UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
______________________
FORM 10-Q
þ☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017June 30, 2020
OR
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 001-37884
VALVOLINE INC.


vvv-20200630_g1.jpg

Kentucky
30-0939371
(State or other jurisdiction of incorporation or organization)
30-0939371
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
Telephone Number (859) 357-7777

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareVVVNew York Stock Exchange
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YesþNoo


Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files).Yesþ Noo


Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer☑Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Large Accelerated Filer þ
Emerging growth company
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
(Do not check if a smaller reporting company)
Emerging Growth Company o
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Act).   Yeso☐No þ

At February 1, 2018,July 31, 2020, there were 200,065,752185,035,286 shares of the Registrantregistrant’s common stock outstanding.



VALVOLINE INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS


Page
PART I – FINANCIAL INFORMATION


Page
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
                         For the three months ended December 31, 2017 and 2016
3
Condensed Consolidated Balance Sheets
                         As of December 31, 2017 and September 30, 2017
4
Condensed Consolidated Statements of Stockholders’ Deficit
5
Condensed Consolidated Statements of Cash Flows
                         For the three months ended December 31, 2017 and 2016
57
Notes to Condensed Consolidated Financial Statements
68
2536
4356
4356
PART II – OTHER INFORMATION
4457
4457
4459
4560
61





2


PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
 Three months ended December 31
(In millions except per share data - unaudited)2017 2016
Sales$545
 $489
Cost of sales350
 304
Gross profit195
 185
    
Selling, general and administrative expenses114
 95
Separation costs2
 6
Equity and other income(9) (10)
Operating income88
 94
Net pension and other postretirement plan non-service income and remeasurement adjustments(10) (26)
Net interest and other financing expense14
 10
Income before income taxes84
 110
Income tax expense94
 38
Net (loss) income$(10) $72
    
NET (LOSS) INCOME PER SHARE   
             Basic$(0.05) $0.35
             Diluted$(0.05) $0.35
    
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING   
             Basic202
 205
             Diluted202
 205
    
DIVIDENDS PAID PER COMMON SHARE$0.07
 $0.05
    
COMPREHENSIVE (LOSS) INCOME   
Net (loss) income$(10) $72
Other comprehensive income (loss), net of tax   
Unrealized translation gain (loss)1
 (9)
Pension and other postretirement obligation adjustment(2) (2)
Other comprehensive loss(1) (11)
Comprehensive (loss) income$(11) $61
    


Three months ended June 30Nine months ended June 30
(In millions, except per share amounts - unaudited)2020201920202019
Sales$516  $613  $1,701  $1,761  
Cost of sales329  406  1,096  1,168  
Gross profit187  207  605  593  
Selling, general and administrative expenses106  116  319  334  
Net legacy and separation-related expenses1  —  —  3  
Equity and other income, net(8) (11) (23) (29) 
Operating income88  102  309  285  
Net pension and other postretirement plan income(9) (2) (27) (7) 
Net interest and other financing expenses19  19  73  55  
Income before income taxes78  85  263  237  
Income tax expense19  20  68  56  
Net income$59  $65  $195  $181  
NET EARNINGS PER SHARE
Basic$0.32  $0.34  $1.04  $0.96  
Diluted$0.32  $0.34  $1.04  $0.96  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic186  189  187  189  
Diluted186  189  188  189  
COMPREHENSIVE INCOME
Net income$59  $65  $195  $181  
Other comprehensive income (loss), net of tax
Currency translation adjustments10  1  (3) (1) 
Amortization of pension and other postretirement plan prior service credit(3) (3) (7) (7) 
Other comprehensive income (loss)7  (2) (10) (8) 
Comprehensive income$66  $63  $185  $173  

See Notes to Condensed Consolidated Financial Statements.



3


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
(In millions except per share amounts - unaudited)December 31
2017		 September 30
2017
(In millions, except per share amounts - unaudited)(In millions, except per share amounts - unaudited)June 30
2020		September 30
2019
Assets   Assets
Current assets   Current assets
Cash and cash equivalents$115
 $201
Cash and cash equivalents$751  $159  
Accounts receivable, net418
 385
Receivables, netReceivables, net396  401  
Inventories, net170
 175
Inventories, net189  194  
Other current assets32
 29
Prepaid expenses and other current assetsPrepaid expenses and other current assets43  43  
Total current assets735
 790
Total current assets1,379  797  
Noncurrent assets   Noncurrent assets
Property, plant and equipment, net384
 391
Property, plant and equipment, net559  498  
Operating lease assetsOperating lease assets261  —  
Goodwill and intangibles, net393
 335
Goodwill and intangibles, net510  504  
Equity method investments33
 30
Equity method investments39  34  
Deferred income taxes196
 281
Deferred income taxes82  123  
Other noncurrent assets86
 88
Other noncurrent assets133  108  
Total noncurrent assets1,092
 1,125
Total noncurrent assets1,584  1,267  
Total assets$1,827
 $1,915
Total assets$2,963  $2,064  
   
Liabilities and Stockholders’ Deficit   Liabilities and Stockholders’ Deficit
Current liabilities   Current liabilities
Short-term debt$—
 $75
Current portion of long-term debt19
 15
Current portion of long-term debt$—  $15  
Trade and other payables141
 192
Trade and other payables178  171  
Accrued expenses and other liabilities208
 196
Accrued expenses and other liabilities254  237  
Total current liabilities368
 478
Total current liabilities432  423  
Noncurrent liabilities   Noncurrent liabilities
Long-term debt1,147
 1,034
Long-term debt1,953  1,327  
Employee benefit obligations331
 342
Employee benefit obligations350  387  
Operating lease liabilitiesOperating lease liabilities231  —  
Other noncurrent liabilities175
 178
Other noncurrent liabilities185  185  
Total noncurrent liabilities1,653
 1,554
Total noncurrent liabilities2,719  1,899  
Commitments and contingencies
 
Commitments and contingencies
Stockholders’ deficit
   
Stockholders’ deficit
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding—
 —
Common stock, par value $0.01 per share, 400 shares authorized; 201 and 203 shares issued and outstanding at December 31, 2017 and September 30, 20172
 2
Preferred stock, no par value, 40 shares authorized; 0 shares issued and outstandingPreferred stock, no par value, 40 shares authorized; 0 shares issued and outstanding—  —  
Common stock, par value $0.01 per share, 400 shares authorized; 185 and 188 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectivelyCommon stock, par value $0.01 per share, 400 shares authorized; 185 and 188 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively2  2  
Paid-in capital—
 5
Paid-in capital20  13  
Retained deficit(238) (167)Retained deficit(211) (284) 
Accumulated other comprehensive income42
 43
Accumulated other comprehensive income1  11  
Total stockholders’ deficit(194) (117)Total stockholders’ deficit(188) (258) 
Total liabilities and stockholders’ deficit
$1,827
 $1,915
Total liabilities and stockholders’ deficit
$2,963  $2,064  
   


See Notes to Condensed Consolidated Financial Statements.



4


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit
Nine months ended June 30, 2020
Accumulated other comprehensive income (loss)
(In millions, except per share amounts - unaudited)Common stockPaid-in capitalRetained deficit
SharesAmountTotals
Balance at September 30, 2019188  $2  $13  $(284) $11  $(258) 
Net income—  —  —  73  —  73  
Dividends paid, $0.113 per common share—  —  —  (21) —  (21) 
Stock-based compensation, net of issuances—  —  3  —  —  3  
Cumulative effect of adoption of new leasing standard, net of tax—  —  —  1  —  1  
Currency translation adjustments—  —  —  —  8  8  
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (2) (2) 
Balance at December 31, 2019188  $2  $16  $(231) $17  $(196) 
Net income—  —  —  63  —  63  
Dividends paid, $0.113 per common share—  —  —  (21) —  (21) 
Repurchase of common stock(3) —  —  (60) —  (60) 
Currency translation adjustments—  —  —  —  (21) (21) 
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (2) (2) 
Balance at March 31, 2020185  $2  $16  $(249) $(6) $(237) 
Net income—  —  —  59  —  59  
Dividends paid, $0.113 per common share—  —  —  (21) —  (21) 
Stock-based compensation, net of issuances—  —  4  —  —  4  
Currency translation adjustments—  —  —  —  10  10  
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (3) (3) 
Balance at June 30, 2020185  $2  $20  $(211) $1  $(188) 
5

Nine months ended June 30, 2019
Accumulated other comprehensive income
(In millions, except per share amounts - unaudited)Common stockPaid-in capitalRetained deficit
SharesAmountTotals
Balance at September 30, 2018188  $2  $7  $(399) $32  $(358) 
Net income—  —  —  53  —  53  
Dividends paid, $0.106 per common share—  —  —  (20) —  (20) 
Stock-based compensation, net of issuances—  —  1  —  —  1  
Cumulative effect of adoption of new revenue standard, net of tax—  —  —  (13) —  (13) 
Currency translation adjustments—  —  —  —  (4) (4) 
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (2) (2) 
Balance at December 31, 2018188  $2  $8  $(379) $26  $(343) 
Net income—  —  —  63  —  63  
Dividends paid, $0.106 per common share—  —  —  (20) —  (20) 
Stock-based compensation, net of issuances—  —  2  —  —  2  
Currency translation adjustments—  —  —  —  2  2  
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (2) (2) 
Balance at March 31, 2019188  $2  $10  $(336) $26  $(298) 
Net income—  —  —  65  —  65  
Dividends paid, $0.106 per common share—  —  —  (20) —  (20) 
Stock-based compensation, net of issuances—  —  3  —  —  3  
Currency translation adjustments—  —  —  —  1  1  
Amortization of pension and other postretirement prior service credits in income—  —  —  —  (3) (3) 
Balance at June 30, 2019188  $2  $13  $(291) $24  $(252) 

See Notes to Condensed Consolidated Financial Statements.
6

Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended
June 30
(In millions - unaudited)20202019
Cash flows from operating activities
Net income$195  $181  
Adjustments to reconcile net income to cash flows from operating activities
Loss on extinguishment of debt19  —  
Depreciation and amortization48  43  
Equity income from unconsolidated affiliates, net of distributions
(3) (4) 
Pension contributions(9) (7) 
Stock-based compensation expense8  8  
Other, net4  2  
Change in assets and liabilities
Receivables13  (48) 
Inventories3  (11) 
Payables and accrued liabilities(10) 34  
Other assets and liabilities3  16  
Total cash provided by operating activities271  214  
Cash flows from investing activities
Additions to property, plant and equipment(94) (73) 
Notes receivable, net of repayments(31) (2) 
Acquisitions of business(18) (50) 
Other investing activities, net—  1  
Total cash used in investing activities(143) (124) 
Cash flows from financing activities
Proceeds from borrowings1,547  745  
Payments of debt issuance costs and discounts(16) (2) 
Repayments on borrowings(925) (727) 
Premium paid to extinguish debt(15) —  
Repurchases of common stock(60) —  
Cash dividends paid(63) (60) 
Other financing activities(3) (5) 
Total cash provided by (used in) financing activities465  (49) 
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash(1) —  
Increase in cash, cash equivalents, and restricted cash592  41  
Cash, cash equivalents, and restricted cash - beginning of period159  96  
Cash, cash equivalents, and restricted cash - end of period$751  $137  
 Three months ended
December 31
(In millions - unaudited)2017 2016
Cash flows from operating activities   
Net (loss) income$(10) $72
Adjustments to reconcile net income (loss) to cash flows from operating activities   
Depreciation and amortization11
 9
Debt issuance cost and discount amortization1
 1
Deferred income taxes85
 —
Equity income from affiliates(5) (4)
Distributions from equity affiliates3
 —
Pension contributions(3) (3)
Gain on pension and other postretirement plan remeasurements—
 (8)
Stock-based compensation expense4
 1
Change in assets and liabilities (a)
   
Accounts receivable(34) 10
Inventories7
 (2)
Payables and accrued liabilities(40) 23
Other assets and liabilities1
 (11)
Total cash provided by operating activities20
 88
Cash flows from investing activities   
Additions to property, plant and equipment(14) (9)
Acquisitions, net of cash acquired(60) —
Other investing activities, net—
 (1)
Total cash used in investing activities(74) (10)
Cash flows from financing activities   
Net transfers to Ashland—
 (2)
Proceeds from borrowings, net of issuance costs44
 75
Repayments on borrowings(4) (79)
Repurchase of common stock(37) —
Purchase of additional ownership in subsidiary(15) —
Cash dividends paid(15) (10)
Other financing activities(4) —
Total cash used in financing activities(31) (16)
Effect of currency exchange rate changes on cash and cash equivalents(1) 2
(Decrease) increase in cash and cash equivalents(86) 64
Cash and cash equivalents - beginning of period201
 172
Cash and cash equivalents - end of period$115
 $236
    
(a) Excludes changes resulting from operations acquired or sold.


See Notes to Condensed Consolidated Financial Statements.

7


Index to Notes to Condensed Consolidated Financial StatementsPage
9
11
15
16
17
17
18
20
21
21
22
22
24
26
35


8

5


Valvoline Inc. and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES


The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline Inc. (“Valvoline” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission (“SEC”) regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017. 2019. Certain prior period amounts have been reclassified to conform to the current presentation.


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


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

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

Recent accounting pronouncements


A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of recent accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The following standards relevant to Valvoline were either issued or adopted in the current period,year, or are expected to have a meaningful impact on Valvoline in future periods.


Recently adopted


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

In July 2015,February 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued accounting guidance, which outlined a comprehensive lease accounting model that requires lessees to simplifyrecognize a right-of-use asset and a corresponding lease liability on the subsequent measurement of certain inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in, first out (“LIFO”)balance sheet and retail inventory methods.superseded previous lease accounting guidance. Valvoline adopted this new lease accounting guidance prospectively on October 1, 2017. 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.

9

Valvoline utilizes LIFOelected 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 value approximately 70%be carried forward for leases which commenced prior to adoption, as well as the practical expedient to not separate lease and non-lease components and account for them as a single lease component. The Company did not elect the hindsight or short-term lease practical expedients.

As a result of adoption, the Company recognized operating lease assets and liabilities inclusive of a reclassified build-to-suit arrangement, derecognized assets and liabilities related to the build-to-suit arrangement, and carried forward existing capital leases as finance lease assets and liabilities. This resulted in a material impact on the Condensed Consolidated Balance Sheet and the recognition of total incremental lease assets, inclusive of prepaid lease balances and deferred rent liabilities, of $219 million and incremental lease liabilities of $214 million, with an immaterial cumulative effect adjustment to reduce Retained deficit as a result of the build-to-suit lease transition requirements. The impact of adoption was not material to the Condensed Consolidated Statements of Comprehensive Income, Cash Flows, or Stockholders’ Deficit, and did not impact the Company's compliance with any of its gross inventory and there were no material differences in the Company's previous valuation methodologyexisting debt covenants. Refer to Note 2 for its remaining inventory using loweradditional information regarding Valvoline's adoption of cost or market to lower of cost or net realizable value.this new guidance.


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

Issued but not yet adopted

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

The FASB issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on Valvoline’s condensed consolidated financial statements, and therefore, is not described above.

10

NOTE 2 - LEASING

As described in Note 1, Valvoline adopted new lease accounting guidance effective October 1, 2019 and changed how employers who sponsor defined benefit pension and/its policy for lease accounting prospectively for lease agreements entered into or postretirement benefit plansreassessed from the date of adoption as described herein.

Lessee arrangements

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

Fixed payments, including variable payments based on a rate or index, are included in the determination of the lease liability, while other variable payments are recognized in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit costIncome in the same caption as other employee compensation costs from services rendered duringperiod in which the period. Allobligation 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 net periodic benefit costlease liability due to Valvoline's election to combine lease and non-lease components. Otherwise, these other components are presented separately outsideexpensed as incurred and comprise the majority of Valvoline's variable lease costs.

As most leases do not provide the operating income caption.rate implicit in the lease, the Company estimates its incremental borrowing rate to best approximate the rate of interest that Valvoline retrospectively adopted this guidancewould have to pay to borrow on October 1, 2017. Accordingly, Net pensiona collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Valvoline applies the incremental borrowing rate to groups of leases with similar lease terms in determining the present value of future payments. In determining the incremental borrowing rate, the Company considers information available at commencement date, including lease term, interest rate yields for specific interest rate environments and other postretirement plan non-service incomethe Company's credit spread.

11

The following table presents the Company's lease balances:

(In millions)Location in Condensed Consolidated Balance SheetJune 30, 2020
Assets
Operating lease assetsOperating lease assets$261 
Finance lease assetsProperty, plant and equipment, net66 
Amortization of finance lease assetsProperty, plant and equipment, net(8)
Total leased assets$319 
Liabilities
Current:
Operating lease liabilitiesAccrued expenses and other liabilities$32 
Finance lease liabilitiesAccrued expenses and other liabilities3 
Noncurrent:
Operating lease liabilitiesOperating lease liabilities231 
Finance lease liabilitiesOther noncurrent liabilities60 
Total lease liabilities$326 

The following table presents the components of total lease costs:

(In millions)Location in Condensed Consolidated Statements of Comprehensive IncomeThree months ended June 30, 2020Nine months ended June 30, 2020
Operating lease cost
Cost of sales and Selling, general and administrative expenses (a)
$11  $33  
Finance lease costs
Amortization of lease assets
Cost of sales (a)
1  2  
Interest on lease liabilitiesNet interest and other financing expenses1  3  
Variable lease cost
Cost of sales and Selling, general and administrative expenses (a)
1  3  
Sublease incomeEquity and other income, net(1) (4) 
Total lease cost$13  $37  
(a) Supply chain and remeasurement adjustments has been reclassifiedretail-related amounts are included in Cost of sales.

12

Other information related to non-operating income for all periods presentedthe Company's leases follows:

(In millions)Three months ended June 30, 2020Nine months ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (a)
$11  $32  
Operating cash flows from finance leases$—  $2  
Financing cash flow from finance leases$1  $1  
Lease assets obtained in exchange for lease obligations:
Operating leases$14  $42  
Finance leases$20  $38  
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated StatementsStatement of Comprehensive Income, which reduced previously reportedCash Flows offset by noncash operating income by $26 millionlease asset amortization and liability accretion.

The following table reconciles the undiscounted cash flows for the three monthsnext five fiscal years ended December 31, 2016.

Issued but not yet adopted

In May 2014, the FASB issued accounting guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance. This guidance introduces a five-step model for revenue recognition that focuses on transfer of control, as opposed to transfer of riskSeptember 30 and rewards under current guidance. The Company is evaluating the effect of adopting the new revenue guidance on its

6


financial statements and does not currently expect it to have a material effect to net earnings. Based on an evaluation of current contracts and revenue streams to-date, Valvoline believes that most revenue transactions recorded under the new guidance will be substantially consistent with treatment under existing guidance, with certain reclassifications expected within the Condensed Consolidated Statements of Comprehensive Earnings and certain minimal changesthereafter to the timing of the recognition of revenues. The Company's revenue transactions generally consist of a single performance obligation to transfer promised goodsoperating and are not accounted for under industry-specific guidance. The Company anticipates expanded footnote disclosures under the new guidance.

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

In February 2016, the FASB issued new accounting guidance related tofinance lease transactions. The primary objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. The Company expects to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While adoption is expected to lead to a material increase in the assets and liabilities recorded on the Condensed Consolidated Balance Sheet and an increase in footnote disclosuresas of June 30, 2020:

(In millions)Operating leasesFinance leases
Remainder of 2020$11  $1  
202141  7  
202239  7  
202335  7  
202431  7  
Thereafter166  67  
Total future lease payments323  96  
Imputed interest60  33  
Present value of lease liabilities$263  $63  

As of June 30, 2020, Valvoline has additional leases primarily related to leases, the Company isits quick lube service center stores that have not yet commenced with approximately $52 million in undiscounted future lease payments that are not included in the processtable above. These leases are expected to commence over the next twelve months and generally have lease terms of developing assessment 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 implementation plansreclassified 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 determine the specific impacts, including those onadoption of the Condensed Consolidated Statementsnew lease accounting guidance under the previously designated capital, financing and operating leases as of Comprehensive Earnings.the fiscal year ended September 30, 2019, were as follows:


13

(In millions)Operating leasesCapital leases and financing obligations
2020$36  $6  
202132  7  
202229  7  
202327  7  
202423  7  
Thereafter120  50  
Total future lease payments (a)
$267  84  
Imputed interest29  
Present value of lease liabilities$55  
(a) Future lease payments do not include fixed payments for executory costs, such as taxes, insurance, maintenance and operating expenses.

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

Operating LeasesFinancing Leases
Weighted average remaining lease term (in years)9.713.3
Weighted average discount rate4.09 %7.45 %

Lessor arrangements

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

14

NOTE 23 - FAIR VALUE MEASUREMENTS


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


(In millions)Fair Value HierarchyJune 30
2020		September 30
2019
Cash and cash equivalents
Money market fundsLevel 1$294  $—  
Time depositsLevel 2159  59  
Prepaid expenses and other current assets
Currency derivatives (a)
Level 23  —  
Other noncurrent assets
Non-qualified trust fundsLevel 117  20  
Total assets at fair value$473  $79  
Accrued expenses and other liabilities
Currency derivatives (a)
Level 2$3  $—  
Interest rate swap agreements (b)
Level 2—  —  
Total liabilities at fair value$3  $—  
 December 31, 2017 September 30, 2017
   Quoted prices in active markets for identical assets   Quoted prices in active markets for identical assets
(In millions)Fair Value Level 1 Fair Value Level 1
Assets       
Cash equivalents (a)
$24
 $24
 $46
 $46
Foreign currency derivatives (b)
1
 1
 1
 1
Non-qualified trust funds (c)
30
 30
 30
 30
Total assets at fair value$55
 $55
 $77
 $77
        
Liabilities       
Foreign currency derivatives (d)
$1
 $1
 $1
 $1
Total liabilities at fair value$1
 $1
 $1
 $1
        
(a)The Company had outstanding contracts with notional values of $125 million and $111 million as of June 30, 2020 and September 30, 2019, respectively.
(a) Included
(b)As of June 30, 2020, the Company’s interest rate swap agreements were in Cash and cash equivalents net liability positions with a combined fair value less than $1 million.

There have been no changes in the Condensed Consolidated Balance Sheets.
(b)
Included in Other current assets in the Condensed Consolidated Balance Sheets.
(c)
As of December 31, 2017, $2 million of this balance is included in Other current assets, with the remainder included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. As of September 30, 2017, this balance is included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.
(d)
Included in Accrued expense and other liabilities in the Condensed Consolidated Balance Sheets.

There were no Level 2nature of inputs or 3valuation approaches relative to the Company's financial assets orand liabilities that wereare accounted for at fair value on a recurring basis as of December 31, 2017 orfrom those at September 30, 2017. Additionally, there2019, other than the agreements noted below, which were no transfers between levels of the fair value hierarchyentered into during the three and nine months ending December 31, 2017ended June 30, 2020. There were no material gains or 2016.losses recognized in earnings during the three and nine months ended June 30, 2020 or 2019 related to these assets and liabilities.


7Interest rate swap agreements



Cash equivalents
A portionIn June 2020, the Company entered into two interest rate swap agreements with three-year maturities to exchange interest rate payments on $175 million of variable rate term loan borrowings to fixed interest rates. The interest rate swap agreements had fair values of zero at inception and have been designated as cash flow hedges with the Company's excess cash is heldunrealized gains or losses recorded in highly liquid investments with maturities of three months or less. Cash equivalents generate interestAccumulated other comprehensive income and are measured at fair value using prevailing market rates.
Derivatives

reclassified into earnings within Net interest and other financing expenses as the underlying payment transactions occur. The Company uses derivativesexpects these hedges to be highly effective and based on interest rates as of June 30, 2020, estimates that there will not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures and exchange one foreign currency for another for a fixed rate at a future date ofbe material reclassifications into earnings over the next twelve months or less. Gains and losses recognized for changes in themonths.

The fair value of these instruments were not material duringinterest rate swap agreements represents the three months ended December 31, 2017 and 2016 and are included in Selling, general and administrative expensedifference in the Condensed Consolidated Statementspresent value of Comprehensive Income to offsetcash flows calculated at the gain or loss oncontracted interest rates and at current market interest rates at the hedged item in the same period as the remeasurement losses and gainsend of the related foreign currency-denominated exposures.period. The Company had outstanding contracts with highly-rated financial institutions with notional values of $43 million and $47 millionutilizes Level 2 observable inputs such as of December 31, 2017 and September 30, 2017, respectively.interest rate yield curves to estimate fair value for the interest rate swap agreements.
Non-qualified trust funds
The Company maintains a non-qualified trust to fund benefit payments for certain of its U.S. non-qualified pension plans, which primarily consists of highly liquid fixed income U.S. government bonds. Gains and losses related to these investments are immediately recognized within Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income.
Long-term debt

The Company'sfair values of the Company’s outstanding fixed rate senior notes consist of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes”) and 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes” and together with the 2024 Notes, “Senior Notes”).
The fair values shown in the table below are based on recent trading values, which are considered Level 2 inputs within the prices at which the bonds have recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of coupon payments each year and the maturity dates.fair value hierarchy. Long-term debt is included in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore
15

excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.
June 30, 2020September 30, 2019
(In millions)Fair valueCarrying valueUnamortized discount and
issuance costs		Fair valueCarrying valueUnamortized
discount and
issuance costs
2024 Notes$—  $—  $—  $390  $371  $(4) 
2025 Notes806  789  (11) 407  395  (5) 
2030 Notes597  592  (8) —  —  —  
Total$1,403  $1,381  $(19) $797  $766  $(9) 
 December 31, 2017 September 30, 2017
(In millions)Fair value Carrying value Unamortized discount and issuance costs Fair value Carrying value Unamortized discount and issuance costs
2024 Notes$399
 $370
 $5
 $401
 $370
 $5
2025 Notes404
 395
 5
 408
 394
 6
Total$803
 $765
 $10
 $809
 $764
 $11


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







8


NOTE 34 - ACQUISITIONS AND DIVESTITURES


Henley Bluewater acquisitionQuick Lubes store acquisitions


On October 2, 2017,During the nine months ended June 30, 2020, the Company completed the acquisition of 56 Quick Lubesacquired 21 service center stores in single and multi-store transactions, including 11 former franchise service centers from Henley Bluewater LLCcenter stores, for $60a total of $18 million. TheseDuring the nine months ended June 30, 2019, the Company acquired 54 service center stores build onfor a total of $50 million.

The Company’s acquisitions are accounted for such that the infrastructureassets acquired and talent baseliabilities assumed are recognized at their acquisition date fair values, with any excess of the existing Company-owned operations in northern Ohio and adds Company-owned locations in Michigan.

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

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


Remaining ownership interest in subsidiaryA summary follows of the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the nine months ended June 30:

(In millions)20202019
Property, plant and equipment$1  $3  
Goodwill8  34  
Intangible assets (a)
Reacquired franchise rights9  5  
Customer relationships—  5  
Trademarks and trade names—  1  
     Other—  2  
Net assets acquired$18  $50  
Valvoline historically owned(a) Intangible assets acquired during the nine months ended June 30, 2020 have a 70% controlling interestweighted average amortization period of 10 years.

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

16

The incremental results of its subsidiary in Thailand. In December 2017, Valvoline purchased the remaining 30% interest for total consideration of approximately $16 million, making it a wholly-owned subsidiaryoperations of the Company. This interest wasacquired stores, which were not material to the current or prior periodCompany’s consolidated results, have been included in the condensed consolidated financial statements for presentationfrom the date of each acquisition, and accordingly, pro forma disclosure as a noncontrolling interest, which was eliminated as a result of this purchase through a net charge to Paid-in capital and Retained deficit.financial information has not been presented.


Dispositions
NOTE 4 - ACCOUNTS RECEIVABLE

The following summarizes Valvoline’s accounts receivable:

(In millions)December 31
2017		 September 30
2017
Trade and other accounts receivable$424
 $390
Less: Allowance for doubtful accounts(6) (5)
 $418
 $385

Prior to May 2017 when Valvoline's former parent company, Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to as “Ashland”), distributed its net investment in Valvoline (the “Distribution”), Ashland was party to an agreement to sell certain Valvoline customer accounts receivable inDuring the form of drafts or bills of exchangenine months ended June 30, 2020, the Company sold 6 service center stores to a financial institution. Each draft constituted an order to pay for obligationsfranchisee within the Quick Lubes reportable segment. Valvoline received proceeds of the customer to Ashland arising from the sale of goods to the customer. The intention of the arrangement was to decrease the time accounts receivable was outstanding and increase cash flows as Ashland in turn remitted payment to Valvoline. During the three months ended December 31, 2016, $11approximately $3 million, of accounts receivable were sold to the financial institution under this agreement.with 0 material gain or loss recognized.


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



9


NOTE 5 - INVENTORIESINTANGIBLE ASSETS

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

The following summarizes Valvoline’s inventories:
(In millions)December 31
2017		 September 30
2017
Finished products$178
 $180
Raw materials, supplies and work in process28
 31
LIFO reserves(33) (33)
Obsolete inventory reserves(3) (3)
 $170
 $175

NOTE 6 - GOODWILL AND OTHER INTANGIBLES

Goodwill


The following table summarizes the changes in the carrying amount of goodwill by reportable segment and in total during the threenine months ended December 31, 2017.June 30, 2020:
(In millions)Core North America Quick Lubes International Total(In millions)Quick LubesCore North AmericaInternationalTotal
September 30, 2017$89
 $201
 $40
 $330
Balance at September 30, 2019Balance at September 30, 2019$301  $89  $40  $430  
Acquisitions (a)
—
 30
 —
 30
Acquisitions (a)
8  —  —  8  
December 31, 2017$89
 $231
 $40
 $360
Currency translationCurrency translation(1) —  —  (1) 
Dispositions (a)
Dispositions (a)
(3) —  —  (3) 
Balance at June 30, 2020Balance at June 30, 2020$305  $89  $40  $434  
       
(a) RelatesRefer to Note 4 for details regarding acquisitions and dispositions completed during the acquisitionnine months ended June 30, 2020.

NOTE 6 - RESTRUCTURING ACTIVITIES

During the second quarter of Henley Bluewater LLCfiscal 2019, Valvoline outlined a broad-based restructuring and cost-savings program to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. Part of this program included employee separation actions, which were generally completed during 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020.

Since program inception, Valvoline has recognized cumulative costs of $13 million, including $1 million during the nine months ended June 30, 2020 and $4 million and $10 million during the three and nine months ended December 31, 2017June 30, 2019, respectively. These costs are for employee termination benefits, which include severance and adjustmentsother benefits provided to employees pursuant to the restructuring program. These expenses were recognized in Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income. The Company does not expect to incur material remaining costs from these actions.

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

The following table presents the expenses recognized related to prior year acquisitions.

Other Intangible Assets

Valvoline's purchased intangible assets were specifically identified when acquiredemployee termination benefits during the nine months ended June 30, 2020 and have finite lives. Intangible assets were $37 millionthe estimated remaining liability, which is included in gross carrying amount, net of $4 million in accumulated amortization as of December 31, 2017 and were reported in Goodwill and intangibles, net on the Condensed Consolidated Balance Sheet. Amortization expense recognized on intangible assets during the three months ended December 31, 2017Sheet within Accrued expenses and 2016 was not material. Amortization expense expected in the next five fiscal years is as follows:other liabilities:


17
(In millions)  
Years ending September 30 (estimated)   
2018  $5
2019  $5
2020  $5
2021  $4
2022  $4
   


10



(In millions)Employee termination benefits
Balance at September 30, 2019$9 
Expenses recognized during the period1 
Payments(6)
Balance at June 30, 2020$4 

NOTE 7 - DEBT OBLIGATIONS


The following table summarizes Valvoline’s short-term borrowings and long-termtotal debt:

(In millions)(In millions)
December 31
2017
 September 30 2017(In millions)June 30
2020		September 30 2019
2030 Notes2030 Notes$600  $—  
2025 Notes2025 Notes$400
 $400
2025 Notes800  400  
2024 Notes2024 Notes375
 375
2024 Notes—  375  
Term Loans281
 285
Term LoanTerm Loan475  575  
Trade Receivables FacilityTrade Receivables Facility120
 75
Trade Receivables Facility90  —  
Revolver—
 —
Other (a)
Other (a)
(10) (11)
Other (a)
8  1  
Debt issuance costs and discountsDebt issuance costs and discounts(20) (9) 
Total debtTotal debt$1,166
 $1,124
Total debt$1,953  $1,342  
Short-term debt—
 75
Current portion of long-term debtCurrent portion of long-term debt19
 15
Current portion of long-term debt—  15  
Long-term debtLong-term debt$1,147
 $1,034
Long-term debt$1,953  $1,327  
   
(a) At December 31, 2017, Other includes $12borrowings under the China construction credit facility of $7 million as of debt issuance cost discounts and $2 million ofJune 30, 2020. In addition, other includes debt acquired through acquisitions. Atacquisitions of $1 million as of June 30, 2020 and September 30, 2017, Other included $13 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions.2019.


Senior Notes

During August 2017, Valvoline completed the issuanceThe Company's outstanding fixed rate senior notes as of June 30, 2020 consist of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million. The net proceeds from the offering of the 2025 Notes was $394$800 million (after deducting initial purchasers' discounts(the “2025 Notes") and debt issuance costs), which were used to make a voluntary contribution to the Company's qualified U.S. pension plan.

During July 2016, Valvoline completed the issuance of 5.500%4.250% senior unsecured notes due 20242030 with an aggregate principal amount of $375 million. The net proceeds from$600 million (the "2030 Notes," and collectively, the offering of the 2024 Notes was $370 million (after deducting initial purchasers’ discounts and debt issuance costs), which were transferred to Valvoline's former parent, Ashland.

"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 on the notes.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 their maturity in the manner specified in the indentures governing the notes.indentures. The notesSenior Notes are guaranteed by each of Valvoline's subsidiaries that guarantee obligations under the existing senior secured credit facility described below.

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

its Senior Credit AgreementAgreement.


2025 Notes

The 2016 Senior Credit Agreement provides for2025 Notes are comprised of two issuances of 4.375% senior unsecured notes due 2025 each with an aggregate principal amount of $1,325$400 million, one issuance that was completed in August 2017 (the "Existing 2025 Notes") and the other that was completed in May 2020 (the "Additional 2025 Notes"), except that the Existing 2025 Notes are registered under the Securities Act of 1933, as amended (the “Securities Act”), and certain transfer restrictions, registration rights and additional interest provisions that apply to the Additional 2025 Notes do not apply to the Existing 2025 Notes. The Additional 2025 Notes were issued in a private offering at 99.5% of their principal amount, resulting in an original issue discount of $2 million. The net proceeds from the offering of $393
18

million (after deducting initial purchasers' discounts and debt issuance costs), together with cash and cash equivalents on hand, were used to repay $450 million in borrowings under the $475 million senior secured revolving credit facilities (“2016 Credit Facilities”facility (the “Revolver”).

2030 Notes

In February 2020, Valvoline issued the 2030 Notes in a private offering for net proceeds of $592 million (after deducting initial purchasers’ discounts and debt issuance costs). A portion of the net proceeds were used to redeem in full Valvoline's 5.500% senior unsecured notes due 2024 at the aggregate principal amount of $375 million (the "2024 Notes"), composedplus an early redemption premium of (i) a five-year $875$15 million, accrued and unpaid interest, as well as related fees and expenses for an aggregate redemption price of $394 million. A loss on extinguishment of the 2024 Notes of $19 million was recognized in Net interest and other financing expenses in the Condensed Consolidated Statements of Comprehensive Income for the nine months ended June 30, 2020, comprised of the early redemption premium and the write-off of related unamortized debt issuance costs and discounts.

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

Senior Credit Agreement

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

During the nine months ended June 30, 2020, the Company borrowed and (ii) a five-yearrepaid $450 million revolving credit facility (includingfrom its Revolver under the Senior Credit Agreement. The initial borrowings under the Revolver were a $100 million letterprecautionary 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 credit sublimit) (“Revolver”). At December 31, 2017the Additional 2025 Notes and existing cash and cash equivalents on hand. As of June 30, 2020 and September 30, 2017, the Term Loans had outstanding principal balances of $281 million and $285 million, respectively. At December 31, 2017 and September 30, 2017,2019 there were no0 amounts outstanding under the Revolver. As of December 31, 2017,June 30, 2020, the total borrowing capacity remaining under the Revolver was $439$468 million due to a reduction of $11$7 million for letters of credit outstanding.



11


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

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

The 2016 Senior Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated net leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum consolidated net leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are 4.5 and 3.0, respectively. As of December 31, 2017,June 30, 2020, Valvoline was in compliance with all covenants under the 2016 Senior Credit Agreement.


Trade Receivables Facility

On November 29, 2016, Valvoline entered into a $125In January 2020, the Company amended its $175 million one-year revolving trade receivables securitization facility (“Trade(the “Trade Receivables Facility”) with certain financial institutions. On, which extended the maturity to November 20, 2017, the Company2021. In April 2020, Valvoline further amended the Trade Receivables Facility to extendmodify the maturity dateeligibility requirements for certain receivables, which had the effect of increasing the Company’s remaining eligible borrowing capacity. This amendment also requires the Company to November 19, 2020maintain an amount outstanding equal to the lesser of 50 percent of the unchanged total borrowing capacity and increase the maximum funding under the facility to $175 million based onborrowing base from the availability of eligible receivablesreceivables. Other relevant terms and other customary factors and conditions.

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


During the first fiscal quarter of 2017,nine months ended June 30, 2020, Valvoline borrowed $75$90 million under the Trade Receivables Facility to proactively increase its cash position and used the net proceeds to repay an equal amountenhance financial agility in light of the Term Loans. Duringuncertainty resulting from the first fiscal quarterCOVID-19 pandemic. As of 2018, Valvoline borrowed $45June 30, 2020, $90 million under the Trade Receivables Facilityremained outstanding and used the proceeds to supplement the daily cash needs of the Company's operations. The Company accounts for the Trade Receivables Facility as secured borrowings. Based upon the maturity dates in place in each respective period, as of December 31, 2017, the $120 million balance outstanding was classified as Long-term debt and the $75 million balance0 amounts were outstanding as of September 30, 2017 was classified as Short-term debt in the Condensed Consolidated Balance Sheets. 2019.

Based on the availability of eligible receivables, the totalremaining borrowing capacity remaining underof the Trade Receivables Facility at December 31, 2017as of June 30, 2020 was $39$85 million. The financing subsidiary owned $253$267 million and $247$259 million of
19

outstanding accounts receivable as of December 31, 2017June 30, 2020 and September 30, 2017,2019, respectively, and these amountswhich are included in Accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.


China Credit Facility
In May 2020, the Company entered into a five-year credit agreement (the “China Credit Facility”) for approximately $40 million to finance the completion of construction of the blending and packaging plant in China. Borrowings will bear interest at the local prime rate less the applicable interest rate margin and will be secured by the assets underlying the project. The financing subsidiary pays customary feesproceeds from the China Credit Facility are restricted for capital expenditures directly related to the lenders,construction of the blending and advances by a lender underpackaging plant in China. As of June 30, 2020, there was $7 million outstanding on the Trade ReceivablesChina Credit Facility, accrue interest for which is reflected in the weighted average interest rates were 2.2%Other line in the table above and 1.5% for the three months ended December 31, 2017 and 2016, respectively. The Trade Receivables Facility contains various customary affirmative and negative covenants and default and termination provisions, which provide for accelerationhad total borrowing capacity remaining 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.approximately $33 million.


12



NOTE 8 – INCOME TAXES


Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual discrete items related specifically to interim periods. IncomeThe following summarizes income tax expense and the effective tax rate in each interim period:

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

The increase in effective tax rates for the three and nine months ended December 31, 2017 was $94 million, an effective tax rate of 111.9%June 30, 2020 compared to expensethe prior year periods was attributed to the mix shift of $38 million and an effectiveprojected annual pre-tax earnings to jurisdictions with higher statutory tax rate of 34.5% for the three months ended December 31, 2016.rates. The increase in income tax expense and the effective tax rate for the nine months ended June 30, 2020 was principally driven by the enactment ofalso related to tax reform, legislation in the U.S. in December 2017, which resulted in a net increaseunfavorable discrete activity in the current year period due to legislation enacted in India, while the clarification of certain provisions of Kentucky tax reform regulations drove favorable discrete activity in the prior year period. Higher pre-tax earnings also led to increased income tax expense in the current year-to-date period.

Legacy tax attributes

In connection with filing the Company's fiscal 2019 income tax returns beginning in July 2020, management determined it is no longer more likely than not to realize certain legacy tax attributes which were transferred from the Company's former parent prior to Valvoline's initial public offering in late fiscal 2016. The Company expects to recognize income tax expense of approximately $68$30 million that more than offset benefits related to the reduction inestablish a full valuation allowance with an offsetting impact to reduce the estimated annual effective tax rate for fiscal 2018.

U.S. tax reform legislation

On December 22, 2017,indemnity obligation due, the Presidentcombined effects of the United States signed into law tax reform legislation (the “Act”), which is generally effective January 1, 2018. The Act includes a number of provisions, including lowering the U.S. corporate federal income tax rate from a maximum of 35% to 21% and changing or limiting certain tax deductions. While the Company expects this rate reduction will ultimately benefit Valvoline, the Act also includes provisions that are expectedanticipated to offset some of the benefit of the rate reduction, including the repeal of the deduction for domestic production activities and the expansion of the limitation on the deduction of certain executive compensation. In addition, the Act alters the landscape of taxation of non-U.S. operations and provides immediate deductions for certain new investments, among other provisions. Based on the Company's provisional estimates of the impacts of the Act, the Company expects the Act will resulthave no impact to net income in a lower estimated annual effective tax rate for Valvoline in fiscal 2018 and beyond and decrease the Company's cash taxes, particularly in years beyond fiscal 2018.

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

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

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

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

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


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Deferred tax remeasurement

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

The Company’s net deferred tax assets of $281 million were determined at September 30, 2017 based on the then-current enacted income tax rates prior to the passage of the Act. As a result of the reduction in the federal corporate income tax rate from 35% to 21% under the Act, the Company revalued its net deferred tax assets as of December 31, 2017, which resulted in a reduction in the value of net deferred tax assets of approximately $67 million that was recorded as additional income tax expense in the Company’s Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2017.2020.

Deemed repatriation

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

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

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

Tax Matters Agreement

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

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


14
20




Uncertainties in income taxes

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

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

NOTE 9 – EMPLOYEE BENEFIT PLANS


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

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

Components of net periodic benefit income

For segment reporting purposes, service cost is proportionately allocated to each reportable segment, while all other components of net periodic benefit income are recognized below operating income within Net pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.

Effective January 1, 2017, Valvoline discontinued certain other postretirement health and life insurance benefits. The effect of these plan amendments resulted in a remeasurement gain of $8 million during the three months ended December 31, 2016 as shown in the table below. The following table summarizes the components of pension and other postretirement benefit income for the three months ended December 31:(income) cost:

Other postretirement benefits
Pension benefits
(In millions)(In millions)2020201920202019
Three months ended June 30Three months ended June 30
Service costService cost$1  $—  $—  $—  
Interest costInterest cost15  21  —  —  
Expected return on plan assetsExpected return on plan assets(21) (20) —  —  
Amortization of prior service creditAmortization of prior service credit—  —  (3) (3) 
Net periodic benefit (income) costNet periodic benefit (income) cost$(5) $1  $(3) $(3) 
Nine months ended June 30Nine months ended June 30
Service costService cost$2  $1  $—  $—  
Interest costInterest cost46  61  1  1  
Expected return on plan assetsExpected return on plan assets(65) (60) —  —  
Amortization of prior service creditAmortization of prior service credit—  —  (9) (9) 
Net periodic benefit (income) costNet periodic benefit (income) cost$(17) $2  $(8) $(8) 
     Other postretirement benefits
 Pension benefits 
(In millions) 2017 2016 2017 2016
Service cost $—
 $1
 $—
 $—
Interest cost 19
 21
 —
 —
Expected return on plan assets (26) (36) —
 —
Amortization of prior service credit —
 —
 (3) (3)
Actuarial gain —
 —
 —
 (8)
Net periodic benefit income $(7) $(14)
$(3) $(11)


15



NOTE 10 – COMMITMENTSLITIGATION, CLAIMS AND CONTINGENCIES


From time to time, Valvoline is involved inparty to lawsuits, claims and other legal actionsproceedings that arise in the ordinary course of business. While Valvoline cannot predict with certaintyThe Company establishes liabilities for the outcome costs recognizedof such matters where losses are determined to be probable and reasonably estimable. Where appropriate, the Company has recorded liabilities with respect to such actionsthese matters, which were immaterial duringnot material for the three months ended December 31, 2017.periods presented as reflected in the condensed consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, Valvoline doesdiscloses matters for which management believes a material loss is at least reasonably possible.

In all instances, management has assessed each matter based on current information available and made a judgment concerning its potential outcome, giving due consideration to the amount and nature of the claim and the probability of success. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable.

Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not have any currentlyexceed the amounts reflected in the condensed consolidated financial statements, based on information available at this time, it is the opinion of management that such pending claims or litigation which Valvoline believes, individually or in the aggregate,proceedings will not have a material adverse effect on its condensed consolidated financial position, results of operations, liquidity or capital resources. While Valvoline cannot predict with certainty the outcome of such matters, where appropriate, adequate reserves have been recorded, which were not material as of December 31, 2017 and September 30, 2017. There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these matters; however, Valvoline currently believes that such potential losses will not be material.statements.


21

NOTE 11 - EARNINGS PER SHARE


The following istable summarizes basic and diluted earnings per share:

Three months endedNine months ended
June 30June 30
(In millions, except per share amounts)2020 201920202019
Numerator 
Net income$59  $65  $195  $181  
Denominator 
Weighted average common shares outstanding186   189  187  189  
Effect of potentially dilutive securities (a)
—   —  1  —  
Weighted average diluted shares outstanding186  189  188  189  
  
Earnings per share 
Basic$0.32   $0.34  $1.04  $0.96  
Diluted$0.32   $0.34  $1.04  $0.96  
(a)Outstanding securities, primarily stock appreciation rights, were not included in the computation of basic and diluted EPS for the three months ended December 31, 2017 and 2016. EPS is reported under the treasury stock method.

  Three months ended
  December 31
(In millions except per share data) 2017 2016
Numerator    
Net (loss) income $(10) $72
Denominator    
Weighted average shares used to compute basic EPS 202
 205
Effect of dilutive securities (a)
 —
 —
Weighted average shares used to compute diluted EPS 202
 205
     
(Loss) earnings per share    
Basic $(0.05) $0.35
Diluted $(0.05) $0.35
     
(a) For the three months ended December 31, 2017, due to the net loss attributable to Valvoline common stockholders, potential common shares primarily related to stock-based compensation plans of approximately 1 million were excluded from the dilutedearnings per share count because their effect would have been anti-dilutive. During the three months ended December 31, 2016, there was notantidilutive. There were approximately 2 million and 1 million a significant dilutive impact from potential common shares.



16


NOTE 12 - STOCKHOLDERS’ DEFICIT

Changes in stockholders' deficitntidilutive outstanding securities in the three and nine months ended December 31, 2017June 30, 2020, respectively, and there were as follows:
(In millions) 
Balance as of September 30, 2017$(117)
   
 Net loss(10)
 
Repurchases of common stock (a)
(39)
 Stock-based compensation plans2
 Dividends paid, $0.0745 per common share(15)
 
Purchase of remaining ownership interest in subsidiary (b)
(14)
 Accumulated other comprehensive income, net of tax: 
 Unrealized currency translation gain1
 
Amortization of pension and other postretirement prior service credits in income (c)
(2)
   
Balance as of December 31, 2017$(194)
   
(a)     During the three months ended December 31, 2017, the Company repurchased approximately 1 million and 2 million shares of its common stock for $39 million. Upon repurchase, shares are retired.
(b)Refer to Note 3 for details regarding the Company's purchase of the remaining ownership interest in a controlled and consolidated subsidiary during the three months ended December 31, 2017.
(c)
Amortization of unrecognized prior service credits is included in net periodic benefit income within Net pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.

NOTE 13 – RELATED PARTY TRANSACTIONS

At December 31, 2017, Valvoline had total net obligations due to Ashland of $81 million, of which $3 million was recorded in Accrued expenses and other liabilities and the remainder was primarily recorded and Other noncurrent liabilities in the Condensed Consolidated Balance Sheets.three and nine months ended June 30, 2019, respectively.


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

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

17




NOTE 1412 - REPORTABLE SEGMENT INFORMATION


Valvoline manages and reports within the following three3 segments:


Core North America - sells Valvoline and other branded products and solutions in the United States and Canada to heavy-duty customers and retailers for consumers to perform their own automotive and engine maintenance, as well as to installer customers who use Valvoline products to service vehicles.
•Quick Lubes - services the passenger car and light truck quick lube market through: Company-ownedthrough company-owned and independent franchised Valvoline Instant Oil Change (“VIOC”) retail quick lube service stores;center stores and itsindependent Express Care stores for independent operatorsthat service vehicles with Valvoline products, as well as through investment in a joint venture in China to purchase Valvoline motor oil and other products and display Valvoline branded signage.
pilot expansion of retail quick lube service center stores outside of North America.

International •Core North America - sells Valvolineengine and other brandedautomotive maintenance products in approximatelythe United States and Canada to retailers, installers, and heavy-duty customers to service vehicles and equipment.

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


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


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


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Segment financial results

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




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

Disaggregation of revenue

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

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

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(In millions)
Three months ended December 31
2017 2016
Sales   
Core North America$251
 $237
Quick Lubes154
 127
International140
 125
Consolidated sales$545
 $489
    
Operating income (loss)   
Core North America$43
 $51
Quick Lubes35
 29
International19
 20
Total operating segments$97
 $100
Unallocated and other (a)
(9) (6)
Consolidated operating income$88
 $94
    
(a)Unallocated and other includes $7 million of expense in the three months ended December 31, 2017 related to adjustments associated with Ashland tax indemnities driven by tax reform legislation, as well as separation costs of $2 million and $6 million for the three months ending December 31, 2017 and 2016, respectively.


18



Sales by reportable segment disaggregated by geographic market follows:

Quick LubesCore North AmericaInternationalTotal
(In millions)20202019202020192020201920202019
Three months ended June 30
North America (a)
$199  $211  $207  $260  $—  $—  $406  $471  
Europe, Middle East and Africa ("EMEA")—  —  —  —  34  43  34  43  
Asia Pacific—  —  —  —  65  72  65  72  
Latin America (a)
—  —  —  —  11  27  11  27  
Totals$199  $211  $207  $260  $110  $142  $516  $613  
Nine months ended June 30
North America (a)
$629  $600  $693  $735  $—  $—  $1,322  $1,335  
Europe, Middle East and Africa ("EMEA")—  —  —  —  125  134  125  134  
Asia Pacific—  —  —  —  193  212  193  212  
Latin America (a)
—  —  —  —  61  80  61  80  
Totals$629  $600  $693  $735  $379  $426  $1,701  $1,761  
(a) Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.

NOTE 13 - SUPPLEMENTAL FINANCIAL INFORMATION

Cash, cash equivalents and restricted cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the totals shown within the Condensed Consolidated Statements of Cash Flows:

(In millions)June 30
2020		September 30
2019		June 30
2019
Cash and cash equivalents$751  $159  $126  
Restricted cash (a)
—  —  11  
Total cash, cash equivalents and restricted cash$751  $159  $137  
(a) Included in Prepaid expenses and other current assets within the Condensed Consolidated Balance Sheets.

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Accounts and other receivables

The following table summarizes Valvoline’s accounts and other receivables in the Condensed Consolidated Balance Sheets:

(In millions)June 30
2020		September 30
2019
Current
Trade$377  $392  
Other15  15  
Notes receivable from franchisees11  —  
Receivables, gross$403  $407  
Allowance for doubtful accounts(7) (6) 
Receivables, net$396  $401  
Non-current (a)
Notes receivable from franchisees$18  $—  
Other notes receivable7  5  
Noncurrent notes receivable, gross$25  $5  
Allowance for losses(2) (2) 
Noncurrent notes receivable, net$23  $3  
(a) Included in Other noncurrent assets within the Condensed Consolidated Balance Sheets.

During the nine month periods ended June 30, 2020 and 2019, Valvoline sold trade accounts receivable to a financial institution of $59 million and $63 million, respectively.

Valvoline’s notes receivable primarily consist of low-interest term loans extended to franchisees to provide financial assistance as a response to the COVID-19 pandemic. Notes receivable are recorded at amortized cost, net of any allowance for credit losses. The notes receivables from franchisees bear interest at variable rates consistent with those in Valvoline's Senior Credit Agreement, and accordingly, their carrying amounts approximate fair value. Valvoline monitors its notes receivable for collectibility and will record provisions for estimated credit losses when the Company believes a loss is probable.
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.

The following table summarizes Valvoline’s inventories in the Condensed Consolidated Balance Sheets:

(In millions)June 30
2020		September 30
2019
Finished products$187  $203  
Raw materials, supplies and work in process31  32  
Reserve for LIFO cost valuation(29) (41) 
Total inventories, net$189  $194  

25

Revenue recognition

The following table disaggregates the Company’s sales by timing of revenue recognized:

Three months endedNine months ended
June 30June 30
(In millions)2020201920202019
Sales at a point in time$508  $602  $1,673  $1,730  
Franchised revenues transferred over time8  11  28  31  
Total consolidated sales$516  $613  $1,701  $1,761  

NOTE 1514 - GUARANTOR FINANCIAL INFORMATION


As described in Note 7, Valvoline issued the 2030 Notes in an unregistered private offering in February 2020 and used a portion of the net proceeds to redeem in full its 2024 Notes. The Existing 2025 Notes described in Note 7 were registered in an exchange offer completed in December 2017 and remain subject to Rule 3-10 of SEC Regulation S-X. In May 2020, the Company issued the Additional 2025 Notes as an add-on to its Existing 2025 Notes. The registration rights agreement with respect to the Additional 2025 Notes require the Company to use its reasonable best efforts to consummate an offer to exchange the outstanding notes for notes registered under the Securities Act. Accordingly, in June 2020, the Company filed a Registration Statement on Form S-4, which became effective in July 2020, to initiate the exchange offer for the Additional 2025 Notes in compliance with its registration obligations. The Company will not receive any proceeds from the exchange offer.

The Senior2025 Notes are general unsecured senior obligations of Valvoline Inc. and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the combined wholly-owned “Guarantor Subsidiaries.” Other subsidiaries (the “Non-Guarantor Subsidiaries”) largely represent the international operations of the Company, which do not guarantee the Senior2025 Notes. Under the terms of the indentures, Valvoline Inc. and the Guarantor Subsidiaries each fully and unconditionally, jointly and severally, guarantee the payment of interest, principal and premium, if any, on each of the notes included in the Senior Notes. Refer to Note 7 for additional information.


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

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

The following tablesS-X and present, on a consolidating basis, the condensed statements of comprehensive income;income, condensed balance sheets;sheets, and condensed statements of cash flows for the parent issuer of these Seniorthe 2025 Notes, the Guarantor Subsidiaries on a combined basis, the Non-Guarantor Subsidiaries on a combined basis, and the eliminations necessary to arrive at the Company'sCompany’s consolidated results.


26
Condensed Consolidating Statements of Comprehensive Income      
For the three months ended December 31, 2017        
(In millions)Valvoline Inc.
(Parent Issuer)		 Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated
Sales$—
 $422
 $134
 $(11) $545
Cost of sales—
 263
 98
 (11) 350
Gross profit—
 159
 36
 —
 195
          
Selling, general and administrative expense9
 83
 22
 —
 114
Separation costs1
 1
 —
 —
 2
Equity and other (income) expenses—
 (12) 3
 —
 (9)
Operating (loss) income(10) 87
 11
 —
 88
Net pension and other postretirement plan non-service income and remeasurement adjustments—
 (10) —
 —
 (10)
Net interest and other financing expense12
 1
 1
 —
 14
(Loss) income before income taxes(22) 96
 10
 —
 84
Income tax expense21
 70
 3
 —
 94
Equity in net income of subsidiaries33
 7
 —
 (40) —
Net (loss) income$(10) $33
 $7
 $(40) $(10)
          
Total comprehensive (loss) income$(11) $32
 $8
 $(40) $(11)

19



Condensed Consolidating Statements of Comprehensive Income
For the three months ended June 30, 2020
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$—  $409  $114  $(7) $516  
Cost of sales—  255  81  (7) 329  
Gross profit—  154  33  —  187  
Selling, general and administrative expenses4  80  22  —  106  
Net legacy and separation-related expenses—  1  —  —  1  
Equity and other (income) expenses, net—  (10) 2  —  (8) 
Operating (loss) income(4) 83  9  —  88  
Net pension and other postretirement plan income—  (9) —  —  (9) 
Net interest and other financing expenses17  1  1  —  19  
(Loss) income before income taxes(21) 91  8  —  78  
Income tax (benefit) expense(7) 24  2  —  19  
Equity in net income of subsidiaries(73) (6) —  79  —  
Net income$59  $73  $6  $(79) $59  
Total comprehensive income$66  $80  $17  $(97) $66  

27
Condensed Consolidating Statements of Comprehensive Income      
For the three months ended December 31, 2016        
(In millions)Valvoline Inc.
(Parent Issuer)		 Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated
Sales$—
 $377
 $124
 $(12) $489
Cost of sales—
 224
 92
 (12) 304
Gross profit—
 153
 32
 —
 185
          
Selling, general and administrative expense2
 69
 24
 —
 95
Separation costs—
 6
 —
 —
 6
Equity and other (income) expenses—
 (13) 3
 —
 (10)
Operating (loss) income(2) 91
 5
 —
 94
Net pension and other postretirement plan non-service income and remeasurement adjustments—
 (26) —
 —
 (26)
Net interest and other financing expense9
 1
 —
 —
 10
(Loss) income before income taxes(11) 116
 5
 —
 110
Income tax (benefit) expense(4) 38
 4
 —
 38
Equity in net income of subsidiaries79
 1
 —
 (80) —
Net income (loss)$72
 $79
 $1
 $(80) $72
          
Total comprehensive income (loss)$61
 $68
 $(7) $(61) $61

20



Condensed Consolidating Statements of Comprehensive Income
For the three months ended June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$—  $491  $140  $(18) $613  
Cost of sales—  324  100  (18) 406  
Gross profit—  167  40  —  207  
Selling, general and administrative expenses3  87  26  —  116  
Net legacy and separation-related expenses—  —  —  —  —  
Equity and other (income) expenses, net—  (16) 5  —  (11) 
Operating (loss) income(3) 96  9  —  102  
Net pension and other postretirement plan income—  (2) —  —  (2) 
Net interest and other financing expenses17  2  —  —  19  
(Loss) income before income taxes(20) 96  9  —  85  
Income tax (benefit) expense(5) 24  1  —  20  
Equity in net income of subsidiaries(80) (8) —  88  —  
Net income$65  $80  $8  $(88) $65  
Total comprehensive income$63  $78  $9  $(87) $63  

28
Condensed Consolidating Balance Sheets        
As of December 31, 2017        
(In millions) Valvoline Inc.
(Parent Issuer)		 Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated
Assets          
Current assets          
Cash and cash equivalents $—
 $18
 $97
 $—
 $115
Accounts receivable, net —
 84
 435
 (101) 418
Inventories, net —
 94
 76
 —
 170
Other current assets —
 29
 3
 —
 32
Total current assets —
 225
 611
 (101) 735
Noncurrent assets          
Property, plant and equipment, net —
 346
 38
 —
 384
Goodwill and intangibles, net —
 391
 2
 —
 393
Equity method investments —
 33
 —
 —
 33
Investment in subsidiaries 622
 444
 —
 (1,066) —
Deferred income taxes 127
 55
 14
 —
 196
Other noncurrent assets 254
 78
 6
 (252) 86
Total noncurrent assets 1,003
 1,347
 60
 (1,318) 1,092
Total assets $1,003
 $1,572
 $671
 $(1,419) $1,827
           
Liabilities and Stockholders' Deficit          
Current Liabilities          
Current portion of long-term debt $19
 $—
 $—
 $—
 $19
Trade and other payables —
 192
 50
 (101) 141
Accrued expenses and other liabilities 119
 55
 34
 —
 208
Total current liabilities 138
 247
 84
 (101) 368
Noncurrent liabilities          
Long-term debt 1,025
 2
 120
 —
 1,147
Employee benefit obligations —
 309
 22
 —
 331
Other noncurrent liabilities 34
 392
 1
 (252) 175
Total noncurrent liabilities 1,059
 703
 143
 (252) 1,653
Commitments and contingencies 
 
 
 
 
Stockholders' (deficit) equity (194) 622
 444
 (1,066) (194)
Total liabilities and stockholders' deficit/equity $1,003
 $1,572
 $671
 $(1,419) $1,827


21



Condensed Consolidating Statements of Comprehensive Income
For the nine months ended June 30, 2020
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$—  $1,357  $376  $(32) $1,701  
Cost of sales—  861  267  (32) 1,096  
Gross profit—  496  109  —  605  
Selling, general and administrative expenses7  243  69  —  319  
Net legacy and separation-related (income) expenses(1) 1  —  —  —  
Equity and other (income) expenses, net—  (36) 13  —  (23) 
Operating (loss) income(6) 288  27  —  309  
Net pension and other postretirement plan income—  (27) —  —  (27) 
Net interest and other financing expenses68  4  1  —  73  
(Loss) income before income taxes(74) 311  26  —  263  
Income tax (benefit) expense(21) 82  7  —  68  
Equity in net income of subsidiaries(248) (19) —  267  —  
Net income$195  $248  $19  $(267) $195  
Total comprehensive income$185  $238  $17  $(255) $185  

29
Condensed Consolidating Balance Sheets        
As of September 30, 2017        
(In millions) Valvoline Inc.
(Parent Issuer)		 Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated
Assets          
Current assets          
Cash and cash equivalents $—
 $99
 $102
 $—
 $201
Accounts receivable, net —
 57
 389
 (61) 385
Inventories, net —
 94
 81
 —
 175
Other current assets —
 25
 4
 —
 29
Total current assets —
 275
 576
 (61) 790
Noncurrent assets          
Property, plant and equipment, net —
 353
 38
 —
 391
Goodwill and intangibles, net —
 333
 2
 —
 335
Equity method investments —
 30
 —
 —
 30
Investment in subsidiaries 606
 447
 —
 (1,053) —
Deferred income taxes 145
 122
 14
 —
 281
Other noncurrent assets 314
 80
 6
 (312) 88
Total noncurrent assets 1,065
 1,365
 60
 (1,365) 1,125
Total assets $1,065
 $1,640
 $636
 $(1,426) $1,915
           
Liabilities and Stockholders' Deficit          
Current Liabilities          
Short-term debt $—
 $—
 $75
 $—
 $75
Current portion of long-term debt 15
 —
 —
 —
 15
Trade and other payables 2
 198
 53
 (61) 192
Accrued expenses and other liabilities 103
 60
 33
 —
 196
Total current liabilities 120
 258
 161
 (61) 478
Noncurrent liabilities          
Long-term debt 1,032
 2
 —
 —
 1,034
Employee benefit obligations —
 321
 21
 —
 342
Other noncurrent liabilities 30
 453
 7
 (312) 178
Total noncurrent liabilities 1,062
 776
 28
 (312) 1,554
Commitments and contingencies 
 
 
 
 
Stockholders' (deficit) equity (117) 606
 447
 (1,053) (117)
Total liabilities and stockholders' deficit/equity $1,065
 $1,640
 $636
 $(1,426) $1,915


22



Condensed Consolidating Statements of Comprehensive Income
For the nine months ended June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Sales$—  $1,396  $415  $(50) $1,761  
Cost of sales—  917  301  (50) 1,168  
Gross profit—  479  114  —  593  
Selling, general and administrative expenses8  258  68  —  334  
Net legacy and separation-related expenses3  —  —  —  3  
Equity and other (income) expenses, net—  (43) 14  —  (29) 
Operating (loss) income(11) 264  32  —  285  
Net pension and other postretirement plan income—  (7) —  —  (7) 
Net interest and other financing expenses47  5  3  —  55  
(Loss) income before income taxes(58) 266  29  —  237  
Income tax (benefit) expense(16) 65  7  —  56  
Equity in net income of subsidiaries(223) (22) —  245  —  
Net income$181  $223  $22  $(245) $181  
Total comprehensive income$173  $215  $20  $(235) $173  

30
Condensed Consolidating Statements of Cash Flows      
For the three months ended December 31, 2017        
(In millions)Valvoline Inc.
(Parent Issuer)		 Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated
Cash flow provided by (used in) operating activities$(2) $52
 $(30) $—
 $20
Cash flows from investing activities         
Additions to property, plant and equipment—
 (13) (1) —
 (14)
Acquisitions, net of cash required—
 (60) —
 —
 (60)
Return of advance from subsidiary60
 —
 —
 (60) —
Total cash provided by (used in) investing activities60
 (73) (1) (60) (74)
Cash flows from financing activities         
Proceeds from borrowings, net of issuance costs of $1—
 —
 44
 —
 44
Repayments on borrowings(4) —
 —
 —
 (4)
Repurchase of common stock(37) —
 —
 —
 (37)
Purchase of additional ownership in subsidiary—
 —
 (15) —
 (15)
Cash dividends paid(15) —
 —
 —
 (15)
Other financing activities(2) —
 (2) —
 (4)
Other intercompany activity, net—
 (60) —
 60
 —
Total cash (used in) provided by financing activities(58) (60) 27
 60
 (31)
Effect of currency exchange rate changes on cash and cash equivalents—
 —
 (1) —
 (1)
Decrease in cash and cash equivalents—
 (81) (5) —
 (86)
Cash and cash equivalents - beginning of year—
 99
 102
 —
 201
Cash and cash equivalents - end of period$—
 $18
 $97
 $—
 $115
          


23



Condensed Consolidating Balance Sheets
As of June 30, 2020
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Assets
Current assets
Cash and cash equivalents$—  $577  $174  $—  $751  
Receivables, net249  47  348  (248) 396  
Inventories, net—  106  83  —  189  
Prepaid expenses and other current assets3  39  1  —  43  
Total current assets252  769  606  (248) 1,379  
Noncurrent assets
Property, plant and equipment, net—  470  89  —  559  
Operating lease assets—  220  41  —  261  
Goodwill and intangibles, net—  432  78  —  510  
Equity method investments—  39  —  —  39  
Investment in subsidiaries1,403  557  —  (1,960) —  
Deferred income taxes68  —  14  —  82  
Other noncurrent assets2  118  13  —  133  
Total noncurrent assets1,473  1,836  235  (1,960) 1,584  
Total assets$1,725  $2,605  $841  $(2,208) $2,963  
Liabilities and Stockholders’ Deficit
Current liabilities
Trade and other payables$—  $326  $100  $(248) $178  
Accrued expenses and other liabilities28  183  43  —  254  
Total current liabilities28  509  143  (248) 432  
Noncurrent liabilities
Long-term debt1,855  1  97  —  1,953  
Employee benefit obligations—  335  15  —  350  
Operating lease liabilities—  203  28  —  231  
Other noncurrent liabilities30  154  1  —  185  
Total noncurrent liabilities1,885  693  141  —  2,719  
Commitments and contingencies
Stockholders’ (deficit) equity(188) 1,403  557  (1,960) (188) 
Total liabilities and stockholders’ deficit / equity$1,725  $2,605  $841  $(2,208) $2,963  

31

Condensed Consolidating Statements of Cash Flows      
For the three months ended December 31, 2016        
(In millions)Valvoline Inc.
(Parent Issuer)		 Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated
Cash flows provided by (used in) operating activities$89
 $75
 $(76) $—
 $88
Cash flows from investing activities         
Additions to property, plant and equipment—
 (9) —
 —
 (9)
Other investing activities, net—
 (1) —
 —
 (1)
Total cash used in investing activities—
 (10) —
 —
 (10)
Cash flows from financing activities         
Net transfers to Ashland(2) —
 —
 —
 (2)
Proceeds from borrowings—
 —
 75
 —
 75
Repayments on borrowings(79) —
 —
 —
 (79)
Cash dividends paid(10) —
 —
 —
 (10)
Other intercompany activity, net2
 (2) —
 —
 —
Total cash (used in) provided by financing activities(89) (2) 75
 —
 (16)
Effect of currency exchange rate changes on cash and cash equivalents—
 —
 2
 —
 2
Increase in cash and cash equivalents—
 63
 1
 —
 64
Cash and cash equivalents - beginning of year—
 94
 78
 —
 172
Cash and cash equivalents - end of period$—
 $157
 $79
 $—
 $236
Condensed Consolidating Balance Sheets
As of September 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Assets
Current assets
Cash and cash equivalents$—  $59  $100  $—  $159  
Receivables, net—  181  338  (118) 401  
Inventories, net—  110  84  —  194  
Prepaid expenses and other current assets—  35  8  —  43  
Total current assets—  385  530  (118) 797  
Noncurrent assets
Property, plant and equipment, net—  431  67  —  498  
Goodwill and intangibles, net—  423  81  —  504  
Equity method investments—  34  —  —  34  
Investment in subsidiaries1,157  546  —  (1,703) —  
Deferred income taxes48  61  14  —  123  
Other noncurrent assets3  96  9  —  108  
Total noncurrent assets1,208  1,591  171  (1,703) 1,267  
Total assets$1,208  $1,976  $701  $(1,821) $2,064  
Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt$15  $—  $—  $—  $15  
Trade and other payables80  127  82  (118) 171  
Accrued expenses and other liabilities9  175  53  —  237  
Total current liabilities104  302  135  (118) 423  
Noncurrent liabilities
Long-term debt1,326  1  —  —  1,327  
Employee benefit obligations—  369  18  —  387  
Other noncurrent liabilities36  147  2  —  185  
Total noncurrent liabilities1,362  517  20  —  1,899  
Commitments and contingencies
Stockholders’ (deficit) equity(258) 1,157  546  (1,703) (258) 
Total liabilities and stockholders’ deficit / equity$1,208  $1,976  $701  $(1,821) $2,064  



32

Condensed Consolidating Statements of Cash Flows
For the nine months ended June 30, 2020
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Cash flows provided by operating activities$(369) $632  $8  $—  $271  
Cash flows from investing activities
Additions to property, plant and equipment—  (66) (28) —  (94) 
Notes receivable, net of repayments—  (29) (2) —  (31) 
Acquisitions of business—  (18) —  —  (18) 
Cash flows used in investing activities—  (113) (30) —  (143) 
Cash flows from financing activities
Proceeds from borrowings1,450  —  97  —  1,547  
Payments of debt issuance costs and discounts(16) —  —  —  (16) 
Repayments on borrowings(925) —  —  —  (925) 
Premium paid to extinguish debt(15) —  —  —  (15) 
Repurchases of common stock(60) —  —  —  (60) 
Cash dividends paid(63) —  —  —  (63) 
Other financing activities(2) (1) —  —  (3) 
Cash flows provided by financing activities369  (1) 97  —  465  
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash—  —  (1) —  (1) 
Increase in cash, cash equivalents, and restricted cash—  518  74  —  592  
Cash, cash equivalents, and restricted cash - beginning of year—  59  100  —  159  
Cash, cash equivalents, and restricted cash - end of period$—  $577  $174  $—  $751  

33

Condensed Consolidating Statements of Cash Flows
For the nine months ended June 30, 2019
(In millions)Valvoline Inc.
(Parent Issuer)		Guarantor SubsidiariesNon-Guarantor SubsidiariesEliminationsConsolidated
Cash flows (used in) provided by operating activities$(94) $98  $210  $—  $214  
Cash flows from investing activities
Additions to property, plant and equipment—  (60) (13) —  (73) 
Notes receivable, net—  —  (2) (2) 
Acquisitions of business—  (28) (22) —  (50) 
Other investing activities, net—  1  —  —  1  
Cash flows used in investing activities—  (87) (37) —  (124) 
Cash flows from financing activities
Proceeds from borrowings663  —  82  —  745  
Payments of debt issuance costs and discounts(2) —  —  —  (2) 
Repayments on borrowings(505) —  (222) —  (727) 
Cash dividends paid(60) —  —  —  (60) 
Other financing activities(2) (2) (1) —  (5) 
Cash flows provided by (used in) financing activities94  (2) (141) —  (49) 
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash—  —  —  —  —  
Increase in cash, cash equivalents, and restricted cash—  9  32  —  41  
Cash, cash equivalents, and restricted cash - beginning of year—  20  76  —  96  
Cash, cash equivalents, and restricted cash - end of period$—  $29  $108  $—  $137  


34

NOTE 1615 – SUBSEQUENT EVENTS


Dividend declared


On January 31, 2018,July 23, 2020, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.0745$0.113 per share onof Valvoline common stock. The dividend is payable on MarchSeptember 15, 20182020 to shareholders of record as of the close of business on March 1, 2018.August 31, 2020.


Share repurchasesInterest rate swap agreement


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

In addition, on January 31, 2018, the Board of Directors of Valvoline authorizedOn July 28, 2020, the Company entered into an interest rate swap agreement to repurchase upexchange interest rate payments on $100 million variable rate term loan borrowings to $300 millionfixed interest rates. The interest rate swap agreement had a fair value of its common stock through September 30, 2020, which amountzero at inception, matures in four years and is in addition to the amount remaining under the 2017 Share Repurchase Authorization. The timing and amount of any purchases of shares of common stock will be based on available liquidity, general business and market conditions and other factors, including alternative investment opportunities.


designated as a highly effective cash flow hedge.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS


Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical facts,fact, including estimates, projections, and statements related to the Company'sCompany’s business plans and operating results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Valvoline has identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,” “forecasts,” “may,” “will,” “should”“should,” and “intends” and the negative of these words or other comparable terminology. These forward-looking statements are based on Valvoline’s current expectations, estimates, projections, and assumptions as of the date such statements are made and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. Additional information regarding these risks and uncertaintiesFactors that might cause such differences include, but are described in Valvoline’s filings withnot limited to, those discussed under the Securities and Exchange Commission, including in theheadings “Risk Factors” and Management’sFactors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections ofOperations,” and “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q and Valvoline’s most recently filed periodic reports on Forms 10-K and Form 10-Q, which are available on Valvoline’s website at http://investors.valvoline.com/sec-filings or on the SEC’s website at http://www.sec.gov.10-Q. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.future, unless required by law.




Index to Management’s Discussion and Analysis of Financial Condition and Results of OperationsPage
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2019, as well as the Condensed Consolidated Financial Statementscondensed consolidated financial statements and the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q.

BUSINESS OVERVIEW


Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide producer, marketer and supplier of engine and automotive maintenance products and services. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed powerful name recognition across multiple product and service channels. In addition to the iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, Valvoline provides a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Valvoline’s premium branded product offerings enhance its high qualityhigh-quality reputation and provide customers with solutions that address a wide variety of needs.
In the United States and Canada, Valvoline'sValvoline’s products and services are sold through more than 1,400 franchised and company-owned quick-lube service center stores, to retailers with over 30,00050,000 retail outlets, and to installer customers with over 12,000 locations, and through 1,139 Valvoline branded franchised and company-owned stores.15,000 locations. Valvoline also has a strong international presence with products sold in approximatelymore than 140 countries.
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Valvoline has three reportable segments: Quick Lubes, Core North America, Quick Lubes, and International, with certain corporate and non-operational items included in Unallocated and Otherother to reconcile to consolidated results.

BUSINESS STRATEGY

To deliver on Valvoline'sValvoline’s key business and growth strategies in 2018,fiscal 2020, the Company is focused on:


•Aggressively growing and strengthening Valvoline’s quick lube networkQuick Lubes through organic service center expansion and opportunistic acquisitions, while enhancing retail service capabilities through a consistent and preferred customer experience delivered by hands-on experts;

•Strengthening and maintaining the foundation in Core North America by leveraging investments in technology and marketing to drive speed, efficiency and value across the business and customer interactions, while increasing penetration of Valvoline’s full product portfolio;

•Accelerating International market share growth through continued development of and investment in key emerging and high value markets;

•Broadening capabilities to serve future transport vehicles by developing relationships with original equipment manufacturers and leveraging innovation in the development of future products and light services in direct and adjacent markets; and

•Accelerating the shift to a services-driven business by leveraging customer relationships and experiences to develop new capabilities globally.

RECENT DEVELOPMENTS

The outbreak of COVID-19 was concentrated in China in late January 2020 and spread quickly, resulting in the World Health Organization declaring a global pandemic on March 11, 2020. COVID-19 has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the spread of COVID-19 in regions throughout the world, including restricting non-essential travel, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to modify or cease normal operations to minimize personal interaction and contact. While certain regions began to relax restrictions beginning in March in China, then certain other areas by late April, including parts of North America, resurgences in cases are being monitored, which in some areas, has led to reinstated and enhanced limitations. The duration and extent of restrictions that will remain in place currently remains unclear.

The COVID-19 pandemic continued creating significant economic disruption during the quarter, which adversely impacted Valvoline's results during the three and nine months ended June 30, 2020. From the lows in volumes and sales in April 2020, each successive month showed improved results and trends. Management estimates the unfavorable impact was approximately $30 to $35 million to operating income in the nine months ended June 30, 2020, most of which impacted results in the three months ended June 30, 2020. While the Company cannot predict the duration or the severity of the COVID-19 pandemic or the impact it will continue to have on Valvoline's business, results of operations, or liquidity, it is important to share the impact to-date, how the Company's response is progressing and how Valvoline's results and financial condition may change going forward.

Retail and Manufacturing Operations

As automotive maintenance has generally been deemed essential business during the pandemic, Valvoline has substantially maintained its operations and continued to serve its customers to help engines run and keep necessary vehicles reliably on the road. Valvoline’s wholly-owned lubricant blending and packaging plants and company-owned Quick Lubes retail service center stores have remained open and operational during the pandemic. Over 97% of Valvoline's franchised service center stores have remained open during the pandemic to-
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date, with certain franchises reducing hours or temporarily closing at the discretion of the respective independent operators. The Company remains committed to keeping as many of its stores open as possible for the communities they serve. Short-term incremental pay and benefit programs, including additional paid sick leave and increased pay rates for hourly and salaried store expansion, opportunistic, high-quality acquisitionsemployees were introduced in both coreQuick Lubes to recognize front-line Company team members. In response to the abrupt decline in miles driven due to restrictions and newthe resulting significant volume and sales declines in the second half of March and continuing through late April, with trends since that time showing steady improvement, Valvoline has responded quickly, including flexing store labor at company-owned retail service center stores and adjusting shifts across its lubricant blending and packaging plants and throughout its distribution networks. In China, after a temporary suspension, construction on the lubricants plant resumed in March 2020 with its opening expected in early fiscal 2021.

Remote Work Arrangements

Valvoline took global actions designed to help further prevent the spread of COVID-19, including implementing work-from-home arrangements. Beginning March 18, 2020, employees, other than those in Valvoline's retail service center stores, production and distribution facilities, began working remotely in virtually all locations globally, except China where work-from-home protocols were implemented earlier and substantially ended in March. These remote work arrangements remain in place and have been designed to allow for continued operation of certain business-critical functions, including financial reporting systems and internal control, which have incorporated remote work arrangements using appropriate digital tools.

Valvoline is continually monitoring the global COVID-19 situation and following the White House Guidelines supported by COVID-19 trend data to make decisions regarding the reopening of corporate offices. Valvoline has developed a set of criteria and guidelines that will be used in returning to the office to ensure the safety and well-being of the Company's employees, including social distancing, enhanced cleaning procedures and availability of personal protection equipment. Currently, the work-from-home protocol for the Company's corporate headquarters in Lexington, Kentucky has been extended due to recent increased trends of positive COVID-19 cases locally. All other U.S. and international office decisions to return to the office will be made based on the COVID-19 trends in the countries, states and locations where the Company's offices are located.

Liquidity

Valvoline's revenues are primarily generated from the sale and service delivery of engine and automotive maintenance products to its customers. Accordingly, declines in miles driven as a result of a reduction in the ability or willingness to travel due to the COVID-19 pandemic has and is expected to continue to adversely impact Valvoline's volumes and results of operations. Miles driven were significantly lower due to the COVID-19 pandemic, which is estimated to have impacted most of Valvoline's key markets withinby late March 2020 and continued during most of April 2020, with trends steadily improving throughout the remainder of the third fiscal quarter and to-date. While management believes Valvoline Instant Oil Change (“VIOC”) systemhas sufficient liquidity to meet its operating cash needs, required pension and strong salesother postretirement plan contributions, debt servicing obligations, and tax-related and other contractual commitments for the next twelve months, certain precautionary steps were taken as outlined herein in response to the COVID-19 pandemic to strengthen the Company's cash position.

As a precautionary measure to enhance financial flexibility in response to the uncertainty resulting from the COVID-19 pandemic, the Company borrowed under its Revolver and Trade Receivables Facility to increase its cash balance by $540 million in late March. The Company subsequently paid its Revolver borrowings in May 2020 with the net proceeds from the offering of the Additional 2025 Notes and cash and cash equivalents on hand. As of June 30, 2020, Valvoline had over $750 million in cash and cash equivalents available for working capital, general corporate purposes, or other purposes permitted under its borrowing facilities. Further, Valvoline suspended its share repurchase program and has taken other steps to preserve cash, including limiting or deferring certain non-essential operating expenses and delaying certain capital expenditures, while continuing to invest in high-return, long-term strategic growth initiatives. Since drawing on its credit facilities in March, the Company has not been required to use these borrowed funds as the Company has generated positive cash flows from operations during the three and nine months ended June 30, 2020.
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As of June 30, 2020, the Company has access to more than $1.3 billion in total liquidity, with no meaningful maturities of its outstanding borrowings until 2024.

COVID-19 Relief

On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among other provisions, the CARES Act includes forms of payroll and income tax relief for corporations. The Company continues to examine the impacts the CARES Act may have on its business and condensed consolidated financial statements and continues to expect modest cash flow benefits in fiscal 2020 and 2021 related to the deferred payment of certain employer payroll-related taxes and accelerated tax deductions. Additionally, other non-U.S. governments are providing various forms of COVID-19 relief, which Valvoline is monitoring and evaluating to determine whether the Company may qualify for additional benefits. The CARES Act and other global COVID-19 relief efforts did not have a material impact on the Company's condensed consolidated financial statements as of and for the three and nine months ended June 30, 2020, though modest cash flow and profitability benefits were realized related to partnerthe deferred payment of certain employer payroll-related taxes, non-US subsidies received, and expanded tax deductions related to bonus depreciation.

Enhanced Safety Standards

Valvoline's priority remains the health and safety of its employees, customers and business partners. Quick Lubes' drive-through, stay-in-your-car service experience previously produced minimal contact with new Express Care operators,customers, and the Company took additional actions to modify in-store procedures to further reduce contact between store teams and customers. Procedures in Valvoline's plants, service center stores and offices have also been modified to encourage social distancing and proper handwashing, increase cleaning cycles, adjust labor and shifts, and provide personal protective equipment. Valvoline has taken actions designed to help further prevent the spread of COVID-19, including restricting travel and implementing broad work-from-home protocols, in addition to continued same-store sales growthfollowing government regulations in each of its locations.

Franchisee Support

Valvoline is providing its franchisees with flexibility to respond to the evolving circumstances of the COVID-19 pandemic. Certain franchisees elected to reduce store operating hours or temporarily close some stores in order to better align to local changes in demand. Additionally, other operational changes were made to in-store operating procedures, enhancing the safe operating environment already afforded through Valvoline's stay-in-your-car service experience. Valvoline's franchises were provided access to detailed information on stimulus-related provisions and profitability within Valvoline’s existing VIOC system stores by attracting newfederal employee assistance programs that may be utilized to provide financial relief. Valvoline also provided various types of financial assistance to support the long-term health of its Quick Lubes franchisee network, including low-interest term loans, waiving royalties for one-and-a-half months, and the temporary extension of payment terms to provide increased financial flexibility and enable franchisees to better support their employees and customers as a result of the impact of the COVID-19 pandemic. These actions have not and increasing customer satisfaction, customer loyaltyare not expected to have an impact on Valvoline's ability to meet its cash needs in the ordinary course, or to comply with the covenants under its debt obligations.

COVID-19 Support

Valvoline made contributions to relief and average transaction size;

accelerating international growth across key markets where demand for premium lubricants is growing, such asresponse funds in the U.S. and China and donated personal protective equipment in China, India and select countriesthe U.S. Valvoline's support also extended to its customers, as orders were supplied and delivered with the same on-time metrics through no-contact deliveries, and in Latin America,some cases, extended payment terms were permitted. Valvoline provided benefits to its employees to cover the cost of COVID-19 testing, promoted its telehealth benefits, amended its savings plan to enhance hardship loan eligibility and payment terms, and provided additional paid sick leave for quarantined employees.


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Forward-Looking Information

Given the unprecedented and rapidly evolving uncertainty related to COVID-19, Valvoline withdrew all previously-issued fiscal 2020 guidance on March 24, 2020. While the Company's results were unfavorably impacted in the three and nine months ended June 30, 2020, each reportable segment demonstrated solid sequential improvement throughout the course of the third fiscal quarter as miles driven trends steadily improved from the unparalleled lows in April 2020 caused by buildingearly-stage COVID-19 restrictions. Assuming the phased reduction of restrictions continues throughout the fourth fiscal quarter, this may lead to continued and gradual modest improvements in miles driven over the coming months. Based on third-party data, miles driven is estimated to have continued recovery in July, though still lagging prior year trends. Likewise, Valvoline's preliminary July results include top-line trends with strong distribution channelssequential improvement though still below the prior year.

The COVID-19 pandemic is currently expected to continue to have an adverse impact on Valvoline's business and results of operations for the three months and year ending September 30, 2020. While uncertainty remains and the potential magnitude and duration of the impacts of COVID-19 cannot be predicted, given current data and trends, management expects fiscal 2020 operating income prior to the anticipated impact to reduce the indemnity obligation described in under-served

geographies, replacing less successfulNote 8, to approximate fiscal 2019 operating income. The full impact of the COVID-19 pandemic on Valvoline will depend on future developments, including among others, the ultimate duration and severity of the outbreak, its impact on suppliers, consumers, franchisees, retailers, installers, distributors and improving brand awareness among installerother customers, in those regions;how quickly and

leveraging innovation, both in terms of product development, packaging, marketing whether normal economic conditions, including miles driven trends and the implementationdemand for Valvoline's products and services resume, and whether the pandemic leads to additional state, regional or national lockdown measures.

Although no assurance can be given, management expects this, together with its competitive advantages and brand strength, strong balance sheet, liquidity position, and the Company’s operating plan, will provide sufficient liquidity for the Company to be well-positioned to manage through challenging operating conditions and eventual recovery to fund operations for at least the next twelve months. If there is a prolonged reduction in miles driven or deferrals of Valvoline’s new digital infrastructure,preventative maintenance, management may be required to strengthen market sharetake additional actions to protect the ongoing operations of the business, which could include further reductions in operating expenses and profitability.spend, among other measures.


FIRSTFor additional information on the impact and potential impact of COVID-19 on Valvoline, refer to Item 1A of Part II of this Quarterly Report on Form 10-Q.

THIRD FISCAL QUARTER 20182020 OVERVIEW


The following were the significant events for the firstthird fiscal quarter of 2018,2020, each of which is discussed more fully in this Quarterly Report on Form 10-Q10-Q:

•Valvoline reported net income of $59 million and diluted earnings per share of $0.32 in the three months ended June 30, 2020, decreases of 9% and 6%, respectively, over the prior year quarter.

•Quick Lubes operating income decreased $12 million from the prior year primarily due to lower volumes as referenced below:

First quarter results werea result of the restrictions in place in response to COVID-19 and showed signs of recovery in June with increased sales of 16% over the prior year driven in part by strong salesin-store execution and new customer acquisition.

•Core North America operating income growth of 34% over the prior year benefited from margin improvement led by same-store sales growthfavorable mix and lower product costs, in VIOC, growthaddition to reduced discretionary expenses, despite lower volume.

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•International operating income declined $8 million from the prior year primarily due to lower volumes from extended COVID-19 impacts in premium product mix across all reportable segments and continued volume gainscertain regions, which more than offset the mixed stages of recovery throughout the quarter in international markets. other regions.

•The Company also continues to be focused on margin expansion and cost management to drive profitability improvements. Valvoline's gross profitcompleted the issuance of 4.375% Additional 2025 Notes with an aggregate principal amount of $400 million as a percentage of sales (i.e., gross margin) was 35.8% and declined due to increased raw material, new packaging and supply chain costs in the current quarter.
Tax reform legislation was enacted in the first fiscal quarter of 2018 and although Valvoline expects to ultimately benefit from the legislation, expenses were recorded during the first quarter, including pre-tax expense of $7 million and income tax expense of $68 million primarily relatedan add-on to the reductionExisting 2025 Notes and used the net proceeds and cash and cash equivalents on hand to repay $450 million in the federal statutory tax rate. Referborrowings under its senior secured revolving credit facility.

•Valvoline returned value to the “Tax-Related Commitments” section in this Management's Discussion and Analysis of Financial Condition and Results of Operations below as well as Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for additional information.
Valvoline acquired 56 company-owned stores within the Quick Lubes reportable segment in connection with the acquisition of business assets from Henley Bluewater LLC. Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for additional information.
Valvoline extended the maturity date by three years and increased the maximum funding capacity of the trade receivables securitization facility to $175 million and borrowed an additional $45 millionits shareholders through a $0.113 per share cash dividend paid during the quarter. Refer to Note 7 and the Financial Position, Liquidity and Capital Resources section below for more details.


Use of Non-GAAP Measures


To aid in the understanding of Valvoline'sValvoline’s ongoing business performance, certain items within this document are presented on an adjusted, non-GAAP basis. These non-GAAP measures presented on both a consolidated and reportable segment basis are not defined within U.S. GAAP and do not purport to be alternatives to net income/loss or cash flows from operating activities as measures of operating performance or cash flows. The following are the non-GAAP measures management has included and how management defines them:


Earnings before interest, taxes, depreciation and amortization (“EBITDA”),•EBITDA, which management defines as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;

•Adjusted EBITDA, which management defines as EBITDA adjusted for key items, as further described below, and net pension and other postretirement plan non-service incomeexpense/income; and remeasurement adjustments; and

•Free cash flow, which management defines as operating cash flows less capital expenditures and certain other adjustments as applicable.


These measures are not prepared in accordance with U.S. GAAP and contain management’s best estimates of cost allocations and shared resource costs. Managementmanagement believes the use of non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of Valvoline’s business by presenting comparable financial results between periods. The non-GAAP information provided is used by Valvoline’s management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA, Adjusted EBITDA and free cash flow. EBITDA, Adjusted EBITDA, and free cash flow provide a supplemental presentation of Valvoline’s operating performance. For a reconciliation of non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.



Due to depreciable assets associated with the nature of the Company'sCompany’s operations and interest costs associated with Valvoline'srelated to Valvoline’s capital structure, management believes EBITDA is an important supplemental measure to evaluate the Company's consolidated and reportable segmentCompany’s operating results between periods on a comparable basis.


Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating performance. Adjusted EBITDA excludes the impact of the following:

•Key items - Key items consist of income or expenses associated with certain unusual, infrequent or non-operational income or expenses not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods. Key items may consist of adjustments related to: the impairment of an equity investment; legacy businesses, including the separation from Ashland and associated impacts of related indemnities; significant acquisitions or dispositions,divestitures; restructuring-related matters,matters; and other matters that are non-operational or unusual in nature. Key items are considered by management to be outside the comparable operational performance of the business and are also often related to legacy matters or market-driven events that are not directly related to the underlying business and do not have an immediate, corresponding impact on the Company's
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Company’s ongoing performance. Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows.

•Net pension and other postretirement plan non-service expense/income and remeasurement adjustments - Net pension and other postretirement plan non-service expense/income and remeasurement adjustments includeincludes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost.cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA will continue to include pension and other postretirement service costs related to current employee service as well as the costs of other benefits provided to employees for current service.

Management uses free cash flow as an additional non-GAAP metric of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide a betteran indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Unlike cash flow from operating activities, free cash flow includes the impact of capital expenditures, providing a more complete picturesupplemental view of cash generation. Free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments.The amount of mandatory versus discretionary expenditures can vary significantly between periods.

Valvoline’s results of operations are presented based on Valvoline’s management structure and internal accounting practices. The structure and practices are specific to Valvoline; therefore, Valvoline’s financial results, EBITDA, Adjusted EBITDA and free cash flow are not necessarily comparable with similar information for other comparable companies. EBITDA, Adjusted EBITDA and free cash flow each have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, net income and cash flows from operating activities as determined in accordance with U.S. GAAP. Because of these limitations, you should rely primarily on net income and cash flows from operating activities should primarily be relied upon as determined in accordance with U.S. GAAP, and use EBITDA, Adjusted EBITDA, and free cash flow should only be used as supplements. In evaluating EBITDA, Adjusted EBITDA, and free cash flow, youone should be aware that in the future Valvoline may incur expenses/income similar to those for which adjustments are made in calculating EBITDA, Adjusted EBITDA, and free cash flow. Valvoline’s presentation of EBITDA, Adjusted EBITDA, and free cash flow should not be construed as a basis to infer that Valvoline’s future results will be unaffected by unusual or nonrecurring items.


Key Business Measures

Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-owned and franchised store counts and same-store sales; lubricant volumes sold by unconsolidated joint ventures; and total lubricant volumes sold and percentage of premium lubricants sold. Management believes these measures are useful to evaluating and understanding Valvoline’s operating performance and should be considered as supplements to, not substitutes for, Valvoline's sales and operating income, as determined in accordance with U.S. GAAP.

Sales in the Quick Lubes reportable segment are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business.
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Temporary store closings remain in the respective store counts with only permanent store closures reflected in the end of period store counts and activity. Same-store-sales ("SSS") is defined as sales by U.S. Quick Lubes service center stores (company-owned, franchised and the combination of these for system-wide SSS), with new stores excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize. Differences in SSS are calculated to determine the percentage change between comparative periods. Quick Lubes revenue is limited to sales at company-owned stores, sales of lubricants and other products to independent franchisees and Express Care operators, and royalties and other fees from franchised stores. Although Valvoline does not recognize store-level sales from franchised stores as revenue in its Condensed Consolidated Statements of Comprehensive Income, management believes system-wide and franchised SSS comparisons and store counts are useful to assess the operating performance of the Quick Lube reportable segment and the operating performance of an average Quick Lubes store.

Lubricant volumes sold by unconsolidated joint ventures are used to measure the operating performance of the International operating segment. Valvoline does not record lubricant sales from unconsolidated joint ventures as International reportable segment revenue. International revenue is limited to sales by Valvoline's consolidated affiliates. Although Valvoline does not record sales by unconsolidated joint ventures as revenue in its Condensed Consolidated Statements of Comprehensive Income, management believes lubricant volumes including and sold by unconsolidated joint ventures is useful to assess the operating performance of its investments in joint ventures.

Management also evaluates lubricant volumes sold in gallons by each of its reportable segments and premium lubricant percentage, defined as premium lubricant gallons sold as a percentage of U.S. branded lubricant volumes for the Quick Lubes and Core North America segments and as a percentage of total segment lubricant volume for the International segment. Premium lubricant products generally provide a higher contribution to segment profitability and the percentage of premium volumes is useful to evaluating and understanding Valvoline’s operating performance.

RESULTS OF OPERATIONS


Consolidated Reviewreview


The following table summarizes the results of the Company's operations for the three months ended December 31, 2017 and 2016:Company’s operations:

Three months ended June 30Nine months ended June 30
2020201920202019
(In millions)% of Sales% of Sales% of Sales% of Sales
Sales$516  100.0%$613  100.0%$1,701  100.0%$1,761  100.0%
Gross profit$187  36.2%$207  33.8%$605  35.6%$593  33.7%
Net operating expenses$99  19.2%$105  17.1%$296  17.4%$308  17.5%
Operating income$88  17.1%$102  16.6%$309  18.2%$285  16.2%
Net income$59  11.4%$65  10.6%$195  11.5%$181  10.3%

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  Three months ended
  December 31
  2017 2016
(In millions)   % of Sales   % of Sales
Sales $545
 100.0% $489
 100.0%
Gross profit $195
 35.8% $185
 37.8%
Net operating expenses $107
 19.6% $91
 18.6%
Operating income $88
 16.1% $94
 19.2%
Net (loss) income $(10) (1.8)% $72
 14.7%
Sales

Sales
Sales for the three months ended December 31, 2017 increased $56June 30, 2020 decreased $97 million, or 11%16%, compared to the three months ended December 31, 2016.June 30, 2019. Sales for the nine months ended June 30, 2020 decreased $60 million, or 3%, compared to the nine months ended June 30, 2019. The following table provides a reconciliation of the change in sales:changes:

Year over year changeYear over year change
(In millions) Three months ended June 30, 2020Nine months ended June 30, 2020
Mix and price$6  $52  
Volume(101) (112) 
Currency exchange(5) (12) 
Acquisitions3  12  
Change in sales$(97) $(60) 
 

(In millions)  Year over year change - Quarter
Pricing $20
Volume 10
Product mix 6
Currency exchange 7
Acquisitions 13
Change in sales $56
The primaryKey drivers of this increasethe decrease in sales for the three and nine months ended June 30, 2020 compared to the prior year period were higher product pricinglower volumes and higher volume levels, which increased sales by $20 million, or 4%,unfavorable currency exchange. For the three and $10 million, or 2%, respectively. During the current quarter,nine months ended June 30, 2020, lubricant gallons sold increased 2%decreased 20% to 43.8 million. Favorable changes36.7 million and 8% to 121.8 million, respectively. The decline in product mix with increases in the percentage oflubricant gallons negatively impacted sales of premium lubricantsas volumes across all reportable segments and favorable foreign currency exchange increased saleswere down due to the COVID-19 slowdown. These declines were partially offset by $6 millionmix improvements in Core North America and $7 million, respectively. Acquisitions within the Quick Lubes reportable segment increased sales by $13 million, or 3%,as well as the benefits of the Eastern European acquisition in the current quarter.International completed in late fiscal 2019.


The changes to reportable segment sales and the drivers thereof are discussed in further detail in the “Reportable Segment Review” section below.



Gross profit


Gross profit margin was 35.8% for the three months ended December 31, 2017June 30, 2020 decreased $20 million compared to 37.8% in the prior year quarter. Grossthree months ended June 30, 2019, while gross profit increased $10$12 million andfor the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019. The table below provides a reconciliation of the change:changes:

Year over year changeYear over year change
(In millions) Three months ended June 30, 2020Nine months ended June 30, 2020
Volume and mix$(39) $(22) 
Price and cost20  36  
Currency exchange(1) (3) 
Acquisitions—  1  
Change in gross profit$(20) $12  
(In millions)  Year over year change - Quarter
Volume and product mix $7
Acquisitions 3
Currency exchange 2
Price and cost (2)
Change in gross profit $10


The increasedecrease in gross profit for the three months ended June 30, 2020 compared to the prior year period was driven by declines in volume, partially offset by the benefit of mix improvements in Quick Lubes and Core North America, in addition to lower costs, which included a favorable raw material cost environment, benefits from the cost savings program that began in fiscal 2019, and the favorable impact from the resumed operations at the
44

Company's second largest domestic blending facility that was temporarily shut down in the prior year due to a nearby third-party fire.

The increases in gross profit margin of 2.4% and 1.9% for the three and nine months ended June 30, 2020, respectively, compared to the prior year periods were primarily driven by higher volume levelsa more favorable cost structure primarily as a result of the cost savings program and favorable changes in product mix of $7 million, or 4%. Additional profits generated by acquisitions of Quick Lubes locations and favorable foreign currency exchange increased gross profit by $3 million and $2 million, respectively. Lower product margins of $2 million were attributed to higher product costs primarily driven by new product packaging as well as increasedbenefits from the raw material costs associated with the hurricanes in the late summer of 2017.and cost environment.


The changes to reportable segment gross profit and the drivers thereof are discussed in further detail in the “Reportable Segment Review” section below.


Net operating expenses


Net operating expenses were $107 million or 19.6% of sales for the three months ended December 31, 2017 compared to $91 million or 18.6% for the three months ended December 31, 2016. The table below provides further details of the components of net operating expenses during each period:expenses:

 Three months ended
 December 31Three months ended June 30Nine months ended June 30
 2017 20162020201920202019
(In millions)   % of Sales   % of Sales(In millions)% of Sales% of Sales% of Sales% of Sales
Selling, general and administrative expenses $114
 20.9 % $95
 19.4 %Selling, general and administrative expenses$106  20.5 %$116  18.9 %$319  18.8 %$334  19.0 %
Separation costs 2
 0.4 % 6
 1.2 %
Equity and other income (9) (1.7)% (10) (2.0)%
Net legacy and separation-related expensesNet legacy and separation-related expenses1  0.2 %—  — %—  — %3  0.2 %
Equity and other income, netEquity and other income, net(8) (1.5)%(11) (1.8)%(23) (1.4)%(29) (1.7)%
Net operating expenses $107
 19.6 % $91
 18.6 %Net operating expenses$99  19.2 %$105  17.1 %$296  17.4 %$308  17.5 %


Selling, general and administrative expenses were $114decreased $10 million or 20.9% of sales,and $15 million in the three and nine months ended December 31, 2017 asJune 30, 2020, respectively, compared to $95 million, or 19.4% of sales, in the three months ended December 31, 2016. Adjustments in the estimates of the amounts payable to Ashland related to indemnities under the Tax Matters Agreement as a result of tax reform legislation increased selling, general and administrative expense by $7 million in the current quarter. Acquisitions, depreciation and foreign currency exchange also contributed $4 million to the year-over-year increase in selling, general and administrative expenses. The remaining increase was primarily the result of planned increased spend related to the Company's investments in its teams and shared infrastructure expenses necessary to operate independently subsequent to the separation from Ashland, which phased in during fiscal 2017, including investments in sales and marketing to drive growth and profitability.


The Company incurred $2 million of costs during the current period related to the separation from Ashland. The decline from the prior year quarter isperiods. These declines were largely driven by controlled spending, including decreases in advertising and promotion costs as well as reduced travel expenses resulting from the impacts of the COVID-19 pandemic. In addition, expenses were lower due to the substantial completion of the restructuring activities associated with the cost savings program commenced in the prior year. These decreases were partially offset by higher rent expense due to the reclassification of a build-to-suit arrangement in adoption of the lease accounting standard.

Net legacy and separation-related activities as Ashland distributed allexpenses increased $1 million and decreased $3 million for the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, which primarily related to adjustments of its remaining interest in Valvoline in May 2017, marking the completion ofindemnities estimated to be due to Valvoline's separation from Ashland.former parent.


Equity and other income, net decreased $1$3 million duringand $6 million for the current year periodthree and nine months ended June 30, 2020, respectively, compared to the prior year periodperiods. The declines were primarily driven by lower profit contributions from unconsolidated joint ventures as a decreaseresult of $2 millionthe COVID-19 pandemic, in addition to other income generated by researchreceived during the prior year for fees associated with the termination of certain contracts and development testing, partially offset by an increase of $1 millionincentives for operating in equity income.a free trade zone outside the U.S.


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


Net pension and other postretirement plan non-service income for the three and remeasurement adjustments decreased by $16nine months ended June 30, 2020 increased $7 million and $20 million, respectively, from the prior year periodperiods. This increase is generally due to lower interest cost and improved asset performance as a decrease of $8 million in pension and other postretirement plan non-service income primarily attributed to the pension de-risking actions taken by the Company in late fiscal 2017 to shift the U.S. qualified plan's target asset allocation toward more fixed income securities and better match the asset duration to thatresult of the pension plan obligations, which resulted in a decrease in related recurring income. In addition, during the prior year quarter, a gain on other postretirement planmost recent remeasurement of $8 million was recorded due to the discontinuation of certain postretirement health and life insurance benefits, compared to none during the current year period as there were no changes requiring remeasurement.plans.

Net interest and other financing expenseexpenses


Net interest and other financing expenseexpenses were flat and increased by $4$18 million during the three and nine months ended December 31, 2017June 30, 2020, respectively, compared to the threeprior year periods. The increase during the nine months
45

ended December 31, 2016. ThereJune 30, 2020 was an increase in interest associated with higher outstanding debt at December 31, 2017 compared to December 31, 2016 primarily relateddue to the borrowing to fundloss on extinguishment in connection with the U.S. qualified pension planredemption of the 2024 Notes in the aggregate principal amount of $400 million during the fourth fiscal quarter of 2017 and $45 million in new borrowings on the trade receivables securitization facility entered into during the three months ended December 31, 2017.March 2020.


Income tax expense


IncomeThe following table summarizes income tax expense and the effective tax rate:

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

The increase in effective tax rates for the three and nine months ended December 31, 2017 was $94 million or an effective tax rate of 111.9%June 30, 2020 compared to an expensethe prior year periods was attributed to the mix shift of $38 million or an effectiveprojected annual pre-tax earnings to jurisdictions with higher statutory tax rate of 34.5% for the three months ended December 31, 2016.rates. The increase in income tax expense and the effective tax rate for the nine months ended June 30, 2020 was also related to tax reform, which resulted in unfavorable discrete activity in the current year was primarily attributedperiod due to legislation enacted in India, while the enactmentclarification of U.S.certain provisions of Kentucky tax reform legislation duringregulations drove favorable discrete activity in the period, which resulted in a net increase inprior year period. Higher pre-tax earnings also led to increased income tax expense of approximately $68 million that more than offset benefits related to the reduction in the estimated annual effective tax rate for fiscal 2018. Specifically, the Company recorded provisional one-time adjustments to income tax expense of $67 million related to the remeasurement of net deferred tax assets due to the income tax rate reduction and $4 million for the deemed repatriation tax on unremitted non-U.S. earnings and profits, net of benefits related to the rate reduction, including $3 million as a result of adjustments to the estimates of the net amounts payable related to indemnities under the Tax Matters Agreement, as well as a reduction in the estimated annual blended effective tax rate for fiscal 2018 . Refer to the “Tax-Related Commitments” section in this Management's Discussion and Analysis of Financial Condition and Results of Operations below for additional details regarding tax reform legislation and its estimated impacts to Valvoline.current year-to-date period.



EBITDA and Adjusted EBITDA


The following table reconciles net income to EBITDA and Adjusted EBITDA to net income for the interim periods presented:EBITDA:


     
  Three months ended December 31
(In millions) 2017 2016
Net (loss) income $(10) $72
Income tax expense 94
 38
Net interest and other financing expense 14
 10
Depreciation and amortization 11
 9
EBITDA 109
 129
Separation costs 2
 6
Adjustment associated with Ashland tax indemnity 7
 —
Non-service pension and other postretirement plan net periodic income (a)
 (10) (18)
Gain on pension and other postretirement plan remeasurements —
 (8)
Adjusted EBITDA $108
 $109
     
Three months ended
June 30		Nine months ended
June 30
(In millions)2020201920202019
Net income$59  $65  $195  $181  
Income tax expense19  20  68  56  
Net interest and other financing expenses19  19  73  55  
Depreciation and amortization17  15  48  43  
EBITDA114  119  384  335  
Net pension and other postretirement plan income (a)
(9) (2) (27) (7) 
Net legacy and separation-related expenses1  —  —  3  
Acquisition and divestiture-related costs—  —  2  —  
Restructuring and related expenses—  4  1  12  
Business interruption expenses—  5  —  6  
Adjusted EBITDA$106  $126  $360  $349  
   
(a) RecurringNet pension and other postretirement plan income includes remeasurement gains and losses, when applicable, and recurring non-service pension and other postretirement net periodic income, which consists of interest cost, expected return on plan assets and amortization of prior service credit. Refer to Note 9 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for further details.


Adjusted EBITDA decreased $20 million for the three months ended June 30, 2020 and increased $11 million for the nine months ended June 30, 2020. The decrease for the three months ended June 30, 2020 was driven by the deeper COVID-19 impacts in Adjusted EBITDA of $1 million was primarilythe Quick Lubes and International segments which more than offset the benefits in Core North America from its variable cost structure and favorable mix due to the performancestrong retail channel performance. The increase for the nine months ended June 30, 2020 was primarily the result of lower expenses driven by the benefits of the Company's operating segments, notably higher planned investments in selling, generalcost savings program that began last year and administrative expenses and higherlower raw material costs related to new product packagingcosts. The expense
46

reductions coupled with mix benefits in Quick Lubes and Core North America more than offset the hurricanes partially offset by higherunfavorable volume levels and favorable changes in product mix.impacts as a result of the COVID-19 pandemic.


The changes to reportable segment EBITDA and Adjusted EBITDA and the drivers thereof are discussed in further detail in “Reportable Segment Review” below.
Reportable Segment Review

segment review
Valvoline’s business is managed within the following three reportable segments:
Core North America - sells Valvoline and other branded products and solutions in the United States and Canada to heavy-duty customers and retailers for consumers to perform their own automotive and engine maintenance, as well as to installer customers who use Valvoline products to service vehicles.

•Quick Lubes - services the passenger car and light truck quick lube market through: Company-ownedthrough company-owned and independent franchised VIOC retail quick lube service stores;center stores and itsindependent Express Care stores for independent operatorsthat service vehicles with Valvoline products, as well as through investment in a joint venture in China to purchase Valvoline motor oil and other products and display Valvoline branded signage.
pilot expansion of retail quick lube service center stores outside of North America.
International •Core North America - sells Valvolineengine and other brandedautomotive maintenance products in approximatelythe United States and Canada to retailers, installers, and heavy-duty customers to service vehicles and equipment.
•International - sells engine and automotive maintenance products in more than 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment.

Valvoline’s reportable segments are measured for profitability based on operating income; therefore, Valvoline does not generally allocate items to each reportable segment below operating income, such as net pension and other postretirement plan income, net interest and other financing expenses, or income tax expense. Operating income by segment includes the allocation of shared corporate costs, which are allocated consistently based on each segment’s proportional contribution to various financial measures.Valvoline does not allocate certain significant corporate and non-operational matters, including, but not limited to, company-wide restructuring activities and costs or adjustments that relate to former businesses that Valvoline no longer operates. These matters are attributed to Unallocated and other. Results of Valvoline’s reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies. Valvoline's

47

Quick Lubes

Management believes the number of company-owned and franchised service center stores as provided in the following tables is useful to assess the operating performance of the Quick Lubes reportable segmentssegment.

Company-owned
Third Quarter 2020Second Quarter 2020First Quarter 2020Fourth Quarter 2019Third Quarter 2019
Beginning of period536  524  519  501  483  
Opened5  7  2  12  4  
Acquired2  1  7  6  13  
Net conversions between company-owned and franchised5  4  (4) —  1  
Closed—  —  —  —  —  
End of period548  536  524  519  501  
 
Franchised (a)
Third Quarter 2020Second Quarter 2020First Quarter 2020Fourth Quarter 2019Third Quarter 2019
Beginning of period883  883  866  851  844  
Opened8  8  13  15  11  
Acquired—  —  —  —  —  
Net conversions between company-owned and franchised(5) (4) 4  —  (1) 
Closed(2) (4) —  —  (3) 
End of period (b)
884  883  883  866  851  
Total stores1,432  1,419  1,407  1,385  1,352  

(a)Valvoline’s franchisees are measured for profitability based on operating income; therefore,distinct legal entities and Valvoline does not generally allocate itemsconsolidate the results of operations of its franchisees.
(b)Included in the store counts at the end of the second and third quarters of fiscal 2020 were certain service center stores temporarily closed at the discretion of the respective independent operators due to each reportable segment below operating income, suchthe impacts of COVID-19. As of June 30, 2020, five franchised service center stores were temporarily closed, and as non-service pension and other postretirement income and remeasurement adjustments, interest expense or income tax expense. Valvoline allocates all items above operating income to its reportable segments except for certain significant corporate and non-operational matters, including, but not limited to, company-wide restructuring activities and costs or adjustments that relate to former businessesof March 31, 2020, 26 franchised service center stores were temporarily closed.

that Valvoline no longer operates. The service cost component of pension and other postretirement benefit plans is allocated to each reportable segment on a ratable basis, while the remaining non-service and remeasurement components of pension and other postretirement benefits costs are recorded below operating income and attributed to Unallocated and other.
The EBITDAyear over year change of 80 net new company-owned and Adjusted EBITDA amounts presented within this section are provided as a meansfranchised stores was the result of 64 net openings and 16 acquired stores. Organic service center store growth was primarily related to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for each reportable segment. Each of these non-GAAP measures is defined as follows: EBITDA (operating income plus depreciationnew company-owned service center store openings and amortization) and Adjusted EBITDA (EBITDA adjusted forfranchisee expansion in key items, which may include adjustments for significant acquisitions or divestitures, as applicable). As Valvoline does not allocate items to each reportable segment below operating income, reportable segment EBITDA and Adjusted EBITDA are reconciled directly to operating income since it is the most directly comparable Condensed Consolidated Statements of Comprehensive Income caption.markets.



48

The following table presents sales, operating income and statistical operating information bysummarizes the results of the Quick Lubes reportable segment for the three months ended December 31, 2017 and 2016:segment:

  Three months ended December 31
(In millions) 2017 2016
Sales    
Core North America $251
 $237
Quick Lubes 154
 127
International 140
 125
  $545
 $489
Operating income (loss)    
Core North America $43
 $51
Quick Lubes 35
 29
International 19
 20
Total operating segments 97
 100
Unallocated and other (9) (6)
  $88
 $94
Depreciation and amortization    
Core North America $4
 $3
Quick Lubes 6
 5
International 1
 1
  $11
 $9
Operating information    
Core North America    
Lubricant sales gallons 23.8
 24.1
Premium lubricants (percent of U.S. branded volumes) 47.8% 43.8%
Gross profit as a percent of sales (a)
 37.7% 40.9%
Quick Lubes    
Lubricant sales gallons 5.7
 5.3
Premium lubricants (percent of U.S. branded volumes) 61.5% 58.6%
Gross profit as a percent of sales (a)
 40.4% 40.1%
International    
Lubricant sales gallons (b)
 14.3
 13.7
Lubricant sales gallons, including unconsolidated joint ventures 25.1
 23.0
Premium lubricants (percent of lubricant volumes) 27.7% 27.4%
Gross profit as a percent of sales (a)
 28.2% 30.7%
     
Three months ended June 30Nine months ended June 30
(In millions)2020201920202019
Sales$199  $211  $629  $600  
Operating income$36  $48  $114  $130  
Depreciation and amortization$11  $9  $31  $26  
Gross profit as a percent of sales (a)
36.7 %39.1 %36.9 %39.0 %
Operating income as a percent of sales18.1 %22.7 %18.1 %21.7 %
Operating information
Lubricant sales gallons6.2  7.2  20.6  20.7  
Premium lubricants (percent of U.S. branded volumes)67.5 %65.5 %67.1 %64.6 %
Same-store sales growth (b) - Company-owned
(5.0)%9.2 %0.5 %9.7 %
Same-store sales growth (b) - Franchised (c)
(10.0)%10.0 %(0.1)%10.3 %
Same-store sales growth (b) - Combined (c)
(8.0)%9.7 %0.2 %10.1 %
(a)Gross profit as a percent of sales is defined as sales, less cost of sales, divided by sales.
(b) Excludes volumes from unconsolidated joint ventures.


Core North America

Core North America sales increased $14 million, or 6%, to $251 million during the current quarter compared to the prior year quarter. This increase was primarily driven by higher product pricing and favorable changes in product mix of $13 million, or 5%, and $4 million, or 2%, respectively. These increases were partially offset by volume declines of approximately $4 million.

Gross profit decreased $2 million compared to the prior year quarter. Higher raw material costs decreased gross profit by $3 million and overall decreases in volume related to the timing of promotions drove declines in non-branded product sales which decreased gross profit by $2 million. These decreases were partially offset by gains in premium product mix which increased gross profit by $3 million. Gross profit margin decreased 3.2 percentage points to 37.7% for the quarter ended December 31, 2017 driven largely by incremental costs associated with the launch of new packaging and higher raw material costs attributed to the hurricanes in late 2017.

Selling, general and administrative expenses, which include corporate expense allocations of costs, increased $3 million, or 6%, during the current quarter compared to the prior year quarter due to planned increases related to the Company's investments in its teams and shared infrastructure expenses.

Operating income totaled $43 million in the current quarter compared to $51 million in the prior year quarter. EBITDA decreased $7 million to $47 million in the current quarter. EBITDA margin decreased 4.1 percentage points to 18.7%.
Core North America - EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that the Company has internally determined to be relevant measures of comparison for the results of Core North America. There were no unusual or key items that affected comparability for Adjusted EBITDA during the three months ended December 31, 2017 and 2016.
  Three months ended December 31
(In millions)  2017 2016
Operating income $43
 $51
Depreciation and amortization 4
 3
EBITDA $47
 $54

Quick Lubes

Quick Lubes sales increased $27 million, or 21%, to $154 million during the current quarter compared to the prior year quarter. Volume increased sales by $8 million as lubricant sales gallons increased to 5.7 million gallons during the quarter. Increased pricing and favorable changes in product mix increased sales $5 million and $1 million, respectively. Acquisitions increased sales by $13 million.

Gross profit increased $11 million during the current quarter compared to the prior year quarter. Increases in volumes and higher premium product mix combined to increase gross profit by approximately $4 million. Favorable pricing increased gross profit by $4 million, while acquisitions increased gross profit by $3 million. Gross profit margin during the current quarter increased 0.3 percentage points to 40.4% as a percentage of sales for the quarter, driven primarily by favorable margins due to increased ticket as a result of pricing improvements coupled with effective store execution, including increased transactions.

Selling, general and administrative expenses, which include corporate expense allocations of costs, increased $6 million, or 27%, during the current quarter compared to the prior year quarter. The increase was primarily a result of planned increases related to the Company's investments in its teams and shared infrastructure expenses of $3 million, an increase of $1 million in operating costs as a result of acquisitions and an increase of $1 million in advertising costs.

Operating income totaled $35 million in the current quarter as compared to $29 million in the prior year quarter. EBITDA increased $7 million to $41 million in the current quarter. EBITDA margin decreased 0.2 percentage points to 26.6% in the current quarter.

Quick Lubes - Additional growth and sales information

Quick Lubes sales are influenced by the number of company-owned stores and the business performance of those stores. Through Quick Lubes, Valvoline sells products to and receives royalty fees from VIOC franchisees. As a result, Quick Lubes sales are influenced by the number of units owned by franchisees and the business performance of franchisees. The following tables provide supplemental information regarding company-owned stores and franchisees that Valvoline believes is relevant to an understanding of the Quick Lubes business.

   Company-owned
   First Quarter 2018 Fourth Quarter 2017 Third Quarter 2017 Second Quarter 2017 First Quarter 2017
            
 Beginning of period384
 383
 374
 347
 342
  Opened2
 2
 1
 —
 —
  Acquired—
 1
 —
 28
 —
  Conversions between company-owned and franchise56
 —
 9
 —
 5
  Closed—
 (2) (1) (1) —
 End of period442
 384
 383
 374
 347
            
  Franchise
   First Quarter 2018 Fourth Quarter 2017 Third Quarter 2017 Second Quarter 2017 First Quarter 2017
            
 Beginning of period743
 730
 734
 729
 726
  Opened11
 15
 6
 7
 10
  Acquired—
 —
 —
 —
 —
  Conversions between company-owned and franchise(56) —
 (9) —
 (5)
  Closed(1) (2) (1) (2) (2)
 End of period697
 743
 730
 734
 729
            
 Total VIOC Stores1,139
 1,127
 1,113
 1,108
 1,076

The year over year change from December 31, 2017 to December 31, 2016 is primarily driven by opening new company-owned stores and franchise locations, including the acquisition of Time-It Lube in the second quarter of 2017, which added 28 company-owned locations. In addition, the acquisition of 56 Henley Bluewater stores converted from franchises in the first quarter of 2018.

  Three months ended December 31
  2017 2016
Same-Store Sales Growth** - Company-owned 8.2% 9.5%
Same-Store Sales Growth** - Franchisee* 7.7% 8.9%
Same-Store Sales Growth** - Combined* 7.9% 9.0%
     
* Valvoline’s franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
** Valvoline has historically determineddetermines same-store sales growth on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in operation.

(c)Valvoline’s franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.

Quick Lubes - EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that the Company has internally determined to be relevant measures of comparison for the results of Quick Lubes. There were no unusual or key items that affected comparability for Adjusted EBITDA during the three months ended December 31, 2017 and 2016.
  Three months ended December 31
(In millions)  2017 2016
Operating income $35
 $29
Depreciation and amortization 6
 5
EBITDA $41
 $34
International

International sales increased $15decreased $12 million, or 12%6%, to $140 million duringfor the current quarter compared to the prior year quarter. HigherLower volumes due to continued limited travel in response to the COVID-19 pandemic negatively impacted sales for the three months ended June 30, 2020, partially offset by an increase in new customer transactions. This net decline in volume levelswas partially offset by premium mix improvements and changesincreases in product mixnon-oil change services, which combined to increasedrive higher average ticket. Same-store sales by $6compared to the prior year periods improved sequentially throughout the quarter with declines in April and May, returning to near pre-COVID-19 levels with 7.1% growth in June.

Sales increased $29 million, or 5%. Favorable foreign currency exchange, for the nine months ended June 30, 2020 compared to the prior year period. The increase in sales for the nine months ended June 30, 2020 compared to the prior year period is a result of higher volumes primarily from unit growth and increased sales by $6 millionaverage ticket due to premium mix improvements and favorable product pricing increased sales $3 million.increases in non-oil change services.


Gross profit margin decreased 2.4% and 2.1% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods. Gross profit margin was negatively impacted by increased $1labor costs including those related to operating during the onset of the COVID-19 pandemic, as well as higher costs associated with the ramp up phase of newly-built company stores within their first year of operation.

Operating income decreased $12 million and $16 million during the three and nine months ended June 30, 2020, respectively, compared to the prior year periods. Lower transactions resulting from the COVID-19 pandemic combined with increased costs, including labor and the allocation of shared corporate costs, drove reduced operating income.
49

Core North America

The following table summarizes the results of the Core North America reportable segment:

Three months ended June 30Nine months ended June 30
(In millions)2020201920202019
Sales$207  $260  $693  $735  
Operating income$51  $38  $144  $109  
Depreciation and amortization$4  $5  $12  $13  
Gross profit as a percent of sales (a)
40.7 %32.5 %37.9 %32.8 %
Operating income as a percent of sales24.6 %14.6 %20.8 %14.8 %
Operating information
Lubricant sales gallons19.0  24.1  61.3  68.2  
Premium lubricants (percent of U.S. branded volumes)59.7 %53.1 %57.7 %52.2 %
(a)Gross profit as a percent of sales is defined as sales, less cost of sales, divided by sales.

Core North America sales decreased $53 million, or 3%20%, duringin the current quarter compared to the prior year period. Sales declines in the three months ended June 30, 2020 were primarily related to lower volumes driven by COVID-19 where the installer channel faced reduced orders from customers affected by the pandemic and the retail channel was less impacted as noted in the rapid improvement in the category during the quarter. IncreasesVolumes across the segment improved sequentially throughout the quarter with significant year-on-year declines in volumesApril and favorable changesMay, finishing with modest growth in product mix combinedJune, due in part to increase gross profits by $2 million. Favorable foreign currency exchange increased gross profit by $1promotional timing benefits in the retail channel and partial restocking in the installer channel.

Sales decreased $42 million, while higher product and supply chain costs resultedor 6%, in a $2 million decrease in gross profit. Gross profit margin decreased by 2.5 percentage points to 28.2%the nine months ended June 30, 2020 compared to the prior year quarter largely driven by higher raw materialperiod. Sales and supply chain costsvolume decreases in some marketsthe nine months ended June 30, 2020 primarily related to reduced volumes due to the COVID-19 pandemic, in addition to the timing of distributor sales and declines in lower-margin business in the lower contribution from higher-margin geographies.installer channel. Partially offsetting volume declines in the nine months ended June 30, 2020 were product and channel mix improvements in addition to favorable adjustments to trade and promotion cost estimates.


Selling, generalGross profit margin increased 8.2% and administrative expenses, which include corporate expense allocations of costs, increased $3 million, or 12%, during5.1% in the current quarterthree and nine months ended June 30, 2020, respectively, compared to the prior year quarter. The increase was primarily relatedperiods. Favorable product and channel mix in addition to $2 million of planned increases related tocost structure benefits driven by favorable raw material costs and the Company's investments in its teams and shared infrastructure expenses, and a $1 million increase in employee costs. Equity and othercost savings program that began last fiscal year improved gross profit margin.

Operating income increased $1$13 million and $35 million during the three and nine months ended June 30, 2020, respectively, compared to the prior year quarter primarily as a result of increased equityperiods. Improved profitability in each period benefited from margin improvements and royalty income from the Company's investments in joint ventures, which had increased volumes during the quarter.reduced discretionary expenses.

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Operating income totaled $19 million in the current quarter as compared to $20 million in the prior year quarter. EBITDA decreased $1 million to $20 million in the current quarter. EBITDA margin decreased 2.5 percentage points to 14.3% in the current quarter.


International - EBITDA and Adjusted EBITDA reconciliation


The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for the results of International. There were no unusual or key items that affected comparability for Adjusted EBITDA during the three months ended December 31, 2017 and 2016.

  Three months ended December 31
(In millions)  2017 2016
Operating income $19
 $20
Depreciation and amortization 1
 1
EBITDA $20
 $21
     

Unallocated and Other

Unallocated and other operating income/loss generally includes items such as certain other corporate and non-operational matters, such as company-wide restructuring activities and legacy costs, including those associated with the separation from Ashland. The following table summarizes the componentsresults of Unallocatedthe International reportable segment:
Three months ended June 30Nine months ended June 30
(In millions)2020201920202019
Sales$110  $142  $379  $426  
Operating income$12  $20  $50  $61  
Depreciation and amortization$2  $1  $5  $4  
Gross profit as a percent of sales (a)
28.1 %28.4 %29.0 %27.8 %
Operating income as a percent of sales10.9 %14.1 %13.2 %14.3 %
Operating information
Lubricant sales gallons (b)
11.5  14.3  39.9  43.1  
Lubricant sales gallons, including unconsolidated joint ventures (c)
19.4  25.2  67.2  74.3  
Premium lubricants (percent of lubricant volume)24.4 %29.0 %26.1 %28.6 %
(a)Gross profit as a percent of sales is defined as sales, less cost of sales, divided by sales.
(b)Excludes volumes from unconsolidated subsidiaries.
(c)Valvoline's unconsolidated joint ventures are distinct legal entities and other operating income/lossValvoline does not consolidate the result of operations of its unconsolidated joint ventures.

International sales decreased $32 million, or 23%, and $47 million, or 11%, for the three and nine months ended June 30, 2020, respectively, compared to the prior year periods. The declines in sales for both periods were largely driven by lower volumes and unfavorable currency exchange that more than offset the benefits from the Eastern European acquisition completed in late fiscal 2019. The majority of the volume decline occurred in Latin America where recovery is lagging due to extended COVID-19 impacts. Partially offsetting this decline was strong growth in China for the quarter, in addition to growth in the EMEA and Asia-Pacific regions in June.

Gross profit margin decreased 0.3% and increased 1.2% for the three and nine months ended June 30, 2020, respectively. The decrease in gross profit margin for the three months ended December 31, 2017June 30, 2020 was primarily due to reduced fixed-cost absorption related to lower volumes. Benefits from a more stable and 2016:favorable raw material cost environment, including the impact from resumed operations at the Company's second largest domestic blending facility that was temporarily shut down in the prior year due to a nearby third-party fire, improved gross profit margin during the nine months ended June 30, 2020.


  Three months ended December 31
(In millions)  2017 2016
Separation costs $(2) $(6)
Adjustments associated with Ashland tax indemnity (7) —
Operating loss $(9) $(6)
     

Unallocated and other had operating loss of $9Operating income decreased $8 million and loss of $6$11 million during the three and nine months ended December 31, 2017June 30, 2020, respectively, primarily due to lower volumes and 2016, respectively. The increaseda decreased contribution from unconsolidated joint ventures attributed to the COVID-19 pandemic, as well as incentives received during the prior year for operating loss is primarilyin a free trade zone outside the result of increased expense related to adjustments recorded for indemnities associated with the Tax Matters Agreement primarilyU.S. These declines were partially offset by lower operating expenses, including reduced travel expenses as a result of tax reform legislation, partially offset by decreased separation costs from the prior year as the separation from Ashland was completed in May 2017.COVID-19 pandemic.



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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES


Overview


The Company closely manages its liquidity and capital resources. Valvoline'sValvoline’s liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, acquisitions, share repurchases, and dividend payments are components of the Company'sCompany’s cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities that support Valvoline'sValvoline’s business and growth strategies and returning capital to shareholders, while funding ongoing operations.


As of December 31, 2017,June 30, 2020, the Company had $115$751 million in Cashcash and cash equivalents,, of which approximately $96$102 million was held by Valvoline'sValvoline’s non-U.S. subsidiaries. The Company utilizes a variety of strategieshas various means to deploy available cash with low tax consequences in the locations where it is needed and the Company has historically intendeddue to indefinitely reinvest undistributed earnings of

its non-U.S. subsidiaries. As a result of the enactment ofU.S. tax reform legislation enacted in December 2017, undistributed earnings of the Company's non-U.S. subsidiaries were subject to the one-time deemed repatriation tax, which provides certain expected opportunities to repatriate with lower tax consequences. Consequently, the Company began to reevaluate its intentions to indefinitely reinvest its non-U.S. undistributed earnings. The Company now plans to repatriate up to approximately $45 million of previously undistributed earnings of certain non-U.S. subsidiaries where the withholding tax implications are expected to be minimal. The Company is presently not aware of any significant restrictions on the repatriation of these funds and additional taxes and other costs that may arise between the deemed and actual distribution dates are not estimated to be material.fiscal 2018.

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


Cash Flowflows


Valvoline’s cash flows as reflected in the Condensed Consolidated Statements of Cash Flows are summarized as follows for the threenine months ended December 31, 2017 and 2016:June 30:


(In millions)2020 2019
Cash provided by (used in): 
Operating activities$271  $214  
Investing activities(143) (124) 
Financing activities465  (49) 
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash(1) —  
Increase in cash, cash equivalents, and restricted cash$592  $41  
 Three months ended December 31
 
(In millions)2017 2016
Cash provided by (used in):   
Operating activities$20
 $88
Investing activities(74) (10)
Financing activities(31) (16)
Effect of currency exchange rate changes on cash and cash equivalents(1) 2
(Decrease) increase in cash and cash equivalents$(86) $64


Operating activities


The decreaseincrease in operating cash flows provided by operating activities for the threenine months ended December 31, 2017June 30, 2020 compared to the prior year period was primarily relateddue to the timing of cash settlements of both asset and liabilityfavorable working capital accounts, including those relatedchanges due to Valvoline's separationdisciplined management, which included modest net favorable benefits from Ashland that drove higher operating cash flowsCOVID-19 relief in the prior year period, . Specifically, in addition to increased cash earnings driven by the three months ended December 31, 2016, Valvoline received $23 million from Ashland in customer payments on certain Valvoline receivables that were collected by Ashland and remitted to Valvoline during the period. In addition, Valvoline's accrued liabilities increased by approximately $40 million during the three months ended December 31, 2016 related primarily to transition services, tax sharing and other miscellaneous billings from Ashland. Also, as described further in Note 4 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, during the three months ended December 31, 2016, the Company sold $11 million of accounts receivablesmix shift to a financial institution and did not sell accounts receivable during the three months ended December 31, 2017.higher proportion of Quick Lubes retail sales.

Investing activities


The increase in cash flows used in investing activities for the threenine months ended December 31, 2017June 30, 2020 compared to the prior year was primarily due to the loans extended to franchisees of approximately $30 million and increases in capital expenditures of $21 million, partially offset by lower cash consideration paid for acquisitions of $31 million.

In response to the COVID-19 pandemic, Valvoline is taking steps to preserve cash, including delaying certain capital expenditures. The Company has planned to defer approximately $20 million from its prior estimates of capital spend in fiscal 2020, while investments in high-return, long-term strategic growth initiatives are planned to continue. These investments include expanding the Quick Lubes store network and completing construction of the Company's first blending and packaging plant in China, which is expected to open in early fiscal 2021.



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Financing activities

The increase in cash flows from financing activities for the nine months ended June 30, 2020 compared to the prior year period was primarily relateddriven by the issuance of the 2030 Notes and borrowings under the Trade Receivables Facility in response to the acquisition of 56 franchise service centers from Henley Bluewater LLC for $60 million, combinedCOVID-19 pandemic to provide enhanced financial flexibility. In addition, share repurchases and transaction costs associated with a moderate increaseborrowing activities in capital expenditures duefiscal 2020 led to planned investments. Valvoline is currently forecasting approximately$80 million to $90 million of capital expenditures for full year fiscal 2018, funded primarily from operatinghigher cash flows.outflows.

Financing activities

The increase in cash flows used in financing activities for the three months ended December 31, 2017 compared to the prior year period was related to transactions that occurred in the current year, including payments related to the repurchase of common stock of $37 million, the purchase of the remaining ownership interest in a consolidated subsidiary for $15 million, lower borrowings in the period related to the trade receivables securitization facility, and the increase in dividends that resulted in an incremental $5 million payment. These increases in cash usage were partially offset by reduced repayments of borrowings in the current year period.


Free cash flow and other liquidity information


The following table sets forth free cash flow for the disclosed periods and reconciles cash flows provided byfrom operating activities to free cash flow. As previously noted, free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments, and includes pension and other postretirement plan remeasurement gains/losses.repayments. Refer to the “Use of Non-GAAP Measures” section previously included above in this Item 2 for additional information.

Nine months ended June 30
(In millions) 20202019
Cash flows provided by operating activities$271  $214  
Additions to property, plant and equipment(94) (73) 
Free cash flow$177  $141  

  Three months ended December 31
(In millions)  2017 2016
Cash flows provided by operating activities $20
 $88
Additions to property, plant and equipment (14) (9)
Free cash flow $6
 $79

Free cash flow was lower for the three months ended December 31, 2017 as compared to the prior year period driven by lower cash flows from operating activities as described above, coupled with higher capital expenditures due to planned investments.

As of December 31, 2017,June 30, 2020, working capital (current assets minus current liabilities, excluding long-term debt due within one year) amounted to $386was $947 million compared to $327$389 million atas of September 30, 2017.2019. Liquid assets (cash, cash equivalents, and accounts receivable) was145%were 266% of current liabilities as of December 31, 2017June 30, 2020 and 123%132% at September 30, 2017.2019. The increase in working capital is driven by increases in cash and cash equivalents primarily due to increased borrowing activity, including those taken as a precautionary measure to preserve liquidity in response to the COVID-19 pandemic, partially offset by increases in payables and accrued liabilities.


Debt
The following summary reflects Valvoline’s debt as of:
 December 31 September 30
(In millions)2017 2017
Short-term debt$—
 $75
Long-term debt (including current portion and debt issuance cost discounts) (a)
1,166
 1,049
Total debt$1,166
 $1,124
    
(a)Amount includes $2 million of debt acquired through acquisitions and is net of $12 million and $13 million of debt issuance cost discounts as of December 31 and September 30, 2017, respectively, which are direct reductions from the carrying amount of debt.


As of December 31, 2017, the senior secured credit facility consisted of a term loan facility with an aggregate principal outstanding balance of $281 million and a $450 million revolving credit facility with no outstanding balance. The revolving credit facility also allows a portion of the availability to be used for outstanding letters of credit, and as of December 31, 2017, there were $11 million in letters of credit outstanding. As of SeptemberJune 30, 2017, the outstanding principal balance of the term loan facility was $285 million and there was no outstanding balance on the revolving facility.


As of December 312020 and September 30, 2017,2019, the Company had long-term debt (including the current portion and debt issuance costs and discounts) of $2.0 billion and $1.3 billion, respectively, comprised of loans and revolving facilities. Following the interest rate swap agreements entered into in June 2020, approximately 80% of Valvoline’s outstanding $400 million in aggregate principal balanceborrowings as of 4.375% senior unsecured notes due in 2025 and $375 million in aggregate principal balance of 5.500% senior unsecured notes due in 2024. In December 2017,June 30, 2020 had fixed rates, with the Company completed registered exchange offers for the senior notes.

During the first fiscal quarter of 2018, the Company amended the trade receivables securitization facility to extend the maturity date to November 19, 2020 and increase the maximum funding under the facility to $175 million. Valvoline borrowed an additional $45 million under this facility during the three months ended December 31, 2017 and used the proceeds to supplement the daily cash needs of the Company's operations.remainder bearing variable interest rates. As of December 31, 2017, $120 million remains outstanding under this facility. As of SeptemberJune 30, 2017, the Company had $75 million outstanding under this facility.

Debt covenant restrictions

Valvoline’s debt contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum consolidated net leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are 4.5 and 3.0, respectively. As of December 31, 2017,2020, Valvoline was in compliance with all covenants of its debt obligations.


Pension and Other Postretirement Plan Obligations

During fiscal 2018,On January 31, 2020, the Company expectsamended the Trade Receivables Facility to make contributionsextend the maturity date to November 19, 2021. On April 22, 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 eligible borrowing capacity. The 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. As of June 30, 2020, the Company had a combined total of $553 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility.

On February 25, 2020, Valvoline completed the issuance of 4.250% 2030 Notes with an aggregate principal amount of $600 million. The net proceeds from the offering of $592 million (after deducting initial purchasers’ discounts and debt issuance costs) were used to fund the redemption of all of the outstanding 5.500% 2024 Notes at an aggregate redemption price, including a redemption premium and unpaid accrued interest, of $394 million, repay $100 million of indebtedness under the Term Loan, and pay related fees and expenses. The remaining net proceeds are expected to fund general corporate purposes, including acquisitions, repayment of indebtedness,
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working capital needs, and capital expenditures. In response to the COVID-19 pandemic, the Company is utilizing the remaining net proceeds to preserve cash and cash equivalents and maintain liquidity.

On May 6, 2020, the Company entered into a five-year credit agreement for approximately $14$40 million to its pension plansfinance the completion of construction of the blending and packaging plant in China. Borrowings will bear interest at the local prime rate less the applicable interest rate margin and will be secured by the assets underlying the project. The proceeds from the China Credit Facility are restricted for capital expenditures directly related to its U.S. non-qualifiedthe construction of the blending and non-U.S. pension plans, of which contributions of $3 million were made duringpackaging plant in China. During the threenine months ended December 31, 2017. June 30, 2020, the Company borrowed $7 million under the China Credit Facility.

On May 22, 2020, the Company completed the issuance of 4.375% Additional 2025 Notes, conducted as an add-on to the Existing 2025 Notes, with an aggregate principal amount of $400 million. The Additional 2025 Notes were issued at 99.5% of their principal amount, resulting in an original issue discount of $2 million. The net proceeds from the offering of $393 million (after deducting initial purchasers’ discounts and debt issuance costs), together with cash and cash equivalents on hand, were used to repay $450 million in borrowings under the Revolver.

Refer to Note 97 of the Notes to Condensed Consolidated Financial Statements for additional information.details regarding the Company’s debt instruments.


Tax-related CommitmentsShare repurchases and dividend payments

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


During the threenine months ended DecemberJune 30, 2020, the Company repurchased approximately 3 million shares of its common stock for $60 million under the share repurchase authorization approved by the Board of Directors on January 31, 2017, enactment of the Act resulted2018 (the “2018 Share Repurchase Authorization”). The Company suspended its share repurchase program in pre-tax expense of $7 million and income tax expense of $68 million duelate March 2020 to conserve liquidity in response to the following:COVID-19 pandemic. As of June 30, 2020, the Company had $15 million remaining under the 2018 Share Repurchase Authorization and will evaluate conditions of resuming its share repurchase program when appropriate.


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

Based on the Company's provisional estimates of the impacts of the Act, management expects there will be a net favorable impact on Valvoline and its U.S. operations primarily due to the reduction in the federal statutory income tax rate. Set forth below is a discussion of certain provisions of the Act and the Company's preliminary assessment of the impact of such provisions on Valvoline's consolidated financial statements:


Given the effective date of the rate reduction in the Act, the Company's statutory federal corporate tax rate for fiscal 2018 will be a blended rate of 24.5%, with the federal statutory rate of 21% beginning in fiscal 2019. Inclusive of the reduction of the annual estimated effective tax rate and combined with income tax expense recorded in the threenine months ended December 31, 2017 related to the enactment of the Act, the Company currently anticipates an estimated consolidated effective tax rate between 44% and 45% for fiscal 2018. The reduced federal tax rate is expected to result in overall lower income tax expense in fiscal 2019, and the Company currently expects that its consolidated effective tax rate for fiscal 2019 will be between 25% and 26%. Such estimates are based on management’s current assumptions with respect to, among other things, the Company’s earnings, state income tax levels and tax deductions.

The Act implements a new territorial tax system and imposes a one-time U.S. tax on the deemed repatriation of certain accumulated non-U.S. earnings and profits. The Company currently expects to settle the related gross liability of approximately $22 million through utilization of foreign tax credits of $18 million, resulting in a net impact of $4 million which was recorded as income tax expense in the three months ended December 31, 2017. As a result of certain opportunities to repatriate with estimated lower tax consequences, the Company now intends to repatriate up to approximately $45 million of previously undistributed non-U.S. earnings in the foreseeable future.  

The Act expands the limitation on the deduction of certain executive compensation. This expansion is subject to transition rules that provide grandfather relief. The Company has currently estimated that these deduction limitations will primarily be effective in future periods.

The Act repeals the deduction for domestic manufacturing production activities. With Valvoline’s domestic manufacturing footprint, the repeal will have an unfavorable impact beginning in fiscal 2019. 

The Act includes a new incentive for U.S. companies to produce goods and services domestically and sell them abroad, which the Company expects will have a favorable impact on Valvoline beginning in fiscal 2019.

The Act provides for an election of 100 percent tax depreciation on certain property expenditures through 2022. The depreciation percentage will be phased down beginning in 2023 through 2026, when the prior depreciation rules will return. The Company expects to benefit from this provision related to the timing of deductions for investments.

Given the Company's present financial profile, management expects to fully deduct interest expense under the present and future limitation rules under the Act.

The Company generally expects taxable state income will increase as a result of deduction limitations associated with the Act. However, the impact is not currently reasonably estimable as most U.S. state tax jurisdictions have not responded to the specific effects of the Act.

As summarized above, based on the Company's provisional estimates of the impacts of the Act, management expects there will be a net favorable impact on Valvoline, taking into account the impact on profitability and improved capital generation, which will provide the Company the opportunity to evaluate the potential utilization of the expected savings to increase or accelerate investments in its business and growth.

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


Dividend Payments and Share Repurchases

For the three months ended December 31, 2017,June 30, 2020, the Company paid $63 million of cash dividends of $0.0745for $0.339 per common share for $15 million.share. On January 31, 2018,July 23, 2020, the Valvoline Board of Directors declared a quarterly cash dividend of $0.0745$0.113 per share onof Valvoline common stock. The dividend isstock payable on MarchSeptember 15, 20182020 to shareholders of record as of the close of business on March 1, 2018.
August 31, 2020. Future declarations of quarterly dividends are subject to approval by the Board of Directors and may be adjusted as business needs or market conditions change. For

Restructuring and related expenses

During the threesecond fiscal quarter of 2019, Valvoline outlined a broad-based restructuring and cost-savings program expected to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. Part of this program includes employee separation actions, which were generally completed during 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020.

Since program inception, Valvoline recognized cumulative restructuring and related expenses of $15 million, with $1 million recognized in the nine months ended December 31, 2016,June 30, 2020. The Company does not expect to incur material remaining costs from these actions. Restructuring expenses include employee severance and termination benefits provided to employees pursuant to the Company paid cash dividendsrestructuring program. Restructuring-related expenses consist of $0.049 per common share for $10 million.those costs beyond those normally included in restructuring and incremental to the Company’s normal operating costs. These restructuring-related costs were expensed as incurred and primarily related to third-party professional service fees incurred in connection with execution of the restructuring program.


ForResults by segment do not include these restructuring and related expenses, which is consistent with the threemanner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses were included in Unallocated and other.

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Valvoline’s restructuring actions remain on track and are expected to generate annualized pre-tax savings of approximately $40 million to $50 million with benefits realized during the first nine months ended December 31, 2017, the Company repurchased approximately 2 million shares for $39 million under the $150 million share repurchase authorization approvedof 2020 and full savings expected to be delivered by the Boardend of Directors on April 24, 2017 (the “2017 Share Repurchase Authorization”). Asfiscal 2020. The ongoing annual savings are anticipated to benefit operating expenses, including Cost of December 31, 2017, there was $61 millionsales and Selling, general and administrative expenses within the Condensed Consolidated Statements of share repurchase authority remaining under the 2017 Share Repurchase Authorization. This repurchase authority allows the CompanyComprehensive Income, with a portion expected to repurchase its stock from time to timebe reinvested in the openbusiness to provide flexibility to address the ongoing market ordynamics in privately negotiated transactions depending upon market priceCore North America and other factors. Repurchases were and will continue to beinvest in accordance with all applicable securities laws and regulations and funded from available liquidity. The Company did not repurchase shares duringgrowth opportunities.

Refer to Note 6 in the three months ended December 31, 2016.

On January 31, 2018, the BoardNotes to Condensed Consolidated Financial Statements in Item 1 of Directors of Valvoline:

Declared a quarterly cash dividend of $0.0745 per share on Valvoline common stock that is payable on March 15, 2018 to shareholders of record on March 1, 2018; and
Authorized the Company to repurchase up to $300 million of its common stock through September 30, 2020, which amount is in addition to the 2017 Share Repurchase Authorization.

Off-Balance Sheet Arrangements and Contractual Obligations

Other than the matters disclosedPart I in this Quarterly Report on Form 10-Q for additional details regarding this restructuring program.

Contractual obligations and inother commitments

The following table sets forth Valvoline’s obligations and commitments to make future payments under existing agreements as of June 30, 2020. Excluded from the ordinary coursetable are contractual obligations for which the ultimate settlement of business sincequantities or prices are not fixed and determinable.

Remainder of1-33-5More than
(In millions)Totalfiscal 2020yearsyears5 years
Contractual obligations (a)
Long-term debt$1,973  $—  $107  $466  $1,400  
Interest payments (b)
478  20  140  133  185  
Operating lease obligations323  11  80  66  166  
Financing lease obligations96  1  14  14  67  
Employee benefit obligations (c)
100  2  20  19  59  
Purchase commitments13  3  10  —  —  
Total contractual obligations$2,983  $37  $371  $698  $1,877  
(a)Other long-term liabilities of approximately $123 million are excluded from this table as the uncertainty related to the amount and period of cash settlements prevents the Company from making a reasonably reliable estimate. These other long-term liabilities include the Company’s net obligations to its former parent company, deferred compensation, unrecognized tax benefits, and self-insurance liabilities that primarily related to workers’ compensation claims, among others.
(b)Interest expense on both variable and fixed rate debt assuming no prepayments, with variable interest rates assumed to remain constant through the end of fiscal 2017, there have been no material changes in the Company's contractual obligations. Seeterm at the Annual Report on Form 10-Krates that existed as of June 30, 2020.
(c)Includes estimated funding of pension plans for the remainder of fiscal year ended September 30, 20172020, as well as projected benefit payments through fiscal 2029 for additional information regarding the Company's off-balance-sheet arrangements and contractual obligations.Valvoline’s unfunded pension plans. Excludes benefit payments from pension plan trust funds.


Summary


As of December 31, 2017,June 30, 2020, cash and cash equivalents totaled $115$751 million, and total debt was $1.2 billion. Valvoline's$2.0 billion, and total remaining borrowing capacity was $553 million. Valvoline’s ability to generate positive cash flows from operations is dependent on general economic conditions, and the competitive environment in the industry, and is subject to the business and other risk factors described in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of the Annual Report on Form 10-K for the year ended September 30, 2017.2019. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives. Valvoline's financial position has enabled it to achieve a Moody's rating of Ba2 and a Standard & Poor’s rating of BB+, which was upgraded in the fourth fiscal quarter of 2017. Subsequent changes to ratings may have an effect on Valvoline's borrowing rate or ability to access capital markets in the future. Borrowing capacity under the 2016 Senior Credit Agreement was $439 million (due to a $11 million reduction for letters of credit) and based on the availability of eligible receivables, $39 million under the trade receivables securitization facility as of December 31, 2017.


Management believes that the Company has sufficient liquidity based on its current cash and cash equivalents position, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions, debt servicing obligations, tax-related and other contractual commitments, as well asand operating requirements for the next twelve months.

RECENT
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NEW ACCOUNTING PRONOUNCEMENTS

For a discussion and analysis of recently issued accounting pronouncements and the impactimpacts on Valvoline, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I inof this Quarterly Report on Form 10-Q.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES


The Company'sCompany’s critical accounting policies and estimates are discussed in detail in Item 7 of Part II in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017. As described in Note 1 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q, the Company adopted accounting policy changes related to the classification of non-service pension and other postretirement net periodic income effective October 1, 2017. Accordingly, Net pension and other postretirement plan non-service income and remeasurement adjustments for all periods presented has been reclassified from within operating income to non-operating income within the Condensed Consolidated Statements of Comprehensive Income.

2019. Management reassessed the critical accounting policies as disclosed in the Annual Report on Form 10-K and determined there were no other changes to critical accounting policies and estimates in the threenine months ended December 31, 2017. There were also no significant changes in estimates associated with those policies.June 30, 2020.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The Company'sCompany’s market risks are discussed in detail in Item 7A of Part II in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2019. Management reassessed the quantitative and qualitative market risk disclosures as described in the Annual Report on Form 10-K and determinedexcept for the broad effects of the COVID-19 pandemic and actions taken to minimize the Company’s exposure to interest rate risk in relation to its variable-rate debt, there werehave been no material changes to Valvoline's exposure to market risks in the threenine months ended December 31, 2017.June 30, 2020.


Refer to Item 2 of Part I and Item 1A of Part II within this Quarterly Report on Form 10-Q for discussion of current market conditions and risks to Valvoline's business and financial performance resulting from the COVID-19 pandemic. Also refer to Notes 3 and 15 in Item 1 of Part I within this Quarterly Report on Form 10-Q for discussion of the interest rate swap agreements the Company has entered into to-date. As a result of those agreements entered into during the nine months ended June 30, 2020, the Company's outstanding borrowings with fixed rates increased to approximately 80% as of June 30, 2020.

ITEM 4.  CONTROLS AND PROCEDURES


Disclosure Controls and Procedures


Valvoline'sValvoline’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the assistance of management, have evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange(the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), and based upon such evaluation, have concluded that as of the Evaluation Date, the Company'sCompany’s disclosure controls and procedures were effective. These controls are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, (“SEC”), and that such information is accumulated and communicated to Valvoline'sValvoline’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control


There were no significant changes in Valvoline’s internal control over financial reporting that occurred during the three monthsfiscal quarter ended December 31, 2017June 30, 2020 that have materially affected, or are reasonably likely to materially affect, Valvoline’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS


From time to time, Valvoline is involved inparty to lawsuits, claims, and other legal actionsproceedings that arise in the ordinary course of business. While ValvolineMany of these legal matters involve complex issues of law and fact and may proceed for protracted periods of time. The Company’s legal proceedings are reviewed on an ongoing basis to establish liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable and to provide disclosure of matters for which management believes a material loss is at least reasonably possible. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. As disclosed within the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, the Company believes it has established adequate accruals for losses that are probable and reasonably estimable.

Although the ultimate resolution of these matters cannot predictbe predicted with certainty and there can be no assurances that the outcome, costs recognized with respectactual amounts required to such actions were immaterial duringsatisfy liabilities from these matters will not exceed the three months ended December 31, 2017. Valvoline does not have any currentlyamounts reflected in the condensed consolidated financial statements, based on information available at this time and taking into account established accruals for estimated losses, it is the opinion of management that such pending claims or litigation which Valvoline believes, individually or in the aggregate, willproceedings are not reasonably likely to have a material adverse effect on its financial position, results of operations, liquidity or capital resources. While Valvoline cannot predict with certainty the outcome of such matters, where appropriate, adequate reserves have been recorded, which were not material as of December 31, 2017. There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these matters; however, Valvoline currently believes that such potential losses will not be material.cash flows.


ITEM 1A. RISK FACTORS


DuringInformation about the period covered by this report, there were no material changes from theCompany's risk factors previously disclosedis contained in Valvoline'sItem 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2019. Other than the risk factor set forth below, there were no material changes to the Company's risk factors previously disclosed.


Pandemics, epidemics or disease outbreaks, such as the novel coronavirus, may disrupt Valvoline’s business and operations, which could materially affect Valvoline’s financial condition, results of operations and forward-looking expectations.

Pandemics, epidemics or disease outbreaks in the United States or globally, may disrupt Valvoline’s business, which could materially affect its results of operations, financial condition and forward-looking expectations. In December 2019, a novel strain of coronavirus ("COVID-19") was identified in Wuhan, China. Since then, COVID-19 has spread globally to most countries and all 50 states within the United States. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has negatively impacted Valvoline's business and results of operations during fiscal 2020 to-date, and adverse impacts are expected to continue in future periods, which Valvoline is unable to reasonably predict due to numerous uncertainties, including the duration and severity of the pandemic.

Specifically, as governments implemented lockdowns and stay-at-home guidelines in response to COVID-19, miles driven were significantly down in most of Valvoline’s key markets by late March 2020 and continued into April, with steady improvements in trends since that time. The decline in miles driven has resulted in lower volumes across Valvoline's reportable segments in fiscal 2020 year-to-date. In February 2020, Valvoline temporarily halted construction of its lubricants plant in China and implemented work-from-home protocols for employees in its China office due to the impact of COVID-19. Construction on the lubricants plant resumed and work-from-home protocols in China largely ended in early March 2020. Beginning March 18, 2020, Valvoline temporarily closed its corporate headquarters in Lexington, Kentucky, while implementing work-from-home protocols. Employees, other than those in Valvoline's retail service center stores, production and distribution facilities, began working remotely in virtually all locations globally, except China, where work-from-home protocols were implemented earlier and substantially ended in March. In addition, all non-essential travel has been restricted. While Valvoline has a distributed workforce and many employees are accustomed to working remotely or with other remote employees, the suspension of travel and doing business in-person could negatively impact the Company's marketing efforts, challenge the ability to enter into customer contracts in a timely manner, or
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create operational or other challenges, including telecommuting issues, as the Company adjusts to a large remote workforce, any of which could harm Valvoline's business. At Quick Lubes service center stores, changes were made requiring employees to wear personal protective equipment and modifying certain in-store procedures to further reduce direct contact from Valvoline's stay-in-your-car service experience. Valvoline may voluntarily elect or be required to temporarily close or reduce operations at its Quick Lubes service center stores, lubricant blending and packaging plants or remove its employees and personnel from the field for their protection. COVID-19 has also had a negative impact on Valvoline’s franchisees. Certain franchises reduced hours or temporarily closed at the discretion of the respective independent operator. Failure of one or more franchisees would have an adverse impact on Valvoline’s business due to its dependence on their growth, financial and operating performance. During the COVID-19 pandemic, Valvoline has seen an increase in attempts to breach its information technology systems with the implementation of work-from-home protocols, including cyber-security threats such as phishing, spam emails, hacking, social engineering, and malicious software, increasing the risks associated with a breach of or failure of Valvoline’s information technology systems.

The Company's return to office plans for its current remote workforce and reduction in travel restrictions are based upon multiple factors, including government mandates, guidelines issued by public health authorities, and the location and job responsibilities of specific Company personnel. Though these plans may be implemented in stages over an extended period of time, the Company may nevertheless experience operational disruptions when employees return to the office. While certain locations have relaxed shelter in place orders, the impact of these initiatives, including their sustainability, remains uncertain.

These impacts and any additional developments as a result of COVID-19, or other pandemics, epidemics or disease outbreaks have had adverse impacts on Valvoline's business and results of operations and may continue to adversely affect Valvoline’s business, results of operations, liquidity, financial condition, and forward-looking expectations, particularly if they are in place for an extended period of time. The spread of COVID-19 may materially adversely affect Valvoline’s ability to implement its growth plans, including, without limitation, delay construction or acquisition of new Quick Lubes service center stores; negatively impact Valvoline’s ability to successfully execute plans to enter into new markets; reduce demand for Valvoline’s products; cause Valvoline to experience inefficiencies in the supply chain, including but not limited to, the delivery of products and services to Valvoline’s customers, receipt of raw materials from suppliers or increased costs of raw materials; or negatively impact Valvoline’s ability to maintain operations.

Valvoline continues to monitor its operations, the operations of its customers, suppliers, franchisees and various government recommendations. The extent to which the spread of COVID-19 impacts Valvoline’s business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the duration and the severity of the spread of COVID-19 and the actions to contain the virus or treat its impact, among others. These events, if they continue to grow in scope, intensify in severity or are sustained for a longer period of time, could result in a period of business and manufacturing disruption, inventory shortage, and reduced sales and profitability, any of which may materially adversely affect Valvoline’s business or results of operations. While the potential economic impact resulting from and the duration of any pandemic, epidemic or outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which may reduce the Company’s ability to access capital and, in the future, negatively affect the Company’s liquidity. In addition, a recession or market correction resulting from the spread of an infectious disease, including COVID-19, could materially affect Valvoline’s business. Such economic recession could have a material adverse effect on the Company’s long-term business as the Company’s customers reduce miles driven and reduce their overall spending on Valvoline products and services. To the extent the COVID-19 pandemic adversely affects the Company’s business and financial results, it may also have the effect of increasing many of the other risks described under the heading “Risk Factors” in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


DuringThe Company did not repurchase any shares of common stock during the three months ended December 31, 2017,June 30, 2020 pursuant to the Company repurchased 1.6 million sharesBoard of its common stock for $39 million under the 2017 Share Repurchase Authorization. Under theDirectors authorization shares may be repurchased on the open market, through Rule 10b5-1 trading plans, Rule 10b-18 repurchase programs and accelerated share acquisition programs. As of December 31, 2017, $61 million remains available for repurchase under this authorization, and on January 31, 2018 the Board of Directors of Valvoline authorized the Company to repurchase up to $300 million of its common stock through September 30, 2020. As of June 30, 2020, which amount is in addition to the 2017 Share Repurchase Authorization.

Share repurchase activity during the three months ended December 31, 2017 was as follows:

Fiscal Period 
Total Number of Shares Purchased (1)
 Average Price Paid per Share, including Commission 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions) (2)
October 1, 2017 to
October 31, 2017
 —
 $—
 —
 $100
November 1, 2017 to November 30, 2017 747,265
 $24.04
 737,629
 $82
December 1, 2017 to
December 31, 2017
 875,728
 $24.58
 875,728
 $61
Total 1,622,993
    1,613,357
   

(1) Total number of shares purchased includes both shares repurchased under the Board of Directors authorization described above, as well as vested restricted stock awards purchased to cover withholding taxes.
(2)Further information regarding the Company's$15 million remained available for share repurchases can be found in Note 12 of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I ofunder this Quarterly Report on Form 10-Q.authorization.

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ITEM 6.  EXHIBITS


10.1*
First Amendment to the Transfer and Administration Agreement, dated as of November 20, 2017, among Valvoline LLC, Lex Capital LLC, the Originators, the Investors, Letter of Credit Issuers, Managing Agents and Administrators party thereto, and PNC Bank National Association, as agent for the Investors.
31.1*
31.2*
32**
101101.INSXBRL Instance Document - the instance document does not appear in the Interactive data files pursuant to Rule 405 of Regulation S-T: (i)Data File because its XBRL tags are embedded within the Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2017Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and 2016, (ii) the Condensed Consolidated Balance Sheets at December 31, 2017 and September 30, 2017, (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2017 and 2016, and (iv) the Notes to Condensed Consolidated Financial Statements.contained in Exhibit 101).
* Filed herewith.
SM Service mark, Valvoline or its subsidiaries, registered in various countries.** Furnished herewith.
™ Trademark, Valvoline or its subsidiaries, registered in various countries.
† Trademark owned by a third party.

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SIGNATURE




Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


VALVOLINE INC.
(Registrant)
August 4, 2020VALVOLINE INC.
By:(Registrant)
February 8, 2018By:/s/ Mary E. Meixelsperger
Mary E. Meixelsperger
Chief Financial Officer



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