.
v3.20.2
Equity Method Investments
12 Months Ended
Sep. 30, 2020
Equity Method Investments and Joint Ventures [Abstract]  
Equity Method Investments EQUITY METHOD INVESTMENTS
Valvoline has a strategic relationship with Cummins, Inc. (“Cummins”), a leading supplier of engines and related component products, which includes co-branding products for heavy duty consumers and a 50% interest in joint ventures in India, China, and Argentina. Valvoline also has joint ventures with other partners in Latin America, China and the U.S. Valvoline’s investments in these unconsolidated affiliates were $44 million and $34 million as of September 30, 2020 and 2019, respectively.

Valvoline’s stockholders’ deficit included $39 million and $32 million of undistributed earnings from affiliates accounted for under the equity method as of September 30, 2020 and 2019, respectively. Summarized financial information for Valvoline’s equity method investments follows as of and for the years ended September 30:

(In millions)20202019
Financial position
Current assets$143 $123 
Current liabilities(75)(77)
Working capital68 46 
Noncurrent assets26 23 
Noncurrent liabilities(8)(2)
Stockholders’ equity$86 $67 

(In millions)202020192018
Results of operations
Sales$273 $309 $313 
Income from operations$50 $59 $62 
Net income$25 $24 $27 
The Company’s transactions with affiliate companies accounted for under the equity method were as follows for the years ended September 30:

(In millions)202020192018
Equity income (a)
$12 $12 $14 
Distributions received$$$10 
Royalty income (a)
$$$
Sales to$$12 $12 
Purchases from$$$
(a)Equity and royalty income from affiliates accounted for under the equity method of accounting are recognized in Equity and other income, net in the Consolidated Statements of Comprehensive Income and are primarily related to the International reportable segment.

Transactions with affiliate companies accounted for under the equity method resulted in the following balances on the Consolidated Balance Sheets as of September 30:

(In millions)20202019
Accounts receivable (a)
$$
Notes receivable (b)
$$
Trade and other payables$$— 
(a)Included in Receivables, net within the Consolidated Balance Sheets.
(b)Included in Other noncurrent assets within the Consolidated Balance Sheets.
v3.20.2
Goodwill and Other Intangibles
12 Months Ended
Sep. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangibles INTANGIBLE ASSETS
Goodwill

The following summarizes the changes in the carrying amount of goodwill for each reportable segment and in total during fiscal 2020 and 2019:

(In millions)Quick LubesCore North AmericaInternationalTotal
Balance at September 30, 2018$252 $89 $40 $381 
Acquisitions
50 — — 50 
Currency translation(1)— — (1)
Balance at September 30, 2019301 89 40 430 
Acquisitions
17 — — 17 
Currency translation— — 
Dispositions (a)
(3)— — (3)
Balance at September 30, 2020$316 $89 $40 $445 
(a)Activity associated with the derecognition of goodwill as the result of the sale and disposal of six service center stores. Refer to Note 5 for details regarding the disposition.
Other intangible assets

Valvoline’s purchased intangible assets were specifically identified when acquired, have finite lives, and are reported in Goodwill and intangibles, net on the Consolidated Balance Sheets. The following summarizes the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of September 30:

(In millions)20202019
Gross carrying amountAccumulated amortizationNet carrying amountGross carrying amountAccumulated amortizationNet carrying amount
Definite-lived intangible assets
Trademarks and trade names $30 $(6)$24 $30 $(4)$26 
Reacquired franchise rights57 (14)43 37 (8)29 
Customer relationships 22 (7)15 22 (5)17 
Other intangible assets(1)(1)
Total definite-lived intangible assets$112 $(28)$84 $92 $(18)$74 

The table that follows summarizes amortization expense (actual and estimated) for intangible assets, assuming no additional amortizable intangible assets, for the years ended September 30:

ActualEstimated
(In millions)202020212022202320242025
Amortization expense$10 $11 $11 $10 $$
v3.20.2
Restructuring Activities
12 Months Ended
Sep. 30, 2019
Restructuring and Related Activities [Abstract]  
Restructuring Activities RESTRUCTURING ACTIVITIES
During the second fiscal quarter of 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 fiscal 2019, with the associated termination benefits substantially paid by the end of fiscal 2020.

Since program inception, Valvoline has recognized cumulative costs of $12 million that were primarily recognized during the year ended September 30, 2019. These costs were for employee termination benefits, which included severance and other benefits provided to employees pursuant to the restructuring program. These expenses were recognized in Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income. The Company does not expect to incur significant remaining costs from these actions.

The results by segment, as disclosed in Note 16, 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.
Activity related to this program is reported primarily within Accrued expenses and other liabilities in the Consolidated Balance Sheets and is summarized as follows:
(In millions)Employee Termination Benefits
Balance at September 30, 2018$— 
Expenses recognized during the period13 
Payments(3)
Changes in estimates (a)
(1)
Balance at September 30, 2019
Expenses recognized during the period
Payments(8)
Changes in estimates (a)
(1)
Balance at September 30, 2020$
(a)Changes in estimate of previously-recognized expenses relate to lower-than-expected termination benefit costs.
v3.20.2
Debt
12 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Debt DEBT
The following table summarizes Valvoline’s debt as of September 30:

(In millions)20202019
2030 Notes$600 $— 
2025 Notes800 400 
2024 Notes— 375 
Term Loan475 575 
Trade Receivables Facility88 — 
China Credit Facility18 — 
Other (a)
— 
Debt issuance costs and discounts(19)(9)
Total debt$1,962 $1,342 
Current portion of long-term debt— 15 
Long-term debt$1,962 $1,327 
(a)Other includes debt acquired through acquisitions.

Senior Notes

The Company's outstanding fixed rate senior notes as of September 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 with the 2025 Notes, 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"). The net proceeds from the issuance of the Existing 2025 Notes were $394 million (after deducting initial purchasers' discounts and debt issuance costs) and were used to make a voluntary contribution to the Company's qualified U.S. pension plan. 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 from the revolving credit facility under the Senior Credit Agreement.

The 2025 Notes were registered in exchange offers in which no additional proceeds were received. The exchange offer for the Existing 2025 Notes was completed in December 2017, and the exchange offer for the Additional 2025 Notes was completed in August 2020. The 2025 Notes have substantially similar terms, except for certain transfer restrictions, registration rights and additional interest provisions that apply to the Additional 2025 Notes do not apply to the Existing 2025 Notes.

2030 and 2024 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 Consolidated Statements of Comprehensive Income during the year ended September 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 Company's term loan facility 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 has utilized the remaining net proceeds in fiscal 2020 to preserve cash and cash equivalents and maintain liquidity.

Senior Credit Agreement

Key terms and conditions

The Senior Credit Agreement, as amended in fiscal 2019, provides an aggregate principal amount of $1,050 million in senior secured credit facilities, comprised of (i) a five-year $575 million term loan facility (the “Term Loan”) and (ii) a five-year $475 million revolving credit facility (the “Revolver”), including a $100 million letter of credit sublimit.

The outstanding principal balance of the Term Loan is required to be repaid in quarterly installments, with the balance due at maturity on April 12, 2024, and prepayment due in the amount of the net cash proceeds from certain events. Amounts outstanding under the Senior Credit Agreement may be prepaid at any time, and from time to time, in whole or part, without premium or penalty. At Valvoline’s option, amounts outstanding under the 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 1.375% per annum and LIBOR plus 2.000% per annum (or between the alternate base rate plus 0.375% per annum and the alternate base rate plus 1.000% per annum), based upon Valvoline’s corporate credit ratings or its consolidated net leverage ratio, whichever yields the lowest rate.

Valvoline’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, non-U.S. subsidiaries and certain other subsidiaries) guarantee the Senior Credit Agreement, which is also 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 non-U.S. subsidiaries, and in certain cases, a portion of the equity interests of other non-U.S. subsidiaries.
The Senior Credit Agreement contains usual and customary representations, warranties, events of default, and 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 the maintenance of financial covenants as of the end of each fiscal quarter, including a maximum consolidated net leverage ratio of 4.5 and a minimum consolidated interest coverage ratio of 3.0. As of September 30, 2020, Valvoline was in compliance with all covenants under the Senior Credit Agreement.

Summary of activity

During fiscal 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 September 30, 2020 from the $575 million outstanding as of September 30, 2019. Quarterly principal payments will resume with $1 million due on June 30, 2022 and $14 million due each quarter beginning with September 30, 2022 through maturity.

During the year ended September 30, 2020, the Company borrowed and repaid $450 million from its Revolver. These 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 cash and cash equivalents that were on hand. As of September 30, 2020 and September 30, 2019 there were no amounts outstanding under the Revolver, and the borrowing capacity remaining as of September 30, 2020 was $469 million due to a reduction of $6 million for letters of credit outstanding.

Trade Receivables Facility

Key terms and conditions

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.

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. Accordingly, the Company accounts for borrowings under the Trade Receivables Facility as secured borrowings. 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 consolidated financial statements.

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 1.4% and 3.4% for the years ended September 30, 2020 and 2019, 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.

Summary of activity

During fiscal 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 September 30, 2020, $88 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 at September 30, 2020 was $79 million. The financing subsidiary owned $267 million and $259 million of outstanding accounts receivable as of September 30, 2020 and 2019, respectively, and these amounts are included in Receivables, net in the Company’s 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 and preparation of the blending and packaging plant in China for production. Borrowings will bear interest at the local prime rate less the applicable interest rate margin, which was 4.35% for the year ended September 30, 2020. The proceeds from the China Credit Facility are restricted for capital expenditures directly related to the construction of and preparation for production of the blending and packaging plant in China, and borrowings are secured by the assets underlying the project. The outstanding balance is required to be repaid in semiannual installments, which total approximately $2 million in fiscal 2022, $4 million in fiscal 2023, and $7 million in fiscal 2024, with the remaining balance due in fiscal 2025. As of September 30, 2020, there was $18 million outstanding on the China Credit Facility, which had remaining borrowing capacity of approximately $22 million.

Long-term debt maturities

The future maturities of debt outstanding as of September 30, 2020, excluding debt issuance costs and discounts, are as follows:

(In millions)
Years ending September 30  
2021  $— 
2022  104 
2023  61 
2024  410 
2025  806 
Thereafter  600 
Total  $1,981 
v3.20.2
Income Taxes
12 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
Components of income tax expense

Income tax expense consisted of the following for the years ended September 30:

(In millions)202020192018
Current
Federal (a)
$16 $10 $(2)
State11 
Non-U.S. 15 19 17 
42 34 21 
Deferred
Federal62 24 136 
State26 — 
Non-U.S.(1)— 
92 23 145 
Income tax expense$134 $57 $166 
(a)Benefit from favorable settlement with tax authorities in fiscal 2018.

The following table presents pre-tax income and the principal components of the reconciliation between the effective tax rate and the U.S. federal statutory income tax rate in effect for the years ended September 30:

(In millions)202020192018
Income before income taxes
United States$399 $212 $282 
Non-U.S.52 53 50 
Total income before income taxes$451 $265 $332 
U.S. statutory tax rate (a)
21.0 %21.0 %24.5 %
Income taxes computed at U.S. statutory tax rate$95 $56 $81 
Increase (decrease) in amount computed resulting from:
Unrecognized tax benefits— 
State taxes, net of federal benefit16 14 
International rate differential— 
Permanent items(4)(3)(3)
Remeasurement of net deferred taxes (b)
(4)73 
Return-to-provision adjustments(2)(6)— 
Deemed repatriation (c)
— — 
Change in valuation allowance29 (4)
Tax Matters Agreement activity(6)(2)
Other(2)
Income tax expense$134 $57 $166 
Effective tax rate29.7 %21.5 %50.0 %
(a)As a result of U.S. tax reform legislation which generally became effective January 1, 2018, the federal corporate income tax rate was lowered from 35% to 21%. Based on the effective date of the rate reduction, the Company's federal corporate statutory income tax rate was a blended rate of 24.5% for fiscal 2018.
(b)The remeasurement of net deferred taxes relates to the enactment and clarification of tax reform legislation. During fiscal 2018, Valvoline recognized $71 million of income tax expense to remeasure net deferred tax assets at the lower enacted corporate tax rates due to U.S. and Kentucky tax reform legislation.
(c)Income tax expense recognized related to the deemed repatriation tax on undistributed non-U.S. earnings and profits in connection with the enactment of U.S. tax reform.

Higher income tax expense in fiscal 2020 from the prior year was principally driven by higher pre-tax earnings and income tax expense recognized during the year to establish a $30 million valuation allowance on certain legacy tax attributes. This increase in expense coupled with prior year benefits from the release of a valuation allowance and the clarification of certain provisions of Kentucky tax reform legislation led to a higher effective tax rate in fiscal 2020.

Deferred taxes

Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting purposes. A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:

(In millions)20202019
Deferred tax assets
Non-U.S. net operating loss carryforwards (a)
$$
State net operating loss carryforwards (b)
18 19 
Employee benefit obligations79 98 
Compensation accruals26 21 
Credit carryforwards (c)
11 19 
Operating lease liabilities69 — 
Other17 23 
Valuation allowances (d)
(30)(2)
Net deferred tax assets192 180 
Deferred tax liabilities
Goodwill and other intangibles 11 
Property, plant and equipment75 47 
Operating lease assets67 — 
Undistributed earnings
Total deferred tax liabilities159 58 
Total net deferred tax assets (e)
$33 $122 
(a)Gross non-U.S. net operating loss carryforwards of $5 million expire in fiscal years 2023 to 2040.
(b)Apportioned gross state net operating loss carryforwards of $365 million expire in fiscal years 2023 through 2037.
(c)Credit carryforwards consist primarily of U.S. tax credits that generally expire in fiscal years 2025 through 2036.
(d)Valuation allowances at September 30, 2020 primarily relate to state net operating loss carryforwards and certain other federal legacy tax attributes that are no longer expected to be realized or realizable.
(e)Due to netting of deferred tax assets and liabilities by jurisdiction, a $1 million net deferred tax liability is included within Other noncurrent liabilities in the Consolidated Balance Sheets as of September 30, 2020 and 2019.

Undistributed earnings

Prior to U.S. tax reform, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its non-U.S. subsidiaries as it was the Company’s intention for these tax basis differences to remain indefinitely reinvested. Valvoline began to record estimated incremental withholding taxes during fiscal 2018 and account for certain of its non-U.S. subsidiaries as being immediately subject to tax, while certain other outside basis differences restricted by regulations, operational or investing needs for non-U.S. subsidiaries remained indefinitely reinvested. If these outside basis differences were no longer to be indefinitely reinvested in the future, the Company may be subject to additional income and withholding taxes, which are not practicable to estimate.
Tax Matters Agreement

Background

Prior to its initial public offering (the "IPO") in September 2016, the Valvoline business operated as a wholly-owned subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). Valvoline was incorporated in May 2016 and in advance of the IPO, the Valvoline business and certain other legacy Ashland assets and liabilities were transferred from Ashland to Valvoline as a reorganization of entities under common Ashland control (the "Contribution"). In connection with the IPO, Ashland retained 83% of the total outstanding shares of Valvoline's common stock. On May 12, 2017, Ashland distributed its interest in Valvoline to Ashland stockholders through a pro rata dividend on shares of Ashland common stock outstanding (the "Distribution"), which marked the completion of Valvoline's separation from Ashland and Valvoline was no longer a controlled and consolidated subsidiary of Ashland.

Key terms and conditions

An agreement (the "Tax Matters Agreement") was entered into on September 22, 2016 between Valvoline and Ashland, that generally provides that Valvoline is required to indemnify Ashland for the following items:

The utilization of certain legacy tax attributes transferred from Ashland as the result of the Contribution;
Taxes for the pre-IPO period that arise on audit or examination and are directly attributable to the Valvoline business;
Certain U.S. federal, state or local taxes for the pre-IPO period of Ashland and/or its subsidiaries that arise on audit or examination and are not directly attributable to either the Valvoline business or the Ashland chemicals business;
Taxes of Valvoline for the period between the IPO and Distribution that are not attributable to Ashland Group Returns (as defined below);
Taxes of Valvoline for all taxable periods that begin on or after the day after the date of the Distribution; and
Taxes and expenses resulting from the failure of the Contribution or Distribution to qualify for their intended tax-free treatment.

For the periods prior to the Distribution, Valvoline was included in Ashland’s consolidated U.S. and state income tax returns and in the income tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). For the taxable periods that began on and after the Distribution, Valvoline is not included in the Ashland Group Returns and files tax returns that include only Valvoline and/or its subsidiaries, as appropriate.

Valvoline has joint and several liability with Ashland to the U.S. Internal Revenue Service for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland Group Returns. Valvoline has joint control with Ashland, over any audit or examination related to taxes for which Valvoline is required to indemnify Ashland. Accordingly, these portions of the Tax Matters Agreement will be settled as examinations of the pre-Distribution periods are completed.

Summary of activity

Adjustments to the net obligations to Ashland under the Tax Matters Agreement are recorded within Net legacy and separation-related (income) expenses, with any resulting impacts to Valvoline's stand-alone income tax provision recorded in Income tax expense within the Consolidated Statements of Comprehensive Income.

In connection with filing the Company's fiscal 2019 income tax returns in the fourth quarter of fiscal 2020, management determined it is no longer more likely than not to realize certain tax attributes which were transferred from Ashland as a result of the Contribution. Accordingly, the Company recognized income tax expense of $30 million to establish a valuation allowance for these tax attributes with an offsetting impact to reduce the estimated indemnity obligation, the combined effects of which have no impact to net income in the fiscal year ended September 30, 2020. Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement are primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets and were $34 million and $66 million as of September 30, 2020 and 2019, respectively.
Based on information available at this time, the Company has established adequate accruals for its obligations under the Tax Matters Agreement. In certain circumstances, the actual amounts ultimately required to satisfy these obligations could significantly exceed those currently reflected in the consolidated financial statements. Such estimates cannot currently be made given the uncertainty with regard to the nature and extent of items that could arise upon examination of the pre-Distribution periods, which include the Contribution and Distribution transactions. For example, if the tax-free nature of the Contribution and/or Distribution transactions is not sustained, if certain reorganization transactions undertaken in connection with the separation and the Distribution are determined to be taxable, or if additional matters arise upon examination of the pre-Distribution periods, Valvoline could have a substantial indemnification obligation to Ashland in excess of those currently provided.

Unrecognized tax benefits

The aggregate changes in the balance of gross unrecognized tax benefits were as follows for the years ended September 30:

(In millions)202020192018
Gross unrecognized tax benefits as of October 1$14 $10 $10 
Increases related to tax positions from prior years
Increases related to tax positions taken during the current year— 
Settlements with tax authorities— — (2)
Lapses of statutes of limitation(1)(1)(1)
Gross unrecognized tax benefits as of September 30 (a)
$15 $14 $10 
(a)These unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Accruals for interest and penalties were $2 million as of September 30, 2020 and 2019.

The Company's U.S. federal income tax returns and certain U.S. state jurisdictions remain open to examination from fiscal 2017 forward. With certain exceptions, years beginning on or after fiscal 2008 generally remain open to examination by certain non-U.S. taxing authorities. Given the indemnification of Ashland for periods in which Valvoline was included in Ashland Group Returns and the years that remain open to examination, a significant portion of the Company's liability for unrecognized tax benefits is included in the Tax Matters Agreement obligation summarized above. These periods that remain open to examination include federal income tax returns from fiscal 2014 and certain U.S. state jurisdictions from fiscal 2011.
Because Valvoline is routinely under examination by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during fiscal 2021. Due to the complexity and number of open years, it is not practical to estimate the amount or range of such change at this time. Based on current information available, management does not expect a material change to the Company's gross unrecognized tax benefits within fiscal 2021.
v3.20.2
Employee Benefit Plans
12 Months Ended
Sep. 30, 2020
Retirement Benefits [Abstract]  
Employee Benefit Plans EMPLOYEE BENEFIT PLANS
Pension and other postretirement plans

The Company's U.S. pension plans are closed to new participants and the accrual of pension benefits has been frozen since September 30, 2016. In addition, most international pension plans are closed to new participants while those that remain open relate to areas where local laws require plans to operate within the applicable country. Valvoline also sponsors healthcare and life insurance plans for certain qualifying retired or disabled employees that were amended to reduce retiree life and medical benefits effective in early fiscal 2017 and limit annual per capita costs.
Components of net periodic benefit costs / income

The following table summarizes the components of pension and other postretirement plans net periodic benefit costs / income and the assumptions used in this determination for the years ended September 30:

(In millions)Pension benefitsOther postretirement benefits
202020192018202020192018
Net periodic benefit costs (income)
Service cost$$$$— $— $— 
Interest cost61 81 75 
Expected return on plan assets(87)(80)(103)— — — 
Amortization of prior service credit (a)
— — — (12)(12)(12)
Actuarial (gain) loss(24)61 38 — 
Net periodic benefit (income) costs$(47)$64 $12 $(9)$(2)$(10)
Weighted-average plan assumptions (b)
Discount rate for service cost
1.49 %2.92 %2.94