UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________

FORM 10-Q

(Mark one)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, ~~2020~~2021


☐			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.

(Exact name of registrant as specified in its charter)


Kentucky			30-0939371
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

100 Valvoline Way

Lexington, Kentucky 40509

(Address of principal executive offices) (Zip Code)

Telephone Number (859) 357-7777

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

VVV

New York Stock Exchange

Indicate by check mark whether the registrant (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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes☐No þ

At January 31, ~~2021,~~2022, there were ~~181,421,240~~179,356,295 shares of the registrant’s common stock outstanding.

~~VALVOLINE INC. AND CONSOLIDATED SUBSIDIARIES~~

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Statements of Comprehensive Income


		Three months ended December 31				Three Months Ended December 31
(In millions, except per share amounts - unaudited)	(In millions, except per share amounts - unaudited)	2020		2019			(In millions, except per share amounts - unaudited)	2021		2020
Sales	Sales	$	653	$	607		Sales	$	858	$	653
Cost of sales	Cost of sales	425		396			Cost of sales	614		425
Gross profit	Gross profit	228		211			Gross profit	244		228

Selling, general and administrative expenses	Selling, general and administrative expenses	117		117			Selling, general and administrative expenses	135		117
Net legacy and separation-related expenses (income)		1		(1)
Legacy and separation-related expenses							Legacy and separation-related expenses	3		1
Equity and other income, net	Equity and other income, net	(14)		(9)			Equity and other income, net	(15)		(14)
Operating income	Operating income	124		104			Operating income	121		124
Net pension and other postretirement plan income	Net pension and other postretirement plan income	(13)		(9)			Net pension and other postretirement plan income	(9)		(13)
Net interest and other financing expenses	Net interest and other financing expenses	20		16			Net interest and other financing expenses	17		20

Income before income taxes	Income before income taxes	117		97			Income before income taxes	113		117
Income tax expense	Income tax expense	30		24			Income tax expense	26		30
Net income	Net income	$	87	$	73		Net income	$	87	$	87

NET EARNINGS PER SHARE	NET EARNINGS PER SHARE						NET EARNINGS PER SHARE
Basic	Basic	$	0.47	$	0.39		Basic	$	0.48	$	0.47
Diluted	Diluted	$	0.47	$	0.39		Diluted	$	0.48	$	0.47

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	WEIGHTED AVERAGE COMMON SHARES OUTSTANDING						WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	Basic	185		189			Basic	181		185
Diluted	Diluted	186		189			Diluted	182		186

COMPREHENSIVE INCOME	COMPREHENSIVE INCOME						COMPREHENSIVE INCOME
Net income	Net income	$	87	$	73		Net income	$	87	$	87
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax
Currency translation adjustments	Currency translation adjustments	18		8			Currency translation adjustments	—		18
Amortization of pension and other postretirement plan prior service credit		(2)		(2)

Amortization of pension and other postretirement plan prior service credits							Amortization of pension and other postretirement plan prior service credits	—		(2)
Unrealized gain on cash flow hedges							Unrealized gain on cash flow hedges	1		—
Other comprehensive income	Other comprehensive income	16		6			Other comprehensive income	1		16
Comprehensive income	Comprehensive income	$	103	$	79		Comprehensive income	$	88	$	103

See Notes to Condensed Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

(In millions, except per share amounts - unaudited) December 31
2020 September 30
2020
Assets
Current assets
Cash and cash equivalents $ 527 $ 760
Receivables, net 430 433
Inventories, net 213 199
Prepaid expenses and other current assets 44 46
Total current assets 1,214 1,438
Noncurrent assets
Property, plant and equipment, net 713 613
Operating lease assets 293 261
Goodwill and intangibles, net 739 529
Equity method investments 46 44
Deferred income taxes 28 34
Other noncurrent assets 123 132
Total noncurrent assets 1,942 1,613
Total assets $ 3,156 $ 3,051
Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt $ 88 $ 0
Trade and other payables 158 189
Accrued expenses and other liabilities 260 255
Total current liabilities 506 444
Noncurrent liabilities
Long-term debt 1,887 1,962
Employee benefit obligations 303 317
Operating lease liabilities 260 231
Other noncurrent liabilities 255 173
Total noncurrent liabilities 2,705 2,683
Commitments and contingencies 0 0
Stockholders’ deficit
Preferred stock, no par value, 40 shares authorized; 0 shares issued and outstanding 0 0
Common stock, par value $0.01 per share, 400 shares authorized; 183 and 185 shares issued and outstanding at December 31, 2020 and September 30, 2020, respectively 2 2
Paid-in capital 25 24
Retained deficit (106) (110)
Accumulated other comprehensive income 24 8
Total stockholders’ deficit (55) (76)
Total liabilities and stockholders’ deficit
$ 3,156 $ 3,051


(In millions, except per share amounts - unaudited)	December 31 2021		September 30 2021
Assets
Current assets
Cash and cash equivalents	$	152	$	230
Receivables, net	530		496
Inventories, net	264		258
Prepaid expenses and other current assets	55		53
Total current assets	1,001		1,037
Noncurrent assets
Property, plant and equipment, net	824		817
Operating lease assets	309		307
Goodwill and intangibles, net	782		775
Equity method investments	50		47
Deferred income taxes	13		14
Other noncurrent assets	204		194
Total noncurrent assets	2,182		2,154
Total assets	$	3,183	$	3,191

Liabilities and Stockholders’ Equity
Current liabilities

Current portion of long-term debt	$	32	$	17
Trade and other payables	218		246
Accrued expenses and other liabilities	291		306
Total current liabilities	541		569
Noncurrent liabilities
Long-term debt	1,662		1,677
Employee benefit obligations	248		258
Operating lease liabilities	276		274
Deferred income taxes	34		26
Other noncurrent liabilities	255		252
Total noncurrent liabilities	2,475		2,487
Commitments and contingencies	0		0
Stockholders’ equity
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding	—		—
Common stock, par value $0.01 per share, 400 shares authorized; 180 shares issued and outstanding at December 31, 2021 and September 30, 2021	2		2
Paid-in capital	33		35
Retained earnings	123		90


Accumulated other comprehensive income	9		8
Total stockholders’ equity	167		135
Total liabilities and stockholders’ equity	$	3,183	$	3,191

See Notes to Condensed Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Statements of Stockholders’ ~~Deficit~~Equity (Deficit)

Three months ended December 31, 2020
(In millions, except per share amounts - unaudited) Common stock Paid-in capital Retained deficit Accumulated other comprehensive income Totals
Shares Amount
Balance at September 30, 2020 185 $ 2 $ 24 $ (110) $ 8 $ (76)
Net income — — — 87 — 87
Dividends paid, $0.125 per common share — — — (23) — (23)
Stock-based compensation, net of issuances — — 1 — — 1
Repurchases of common stock (2) — — (58) — (58)
Cumulative effect of adoption of new credit losses standard, net of tax — — — (2) — (2)
Other comprehensive income, net of tax — — — — 16 16
Balance at December 31, 2020 183 $ 2 $ 25 $ (106) $ 24 $ (55)
Three months ended December 31, 2019
(In millions, except per share amounts - unaudited) Common stock Paid-in capital Retained deficit Accumulated other comprehensive income Totals
Shares Amount
Balance at September 30, 2019 188 $ 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
Other comprehensive income, net of tax — — — — 6 6
Balance at December 31, 2019 188 $ 2 $ 16 $ (231) $ 17 $ (196)



	Three months ended December 31, 2021
(In millions, except per share amounts - unaudited)	Common stock			Paid-in capital		Retained earnings		Accumulated other comprehensive income		Totals
	Shares	Amount
Balance at September 30, 2021	180	$	2	$	35	$	90	$	8	$	135
Net income	—	—		—		87		—		87
Dividends paid, $0.125 per common share	—	—		—		(23)		—		(23)
Stock-based compensation, net of issuances	—	—		(2)		—		—		(2)
Repurchases of common stock	—	—		—		(31)		—		(31)
Other comprehensive income, net of tax	—	—		—		—		1		1
Balance at December 31, 2021	180	$	2	$	33	$	123	$	9	$	167


























	Three months ended December 31, 2020
(In millions, except per share amounts - unaudited)	Common stock			Paid-in capital		Retained deficit		Accumulated other comprehensive income		Totals
	Shares	Amount
Balance at September 30, 2020	185	$	2	$	24	$	(110)	$	8	$	(76)
Net income	—	—		—		87		—		87
Dividends paid, $0.125 per common share	—	—		—		(23)		—		(23)
Stock-based compensation, net of issuances	—	—		1		—		—		1
Repurchases of common stock	(2)	—		—		(58)		—		(58)
Cumulative effect of adoption of credit losses standard, net of tax	—	—		—		(2)		—		(2)
Other comprehensive income, net of tax	—	—		—		—		16		16
Balance at December 31, 2020	183	$	2	$	25	$	(106)	$	24	$	(55)

See Notes to Condensed Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

Three months ended
December 31
(In millions - unaudited) 2020 2019
Cash flows from operating activities
Net income $ 87 $ 73
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization 21 16
Equity income from unconsolidated affiliates, net of distributions
0 (2)
Pension contributions (1) (4)
Stock-based compensation expense 3 4
Other, net 0 2
Change in assets and liabilities
Receivables 7 7
Inventories (4) 4
Payables and accrued liabilities (40) (47)
Other assets and liabilities 6 6
Total cash provided by operating activities 79 59
Cash flows from investing activities
Additions to property, plant and equipment (35) (28)
Repayments on notes receivable 9 0
Acquisitions of businesses (218) (6)
Other investing activities, net (1) (1)
Total cash used in investing activities (245) (35)
Cash flows from financing activities
Proceeds from borrowings 11 0
Repurchases of common stock (58) 0
Cash dividends paid (23) (21)
Other financing activities (3) (2)
Total cash used in financing activities
(73) (23)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash 6 3
(Decrease) increase in cash, cash equivalents, and restricted cash (233) 4
Cash, cash equivalents, and restricted cash - beginning of period 761 159
Cash, cash equivalents, and restricted cash - end of period $ 528 $ 163


	Three months ended December 31
(In millions - unaudited)	2021		2020
Cash flows from operating activities
Net income	$	87	$	87
Adjustments to reconcile net income to cash flows from operating activities

Depreciation and amortization	25		21

Deferred income taxes	8		—





Stock-based compensation expense	3		3
Other, net	(1)		(1)
Change in assets and liabilities
Receivables	(37)		7
Inventories	(6)		(4)
Payables and accrued liabilities	(41)		(40)
Other assets and liabilities	(6)		6
Total cash provided by operating activities	32		79
Cash flows from investing activities
Additions to property, plant and equipment	(35)		(35)
Repayments of notes receivable	3		9

Acquisitions of businesses	(14)		(218)


Other investing activities, net	—		(1)
Total cash used in investing activities	(46)		(245)
Cash flows from financing activities
Proceeds from borrowings	30		11

Repayments on borrowings	(31)		—

Repurchases of common stock	(31)		(58)

Cash dividends paid	(23)		(23)
Other financing activities	(8)		(3)
Total cash used in financing activities	(63)		(73)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash	—		6
Decrease in cash, cash equivalents and restricted cash	(77)		(233)
Cash, cash equivalents and restricted cash - beginning of period	231		761
Cash, cash equivalents and restricted cash - end of period	$	154	$	528

See Notes to Condensed Consolidated Financial Statements.

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, ~~2020.~~2021. Certain prior period amounts disclosed herein have been reclassified to conform to the current presentation.

Use of estimates, risks and uncertainties

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

Valvoline has substantially maintained its operations throughout the COVID-19 pandemic to-date and has continued precautionary measures to protect the Company's employees and customers and manage through the currently known impacts on its business. ~~Given the unprecedented nature~~Current and future impacts as a result of the pandemic ~~the extent of future impacts~~ cannot be reasonably quantified or estimated ~~at this time~~ due to ~~numerous~~its unprecedented nature, breadth, and uncertainties, including the ultimate duration and severity of the pandemic.

Strategic separation

On October 12, 2021, Valvoline announced its intention to pursue a separation of its two reportable segments, Retail Services and Global Products. Valvoline is evaluating the alternatives to accomplish the separation of these two businesses, and consummation of the separation will be subject to final approval by Valvoline's Board of Directors (the “Board”). No timetable has currently been established for completion of the separation, which is expected to enable the two businesses to enhance focus on their distinct customer bases, strategies and operational needs.

Recent accounting pronouncements

The following ~~standards~~accounting guidance relevant to Valvoline ~~were~~was either issued or adopted in the current year, or ~~are~~is expected to have a meaningful impact on Valvoline in future periods upon adoption. The ~~FASB~~Financial Accounting Standards Board ("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 below.

~~Recently adopted~~

In June 2016, the Financial Accounting Standards Board ("FASB") issued updated guidance that changes the recognition of credit losses from an incurred or probable loss methodology to a current expected credit loss model that results in the immediate recognition of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, principally trade and other receivables for Valvoline. The new credit loss guidance was adopted on October 1, 2020 using the required modified retrospective approach. Under this approach, the new accounting guidance is applied prospectively from the date of adoption through a cumulative effect adjustment in retained deficit, while prior period financial statements continue to be reported in accordance with the previous guidance. Adoption did not have a material impact on the Company's condensed consolidated financial statements and resulted in a $2 million, net of tax, cumulative effect of accounting change that increased retained deficit and allowances for credit losses.

In connection with and following the adoption of this guidance, Valvoline maintains allowances to estimate expected lifetime credit losses that are based on a broad range of reasonable and supportable information and factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, and historical collection experience. Refer to Note 11 for additional information regarding the Company's trade and other receivables and its allowances for credit losses.

Issued but not yet adopted

In March 2020, the FASB issued guidance ~~regarding~~to simplify the ~~effects~~accounting for arrangements modified as a result of reference rate reform ~~intended to ease financial reporting burdens~~ as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates. This guidance is available to be adopted on a prospective basis through the end of calendar 2022 for qualifying contract modifications and hedging arrangements. The Company has interest rate swap hedging arrangements and U.S.-based variable rate long-term debt ~~as described in Notes 2 and 5 to the Condensed Consolidated Financial Statements, respectively,~~ for which existing payments are based on ~~LIBOR. This~~LIBOR tenors expected to cease in June 2023. As of December 31, 2021, 28% of Valvoline’s outstanding total long-term debt and $275 million of its interest rate swap agreements are under existing arrangements that mature following LIBOR cessation and do not contain fallback provisions to alternative reference rates. The Company is evaluating its options for these arrangements and expects to adopt this guidance ~~is available~~ to ~~be adopted through~~ the ~~end of~~

~~calendar 2022 to simplify the accounting for arrangements modified for the transition to alternative reference rates.The Company expects to adopt this guidance to the~~ extent ~~its arrangements~~there are ~~modified for the underlying reference rate~~qualifying contractual modifications prior to the end of calendar ~~2022 and~~2022. Valvoline does not expect ~~adoption will~~any modifications that may apply for this guidance to have a material impact on its condensed consolidated financial statements.

NOTE 2 - FAIR VALUE MEASUREMENTS

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy:


		As of December 31, 2020											As of December 31, 2021
(In millions)	(In millions)	Total		Level 1		Level 2		Level 3		NAV (a)		(In millions)	Total		Level 1		Level 2		Level 3		NAV (a)
Cash and cash equivalents	Cash and cash equivalents											Cash and cash equivalents
Money market funds	Money market funds	$	189	$	189	$	—	$	—	$	—	Money market funds	$	1	$	1	$	—	$	—	$	—
Time deposits	Time deposits	36		—		36		—		—		Time deposits	36		—		36		—		—
Prepaid expenses and other current assets	Prepaid expenses and other current assets											Prepaid expenses and other current assets
Currency derivatives (b)	Currency derivatives (b)	1		—		1		—		—		Currency derivatives (b)	2		—		2		—		—
Other noncurrent assets	Other noncurrent assets											Other noncurrent assets
Non-qualified trust funds	Non-qualified trust funds	15		—		6		—		9		Non-qualified trust funds	10		—		2		—		8
Interest rate swap agreements												Interest rate swap agreements	4		—		4		—		—
Total assets at fair value	Total assets at fair value	$	241	$	189	$	43	$	—	$	9	Total assets at fair value	$	53	$	1	$	44	$	—	$	8

Accrued expenses and other liabilities	Accrued expenses and other liabilities											Accrued expenses and other liabilities
Currency derivatives (b)	Currency derivatives (b)	$	1	$	—	$	1	$	—	$	—	Currency derivatives (b)	$	1	$	—	$	1	$	—	$	—
Interest rate swap agreements		1		—		1		—		—

Other noncurrent liabilities	Other noncurrent liabilities											Other noncurrent liabilities
Deferred compensation obligations	Deferred compensation obligations	27		—		—		—		27		Deferred compensation obligations	27		—		—		—		27
Total liabilities at fair value	Total liabilities at fair value	$	29	$	—	$	2	$	—	$	27	Total liabilities at fair value	$	28	$	—	$	1	$	—	$	27

		As of September 30, 2020
(In millions)		Total		Level 1		Level 2		Level 3		NAV (a)
Cash and cash equivalents
Money market funds		$	296	$	296	$	—	$	—	$	—
Time deposits		139		—		139		—		—
Prepaid expenses and other current assets
Currency derivatives (b)		3		—		3		—		—
Other noncurrent assets
Non-qualified trust funds		16		—		8		—		8
Total assets at fair value		$	454	$	296	$	150	$	—	$	8

Accrued expenses and other liabilities
Currency derivatives (b)		$	2	$	—	$	2	$	—	$	—
Interest rate swap agreements		1		—		1		—		—
Other noncurrent liabilities
Deferred compensation obligations		25		—		—		—		25
Total liabilities at fair value		$	28	$	—	$	3	$	—	$	25


	As of September 30, 2021
(In millions)	Total		Level 1		Level 2		Level 3		NAV (a)
Cash and cash equivalents
Money market funds	$	13	$	13	$	—	$	—	$	—
Time deposits	87		—		87		—		—
Prepaid expenses and other current assets
Currency derivatives (b)	3		—		3		—		—
Other noncurrent assets
Non-qualified trust funds	11		—		4		—		7
Interest rate swap agreements	2				2		—
Total assets at fair value	$	116	$	13	$	96	$	—	$	7

Accrued expenses and other liabilities
Currency derivatives (b)	$	3	$	—	$	3	$	—	$	—
Interest rate swap agreements	1		—		1		—		—
Other noncurrent liabilities
Deferred compensation obligations	24		—		—		—		24
Total liabilities at fair value	$	28	$	—	$	4	$	—	$	24

(a)Funds measured at fair value using the net asset value ("NAV") per share practical expedient have not been classified in the fair value hierarchy.

(b)The Company had outstanding contracts with notional ~~value~~values of ~~$139~~$143 million and ~~$149~~$137 million as of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, respectively.

There were no material gains or losses recognized in earnings during the three months ended December 31, ~~2020~~2021 or ~~2019~~2020 related to these assets and liabilities.

Long-term debt

Long-term debt is reported in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the disclosure above of financial assets and liabilities measured at fair value within the condensed consolidated financial statements on a recurring basis. The fair values of the ~~Company’s~~Company's outstanding fixed rate senior notes shown ~~in the table~~ below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. ~~Long-term debt is included in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above.~~


	December 31, 2021						September 30, 2021
(In millions)	Fair value		Carrying value (a)		Unamortized discounts and issuance costs		Fair value		Carrying value (a)		Unamortized discounts and issuance costs
2030 Notes	$	614	$	593	$	(7)	$	622	$	593	$	(7)
2031 Notes	523		529		(6)		531		529		(6)
Total	$	1,137	$	1,122	$	(13)	$	1,153	$	1,122	$	(13)

(a)Carrying values shown ~~in the following table~~ are net of unamortized discounts and debt issuance costs.

December 31, 2020 September 30, 2020
(In millions) Fair value Carrying value Unamortized
discounts and
issuance costs Fair value Carrying value Unamortized
discounts and
issuance costs
2025 Notes $ 826 $ 790 $ (10) $ 827 $ 790 $ (10)
2030 Notes 635 592 (7) 613 592 (8)
Total $ 1,461 $ 1,382 $ (17) $ 1,440 $ 1,382 $ (18)

Refer to Note 54 for ~~more information on Valvoline’s~~details of these notes as well as Valvoline's other debt instruments that have variable interest rates ~~and accordingly, their~~with carrying amounts that approximate fair value.

NOTE 3 - ACQUISITIONS ~~AND DIVESTITURES~~

~~Quick Lubes store~~The Company acquired 12 service center stores in single and multi-store transactions for an aggregate purchase price of $14 million during the three months ended December 31, 2021. These acquisitions expand Valvoline's retail

presence in key North American markets, increase the number of company-operated service center stores, and contributed to growing the Retail Services system to over 1,600 system-wide service center stores.

During the three months ended December 31, 2020, the Company acquired 81 service center stores in single and multi-store transactions, including 27 former franchise locations converted to company-owned service center stores and 12 franchise-operated service center stores, for an aggregate purchase price of $218 million. ~~These acquisitions expanded Valvoline's Quick Lubes system in key markets to more than 650 and 1,500 company-owned and system-wide service center stores, respectively, and included:~~

•~~NaN company-owned service center stores in Texas acquired from Kent Lubrication Centers Ltd. (doing business as Avis Lube) on October 1, 2020;~~

•~~NaN former franchise locations converted to company-owned service center stores in Kansas and Missouri acquired from Westco Lube, Inc. on October 15, 2020;~~

•~~NaN company-owned service center stores in Idaho acquired from L&F Enterprises (doing business as Einstein's Oilery) on October 30, 2020; and~~

•~~NaN Mister Oil Change Express® locations across 7 states (15 company-owned and 12 franchise-operated) acquired from Car Wash Partners, Inc. on December 11, 2020.~~

During the three months ended December 31, 2019, the Company acquired 9 service center stores in single and multi-store transactions, including 2 former franchise locations converted to company-owned service center stores, for a total of $6 million.

The Company’s acquisitions are accounted for as business combinations. A summary follows of the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the three months ended December 31:


(In millions)	(In millions)	2020		2019		(In millions)	2021		2020

Inventories	Inventories	$	2	$	0	Inventories	$	—	$	2
Property, plant and equipment (a)		79		0

Property, plant and equipment						Property, plant and equipment	3		79
Operating lease assets	Operating lease assets	23		0		Operating lease assets	4		23
Goodwill (b)		175		5
Intangible assets (c)
Reacquired franchise rights (d)		33		1
Goodwill (a)						Goodwill (a)	11		175
Intangible assets (b)						Intangible assets (b)
Reacquired franchise rights (c)						Reacquired franchise rights (c)	—		33

Other	Other	3		0		Other	—		3

Other current liabilities (a)		(6)		0
Other current liabilities						Other current liabilities	—		(6)
Operating lease liabilities	Operating lease liabilities	(21)		0		Operating lease liabilities	(4)		(21)
Other noncurrent liabilities (a)		(70)		0
Other noncurrent liabilities						Other noncurrent liabilities	—		(70)
Net assets acquired	Net assets acquired	$	218	$	6	Net assets acquired	$	14	$	218

(a)Includes $73 million of finance lease assets in property, plant and equipment and finance lease liabilities of $3 million and $70 million in other current and noncurrent liabilities, respectively, for leases acquired during the three months ended December 31, 2020.

~~(b)~~Goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions.

~~(c)~~(b)Intangible assets acquired during the three months ended December 31, 2020 ~~and 2019~~ have weighted average amortization periods of 11 ~~and six years, respectively.~~years.

~~(d)~~(c)Prior to the acquisition of former franchise service center stores, ~~Valvoline~~the Company licensed the right to operate franchised ~~quick lube~~ service centers, including the use of ~~the Company’s~~Valvoline's trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately 11 years for the rights reacquired in fiscal 2021. The effective settlement of these arrangements resulted in 0 settlement gain or loss as the contractual terms were at market.

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

~~NOTE 4 - INTANGIBLE ASSETS~~

~~Goodwill~~

~~The following table summarizes the changes in the carrying amount of goodwill by reportable segment and in total during the three months ended December 31, 2020:~~

(In millions) Quick Lubes Core North America International Total
Balance at September 30, 2020 $ 316 $ 89 $ 40 $ 445
Acquisitions (a)
175 0 0 175
Currency translation 1 0 0 1
Balance at December 31, 2020 $ 492 $ 89 $ 40 $ 621

~~(a) Refer to Note 3 for details regarding the acquisitions completed during the three months ended December 31, 2020.~~

~~Other intangible assets~~

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

(In millions) December 31, 2020 September 30, 2020
Gross carrying amount Accumulated amortization Net carrying amount Gross carrying amount Accumulated amortization Net carrying amount
Definite-lived intangible assets
Trademarks and trade names $ 31 $ (6) $ 25 $ 30 $ (6) $ 24
Reacquired franchise rights 90 (16) 74 57 (14) 43
Customer relationships 22 (7) 15 22 (7) 15
Other intangible assets 6 (2) 4 3 (1) 2
Total definite-lived intangible assets $ 149 $ (31) $ 118 $ 112 $ (28) $ 84

~~The table that follows summarizes amortization expense (actual and estimated) for intangible assets, assuming no additional amortizable intangible assets:~~

Actual Estimated
Three months ended
December 31 Years ended September 30
(In millions) 2020 2021 2022 2023 2024 2025
Amortization expense $ 3 $ 15 $ 14 $ 14 $ 13 $ 11

NOTE 54 - DEBT

The following table summarizes Valvoline’s total ~~debt:~~debt as of:


(In millions)	(In millions)	December 31 2020		September 30 2020		(In millions)	December 31 2021		September 30 2021
2031 Notes						2031 Notes	$	535	$	535
2030 Notes	2030 Notes	$	600	$	600	2030 Notes	600		600
2025 Notes		800		800

Term Loan	Term Loan	475		475		Term Loan	475		475

Trade Receivables Facility		88		88
China Credit Facility		30		18

Revolver (a)						Revolver (a)	—		—
Trade Receivables Facility (b)						Trade Receivables Facility (b)	59		59
China Construction Facility (c)						China Construction Facility (c)	39		39
China Working Capital Facility (d)						China Working Capital Facility (d)	—		—
Debt issuance costs and discounts	Debt issuance costs and discounts	(18)		(19)		Debt issuance costs and discounts	(14)		(14)
Total debt	Total debt	1,975		1,962		Total debt	1,694		1,694

Current portion of long-term debt	Current portion of long-term debt	88		0		Current portion of long-term debt	32		17
Long-term debt	Long-term debt	$	1,887	$	1,962	Long-term debt	$	1,662	$	1,677

(a)

~~Senior Notes~~

The Company's outstanding fixed rate senior notes as of December 31, 2020 consist of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800 million (the “2025 Notes") and 4.250% senior unsecured notes due 2030 with an aggregate principal amount of $600 million (the "2030 Notes," and collectively with the 2025 Notes, the "Senior Notes").

On December 15, 2020, Valvoline executed its call option to redeem the 2025 Notes, conditional upon closing the offering of 3.625% senior unsecured notes due 2031 with an aggregate principal amount of $535 million (the “2031 Notes") in January 2021. The Company intends to utilize the net proceeds of $528 million (after deducting initial purchasers’ discounts and debt issuance costs), together with cash and cash equivalents on hand, to fully redeem the 2025 Notes at an aggregate redemption price of approximately $840 million, which will include an early redemption premium of $26 million and accrued and unpaid interest, in addition to paying related fees and expenses.

~~Senior Credit Agreement~~

As of December 31, ~~2020 and September 30, 2020,~~2021, the ~~term loan facility (the “Term Loan”) had an outstanding principal balance of $475 million and there were 0 amounts outstanding~~total borrowing capacity remaining under the $475 million revolving credit facility (the "Revolver"), both senior secured credit facilities provided under the senior credit agreement (the “Senior Credit Agreement”). As of December 31, 2020, the total borrowing capacity remaining under the Revolver was ~~$470~~$471 million due to a reduction of $5$4 million for letters of credit outstanding.

(b)The Trade Receivables Facility had $116 million of borrowing capacity remaining and the wholly-owned financing subsidiary owned $304 million of outstanding accounts receivable as of December 31, 2021.

(c)The remaining borrowing capacity under the China Construction Facility was approximately $4 million as of December 31, 2021.

(d)The China Working Capital Facility had a borrowing capacity remaining of approximately $24 million as of December 31, 2021.

As of December 31, ~~2020,~~2021, Valvoline was in compliance with all covenants under ~~the Senior Credit Agreement.~~

~~Trade Receivables Facility~~

The $175 million trade receivables securitization facility (the "Trade Receivables Facility") had an outstanding balance of $88 million as of December 31, 2020 and September 30, 2020. Based on the availability of eligible receivables, the remaining borrowing capacity of the Trade Receivables Facility as of December 31, 2020 was $36 million. As of December 31, 2020 and September 30, 2020, the financing subsidiary owned $214 million and $267 million, respectively, of outstanding accounts receivable, which are included in Receivables, net in the Company’s Condensed Consolidated Balance Sheets.

~~China Credit Facility~~

~~During the first fiscal quarter of 2021, Valvoline borrowed $11 million under~~ its $40 million credit agreement to finance capital expenditures associated with the preparation of the blending and packaging plant in China for production (the "China Credit Facility"). The China Credit Facility had $30 million and $18 million outstanding as of December 31, 2020 and September 30, 2020, respectively. The remaining borrowing capacity under the China Credit Facility was approximately $10 million as of December 31, 2020.

~~China Working Capital Facility~~

On November 16, 2020, the Company entered into a one-year revolving credit facility of approximately $23 million to finance working capital needs for the blending and packaging plant in China (the “China Working Capital Facility”). Borrowings will bear interest at the local prime rate less the applicable interest rate margin with interest due monthly and repayment of borrowings due at maturity. As of December 31, 2020, the China Working Capital Facility had 0 outstanding borrowings, leaving its full borrowing capacity of approximately $23 million remaining.long-term borrowings.

NOTE 65 – INCOME TAXES

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


		Three months ended						Three months ended
		December 31						December 31
(In millions)	(In millions)	2020			2019				(In millions)	2021			2020
Income tax expense	Income tax expense	$	30		$	24			Income tax expense	$	26		$	30
Effective tax rate percentage	Effective tax rate percentage	25.6		%	24.7		%		Effective tax rate percentage	23.0		%	25.6		%

The ~~increase~~decreases in ~~income tax expense and~~ the effective tax rate ~~over the prior year was~~and income tax expense were principally driven by ~~an increase~~discrete benefits in ~~pre-tax income and~~the current year compared to unfavorable discrete ~~items compared to favorable discrete items~~impacts in the prior year.

From a combination of statute expirations and anticipated audit settlements in the next twelve months, Valvoline currently estimates a decrease in the range of $25 million to $35 million in indemnity obligations due to the Company's former parent, which is expected to include certain unrecognized tax benefits.

1312

NOTE 76 – EMPLOYEE BENEFIT PLANS

The following table summarizes the components of pension and other postretirement benefit income:


						Other postretirement benefits					Pension benefits						Other postretirement benefits
		Pension benefits
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)			2021			2020			2021			2020
Three months ended December 31	Three months ended December 31									Three months ended December 31
Service cost	Service cost	$	1	$	1	$	0	$	0	Service cost	$	—		$	1		$	—		$	—
Interest cost	Interest cost	11		16		0		0		Interest cost	11			11			—			—
Expected return on plan assets	Expected return on plan assets	(22)		(22)		0		0		Expected return on plan assets	(20)			(22)			—			—
Amortization of prior service credit		0		0		(2)		(3)
Amortization of prior service credits										Amortization of prior service credits	—			—			—			(2)

Net periodic benefit income	Net periodic benefit income	$	(10)	$	(5)	$	(2)	$	(3)	Net periodic benefit income	$	(9)		$	(10)		$	—		$	(2)

NOTE 87 – LITIGATION, CLAIMS AND CONTINGENCIES

From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company establishes liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable. Where appropriate, the Company has recorded liabilities with respect to these matters, which were not material for the periods presented as reflected in the condensed consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, Valvoline discloses matters ~~for which~~when management believes a material loss is at least reasonably possible.

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

Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not exceed the amounts reflected in the condensed consolidated financial statements, based on information available at this time, it is the opinion of management that such pending claims or proceedings will not have a material adverse effect on its condensed consolidated financial statements.

NOTE 98 - EARNINGS PER SHARE

The following table summarizes basic and diluted earnings per share:


		Three months ended				Three months ended
		December 31				December 31
(In millions, except per share amounts)	(In millions, except per share amounts)	2020		2019			(In millions, except per share amounts)	2021		2020
Numerator	Numerator						Numerator
Net income	Net income	$	87	$	73		Net income	$	87	$	87

Denominator	Denominator						Denominator

Weighted average common shares outstanding	Weighted average common shares outstanding	185		189			Weighted average common shares outstanding	181		185
Effect of potentially dilutive securities (a)	Effect of potentially dilutive securities (a)	1		0			Effect of potentially dilutive securities (a)	1		1
Weighted average diluted shares outstanding	Weighted average diluted shares outstanding	186		189			Weighted average diluted shares outstanding	182		186

Earnings per share	Earnings per share						Earnings per share
Basic	Basic	$	0.47	$	0.39		Basic	$	0.48	$	0.47
Diluted	Diluted	$	0.47	$	0.39		Diluted	$	0.48	$	0.47

(a)~~For the three months ended December 31, 2020 and 2019, there~~There were approximately 1 million outstanding stock appreciation rights not included in the computation of diluted earnings per share for the three months ended December 31, 2020, because the effect would have been antidilutive.

NOTE 109 - REPORTABLE SEGMENT INFORMATION

Valvoline manages ~~and reports within~~its business through the following 32 reportable segments:

•~~Quick Lubes~~Retail Services ~~services~~- services the passenger car and light truck quick lube market in the United States and Canada with a broad array of preventive maintenance services and capabilities performed through ~~company-owned~~Valvoline’s retail network of company-operated and independent franchised ~~retail quick lube~~ service center stores, ~~and~~in addition to independent Express Care stores that service vehicles with Valvoline products.

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

•~~International~~ ~~sells engine and automotive~~preventive maintenance products in more than 140 countries ~~outside of the United States~~ and ~~Canada for the maintenance of consumer~~territories to mass market and automotive parts retailers, installers, and commercial customers, including original equipment manufacturers (“OEM”), to service light- and heavy-duty 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~~allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline defines as segment ~~performance and in allocating resources. Sales and~~ operating income adjusted for depreciation and amortization and certain key items impacting comparability.

Certain indirect expenses are ~~the primary U.S. GAAP measures evaluated in assessing~~recognized within 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~~the estimated utilization of indirect resources. Costs to ~~various financial measures. Intersegment sales~~support corporate functions and certain non-operational and corporate activity that is not directly attributable to a particular segment are not ~~material, and assets are not allocated and~~ included in the ~~assessment of segment performance; consequently, these items are not disclosed by segment herein.~~

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

Segment financial results

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

(In millions)
Three months ended
December 31
2020 2019
Sales
Quick Lubes $ 254 $ 218
Core North America 235 248
International 164 141
Consolidated sales $ 653 $ 607
Operating income
Quick Lubes $ 43 $ 38
Core North America 47 46
International 34 20
Total operating segments 124 104
Unallocated and other (a)
0 0
Consolidated operating income $ 124 $ 104


	Three months ended
	December 31
(in millions)	2021		2020
Sales
Retail Services	$	346	$	254
Global Products	512		399
Consolidated sales	$	858	$	653

Adjusted EBITDA
Retail Services	$	98	$	70
Global Products	77		94
Total operating segments	175		164
Corporate	(19)		(15)
Consolidated Adjusted EBITDA	156		149
Reconciliation to income before income taxes:
Net interest and other financing expenses	(17)		(20)
Depreciation and amortization	(25)		(21)
Key items: (a)
Net pension and other postretirement plan income	9		13
Legacy and separation-related expenses	(3)		(1)
LIFO charge	(6)		(4)
Information technology transition costs	(1)		—
Business interruption recovery	—		1
Income before income taxes	$	113	$	117

(a)~~Unallocated~~Key items represent adjustments to U.S. GAAP results and consist of non-operational matters, including pension and other ~~includes net~~postretirement plan non-service income and remeasurement adjustments, legacy and separation-related activity, changes in the last-in, first-out ("LIFO") inventory reserve, and certain other corporate matters ~~not allocated to~~excluded from operating results that management believes impacts the ~~reportable segments.~~comparability of operational results between periods.

Disaggregation of revenue

~~The following table summarizes sales~~Sales by primary customer channel for the Company’s reportable ~~segments:~~segments are summarized below:

Three months ended
December 31
(In millions) 2020 2019
Quick Lubes
Company-owned operations $ 178 $ 142
Non-company owned operations 76 76
Total Quick Lubes 254 218
Core North America
Retail 135 137
Installer and other 100 111
Total Core North America 235 248
International 164 141
Consolidated sales $ 653 $ 607


	Three months ended
	December 31
(In millions)	2021		2020
Retail Services
Company operations	$	243	$	178
Non-company operations	103		76
Total Retail Services	346		254

Global Products
Do-It-Yourself	175		140
Installer and other	337		259
Total Global Products	512		399

Consolidated sales	$	858	$	653

Sales by reportable segment disaggregated by geographic market follows:


		Quick Lubes				Core North America				International				Total					Retail Services				Global Products				Total
(In millions)	(In millions)	2020		2019		2020		2019		2020		2019		2020		2019		(In millions)	2021		2020		2021		2020		2021		2020
Three months ended December 31	Three months ended December 31																	Three months ended December 31
North America (a)	North America (a)	$	254	$	218	$	235	$	248	$	0	$	0	$	489	$	466	North America (a)	$	346	$	254	$	304	$	235	$	650	$	489
Europe, Middle East and Africa ("EMEA")	Europe, Middle East and Africa ("EMEA")	0		0		0		0		51		47		51		47		Europe, Middle East and Africa ("EMEA")	—		—		67		51		67		51
Asia Pacific	Asia Pacific	0		0		0		0		83		70		83		70		Asia Pacific	—		—		104		83		104		83
Latin America (a)	Latin America (a)	0		0		0		0		30		24		30		24		Latin America (a)	—		—		37		30		37		30
Totals	Totals	$	254	$	218	$	235	$	248	$	164	$	141	$	653	$	607	Totals	$	346	$	254	$	512	$	399	$	858	$	653

(a)Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.

NOTE 1110 - 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~~Statements of Cash Flows to ~~the totals shown within~~ the Condensed Consolidated ~~Statements of Cash Flows:~~Balance Sheets:


(In millions)	(In millions)	December 31 2020		September 30 2020		December 31 2019		(In millions)	December 31 2021		September 30 2021		December 31 2020
Cash and cash equivalents	Cash and cash equivalents	$	527	$	760	$	162	Cash and cash equivalents	$	152	$	230	$	527
Restricted cash (a)	Restricted cash (a)	1		1		1		Restricted cash (a)	2		1		1
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	$	528	$	761	$	163	Total cash, cash equivalents and restricted cash	$	154	$	231	$	528

(a)Included in Prepaid expenses and other current assets within the Condensed Consolidated Balance Sheets.

Accounts and other receivables

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


(In millions)	(In millions)	December 31 2020		September 30 2020		(In millions)	December 31 2021		September 30 2021
Current

Trade	Trade	$	410	$	409	Trade	$	513	$	475
Other	Other	13		14		Other	15		16
Notes receivable from franchisees (a)	Notes receivable from franchisees (a)	11		13		Notes receivable from franchisees (a)	7		10
Receivables, gross	Receivables, gross	434		436		Receivables, gross	535		501
Allowance for credit losses	Allowance for credit losses	(4)		(3)		Allowance for credit losses	(5)		(5)
Receivables, net	Receivables, net	$	430	$	433	Receivables, net	$	530	$	496

Non-current (b)
Notes receivable from franchisees (a)		$	8	$	13
Other notes receivable		8		8
Noncurrent notes receivable, gross		16		21
Allowance for losses		(5)		(4)
Noncurrent notes receivable, net		$	11	$	17

(a)Notes receivable from franchisees were primarily issued in fiscal 2020 to provide financial assistance in response to the COVID-19 pandemic. NoThere were no material balances ~~were~~ past due as of December 31, ~~2020.~~2021.

~~(b)Included in Other noncurrent assets within the Condensed Consolidated Balance Sheets.~~

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:~~Sheets as of:


(In millions)	(In millions)	December 31 2020		September 30 2020		(In millions)	December 31 2021		September 30 2021
Finished products	Finished products	$	204	$	195	Finished products	$	277	$	276
Raw materials, supplies and work in process	Raw materials, supplies and work in process	39		30		Raw materials, supplies and work in process	60		49
Reserve for LIFO cost valuation	Reserve for LIFO cost valuation	(30)		(26)		Reserve for LIFO cost valuation	(73)		(67)

Total inventories, net	Total inventories, net	$	213	$	199	Total inventories, net	$	264	$	258

Revenue recognition

The following ~~table~~ disaggregates the Company’s sales by timing of recognition:


		Three months ended				Three months ended
		December 31				December 31
(In millions)	(In millions)	2020		2019			(In millions)	2021		2020
Sales at a point in time	Sales at a point in time	$	642	$	596		Sales at a point in time	$	844	$	642
Franchised revenues transferred over time	Franchised revenues transferred over time	11		11			Franchised revenues transferred over time	14		11
Total consolidated sales	Total consolidated sales	$	653	$	607		Total consolidated sales	$	858	$	653

NOTE 1211 – SUBSEQUENT EVENTS

~~Debt refinancing~~

In January 2021, the Company completed the issuance of the 2031 Notes and used the net proceeds of $528 million, together with $312 million of cash and cash equivalents on hand, to fully redeem the 2025 Notes, with an aggregate redemption price of approximately $840 million. The Company expects to recognize a loss on extinguishment of the 2025 Notes of $36 million during the second quarter of fiscal 2021, comprised of the early redemption premium and the write-off of related unamortized debt issuance costs and discounts.

Dividend declared

On January ~~28, 2021,~~24, 2022, the Board ~~of Directors of Valvoline~~ declared a quarterly cash dividend of $0.125 per share of Valvoline common stock. The dividend is payable on March 15, ~~2021~~2022 to shareholders of record on February ~~26, 2021.~~28, 2022.

~~Share repurchases~~

The Company repurchased over 1 million shares for an aggregate amount of $33 million from January 1, 2021 through January 31, 2021 pursuant to the Board of Directors authorization on November 12, 2020 to repurchase up to $100 million of common stock through September 30, 2021 (the “2020 Share Repurchase Authorization”). The Company has $9 million in aggregate share repurchase authority remaining under the 2020 Share Repurchase Authorization as of January 31, 2021.

1817

FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, including estimates, projections, and statements related to the Company’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,” 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. Factors that might cause such differences include, but are not limited to, those discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q and Valvoline’s most recently filed periodic report on Form 10-K. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, unless required by law.


Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations			Page

Business Overview			1918
Results of Operations - Consolidated Review			2322
Results of Operations - Reportable Segment Review			25
Financial Position, Liquidity and Capital Resources			2927
New Accounting Pronouncements			3330
Critical Accounting Policies and Estimates			3330

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, ~~2020,~~2021, as well as the condensed 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 AND PURPOSE

Valvoline Inc. is a ~~worldwide marketer~~global vehicle and ~~supplier~~engine care company that continuously powers the future of ~~engine~~mobility through innovative services and ~~automotive~~products for electric, hybrid and internal combustion powertrains. Valvoline has consistently led the way innovating and reinventing its services and products for changing technologies and customer needs throughout its 155-year history. Valvoline operates a fast-growing, best-in-class network of service center stores, which are well positioned to serve evolving vehicle maintenance ~~products and services. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed powerful recognition across multiple product and service channels.~~needs with Valvoline's iconic products. In addition to its quick, easy and trusted quick lube oil change services and the ~~iconic~~legendary 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, fluids, and other complementary products and services, including leading the world's supply of battery fluids ~~designed~~ to ~~improve~~electric vehicle manufacturers, with each solution tailored to help extend vehicle and engine ~~performance~~range and ~~lifespan. Valvoline’s premium branded product offerings enhance its high-quality reputation and provide customers with solutions that address a wide variety of needs.~~efficiency.

InValvoline provides vehicle and engine care solutions to a range of customers, including end consumers, OEMs, mass market and automotive parts retailers, small to large installers, vehicle fleets, and distributors, among others. Valvoline operates and franchises more than 1,600 service center locations and is the second and third largest chain in the United States (“U.S.”) and Canada, Valvoline’s products and services are sold through more than 1,500 company-owned and franchised quick lube service center stores, to retailers with over 55,000 retail outlets, and to installer customers with approximately 15,000 locations. Valvoline also has a strong international presence with products soldrespectively, by number of stores. With sales in more than 140 ~~countries. Valvoline serves its global customer base through its sales force~~countries and ~~technical support organization~~territories, Valvoline’s solutions are available for every engine and ~~leverages technology, global customer relationships,~~powertrain, including high-mileage and ~~its diverse supply chain network to meet customer demands locally. This combination of scale~~heavy-duty applications, and ~~strong local presence is critical to the Company’s success.~~

Valvoline has three reportable segments: Quick Lubes, Core North America, and International, with certain corporate and non-operational items included in Unallocated and Other to reconcile to consolidated results.are offered at more than 80,000 locations worldwide.

1918

BUSINESS STRATEGY

Valvoline is focused on the following key business and growth strategies in fiscal ~~2021:~~2022:

•Executing the strategic separation of Valvoline's two business segments, Retail Services and Global Products, to create sustainable value for the Company's stakeholders and best position the segments for continued long-term success by allowing Retail Services to continue its growth and focus on leveraging its world class service model and providing Global Products with the opportunity to focus and allocate capital to its own strategic priorities;

•Aggressively growing ~~Quick Lubes~~Retail Services through organic service center expansion, ~~and~~ opportunistic acquisitions, and franchisee growth, while rapidly diversifying and expanding retail service offerings and capabilities through a quick, easy, and trusted customer experience delivered by hands-on experts;

•~~Strengthening~~Accelerating Global Products market share growth through continued development of and ~~maintaining the foundation~~investment in ~~Core North America~~key global emerging and high value markets by fully leveraging ~~investments in technology~~brand equity and ~~marketing~~product platforms 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;~~

•Expanding capabilities to serve future transport vehicles by continuing to develop relationships with electric vehicle ~~original equipment manufacturers~~OEMs and leveraging innovation in the delivery of future services and products in direct and adjacent markets; and

•Building a strong foundation enabled by data and technology to make Valvoline easy to do business with.

RECENT DEVELOPMENTS

~~Though~~ Strategic separation

On October 12, 2021, Valvoline announced its intention to pursue a separation of its two reportable segments, Retail Services and Global Products. Valvoline is making progress and evaluating alternatives to accomplish the separation of these two strong businesses. Consummation of the separation will be subject to final approval by Valvoline's Board, and no timetable has currently been established for completion of the separation. Valvoline’s results this quarter highlight the independent strengths of both of its reportable segments, and separation is expected to enable the two businesses to enhance focus on their distinct customer bases, strategies for continued growth, and operational needs.

COVID-19 ~~remains a headwind to miles driven and management believes this contributed to certain unfavorable impacts on its results during the three months ended December 31, 2020, Valvoline's business~~update

Valvoline has been able to substantially maintain its operations, ~~to-date~~demonstrating growth and ~~demonstrated solid performance~~strong results, while managing through the effects of the COVID-19 global pandemic. Management is unable to reasonably quantify the impact of COVID-19 on its current ~~results due to their breadth and variability given the current stage and duration of the pandemic.~~

year results. The continually evolving COVID-19 pandemic ~~has continued to evolve~~remains uncertain and its future impact on Valvoline will depend on a number of factors, including ~~and~~ among others, the ~~ultimate~~ duration and severity of the ~~pandemic~~spread of COVID-19, emerging variants, vaccine and booster effectiveness, public acceptance of safety protocols, and government measures, including vaccine mandates, implemented at the ~~success of vaccinations~~local and ~~restrictive measures on containing~~federal levels designed to slow and contain the spread of ~~the virus.~~COVID-19, among others. While the Company cannot predict the duration or the scale of the COVID-19 pandemic, or the effect it may continue to have on Valvoline's business, results of operations, or liquidity, management continuously monitors the situation, the sufficiency of its responses, and makes adjustments as needed. For more information, refer to Risk Factors included in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

FIRST FISCAL QUARTER ~~2021~~2022 OVERVIEW

The following were the significant events for the first fiscal quarter of ~~2021,~~2022, each of which is discussed more fully in this Quarterly Report on Form 10-Q:

•Valvoline reported net income of $87 million and diluted earnings per share of ~~$0.47~~$0.48 in the three months ended December 31, ~~2020, increases over~~2021. Net income was flat compared to the prior year ~~quarter~~ ~~of 19%~~period and ~~21%,~~ ~~respectively, driven by profitability improvements across all reportable segments.~~diluted EPS grew 2%.

•~~Quick Lubes operating income grew 13%~~Retail Services sales increased 36% over the prior year ~~period~~ driven by ~~organic~~ system-wide ~~same store sales~~same-store-sales ("SSS") growth of ~~6.0%~~24.7% and the addition of ~~126~~102 net new stores to the system from the prior year. Operating income and adjusted EBITDA increased 45% and 40%, respectively, over the prior year primarily due to strong top-line growth and margin expansion.

•Global Products sales grew 28% over the prior year primarily attributable to expanded distribution in North America and higher volumes in China and EMEA. Operating income and adjusted EBITDA decreased 20% and 18%, respectively, from the prior year primarily due to transitory supply chain costs and lingering price-cost lag that compared to modestly favorable price-cost lag in the prior year.

•Core North America operating income increased 2% over the prior year period due to favorable channel and product mix, in addition to lower expenses, which combined to more than offset unfavorable price-cost lag.

•~~International operating income increased~~ ~~70% over~~ ~~the prior year driven by broad-based volume growth, improved gross margin rates primarily attributed to favorable geographic and product mix, and strong performance from unconsolidated joint ventures.~~

•~~Valvoline~~The Company returned ~~$81~~$54 million to its shareholders through payment of a cash dividend of $0.125 per share during the quarter ~~while making substantial growth investments. The Company increased its quarterly dividend rate 11% from fiscal 2020 to $0.125 per share~~ and ~~repurchased over 2~~repurchasing approximately 1 million shares of Valvoline common ~~stock for $58 million.~~stock.

Use of Non-GAAP Measures

To ~~aid~~supplement the financial measures prepared in ~~the understanding of Valvoline’s ongoing business performance,~~accordance with U.S. GAAP, certain items within this document are presented on an adjusted ~~non-GAAP~~ basis. These non-GAAP measures, ~~are~~presented both on a consolidated and reportable segment basis, have limitations as analytical tools and should not ~~defined within~~be considered in isolation from, or as an alternative to, or more meaningful than, the financial statements presented in accordance with U.S. GAAP. The financial results presented in accordance with U.S. GAAP and ~~do not purport to~~reconciliations of non-GAAP measures included within this Quarterly Report on Form 10-Q should be ~~alternatives to net income/loss or cash flows from operating activities as measures of operating performance or cash flows.~~ carefully evaluated.

The following are the non-GAAP measures management has included and how management defines them:

•EBITDA ~~which management defines~~ - defined as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;

•Adjusted EBITDA ~~which management defines~~ - defined as EBITDA adjusted for certain unusual, infrequent or non-operational activity not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods ("key items," as further described ~~below,~~below);

•Segment adjusted EBITDA - defined as segment operating income adjusted for depreciation and ~~net pension and other postretirement plan expense/income; and~~amortization, in addition to key items impacting comparability;

•Free cash flow ~~which management defines~~-defined as ~~operating~~ cash flows from operating activities less capital expenditures and certain other adjustments as applicable; and

•Discretionary free cash flow - defined as cash flows from operating activities less maintenance capital expenditures and certain other adjustments as applicable.

These measures are not prepared in accordance with U.S. GAAP and management believes the use of non-GAAP measures ~~assists investors in understanding the ongoing~~on a consolidated and reportable segment basis provides a useful supplemental presentation of Valvoline's operating performance, enables comparison of ~~Valvoline’s business by presenting comparable~~ financial trends and results between ~~periods.~~periods where certain items may vary independent of business performance, and allows for transparency with respect to key metrics used by management in operating the business and measuring performance. 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.~~such measures. For a reconciliation of the most comparable U.S. GAAP measures to the non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.

~~Due~~Management believes EBITDA measures provide a meaningful supplemental presentation of Valvoline’s operating performance due to the depreciable assets associated with the nature of the Company’s operations and interest costs related to Valvoline’s capital ~~structure, management believes EBITDA is an important supplemental measure to evaluate the Company’s operating results between periods on a comparable basis.~~

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

•~~Key~~key items, ~~- Key items~~which consist of income or expenses associated with certain unusual, infrequent or non-operational ~~income or expenses~~activity not directly

attributable to the underlying business ~~which~~that management believes impacts the comparability of operational results between periods. Adjusted EBITDA measures enable comparison of financial trends and results between periods where key items may vary independent of business performance. Key items are often related to legacy matters or market-driven events considered by management to be outside the comparable operational performance of the business.

Key items may consist of adjustments related to: ~~the impairment of an equity investment;~~ legacy businesses, including the separation from Valvoline's former parent company and associated impacts of related indemnities; significant acquisitions or divestitures; restructuring-related matters; and other matters that are non-operational or unusual in nature. Key items ~~are considered by management to be outside~~also include 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 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.following:

•Net pension and other postretirement plan expense/income - ~~Net pension and other postretirement plan expense/income~~ includes 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/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~~includes the costs of ~~other~~ benefits provided to employees for current ~~service.~~service, including pension and other postretirement service costs.

•Changes in the last-in, first-out ("LIFO") inventory reserve - charges or credits recognized in Cost of sales to value certain lubricant inventories at the lower of cost or market using the LIFO method. During inflationary or deflationary pricing environments, the application of LIFO can result in variability of the cost of sales recognized each period as the most recent costs are matched against current sales, while preceding costs are retained in inventories. LIFO adjustments are determined based on published prices, which are difficult to predict and largely dependent on future events. The application of LIFO can impact comparability and enhance the lag period effects between changes in inventory costs and relating pricing adjustments.

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.

Management uses free cash flow and discretionary free cash flow as an additional non-GAAP ~~metric~~metrics of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an 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~~Free cash flow includes the impact of capital expenditures, providing a supplemental view of cash generation. Discretionary free cash flow includes the impact of maintenance capital expenditures, which are routine uses of cash that are necessary to maintain the Company's operations and provides a supplemental view of cash flow generation to maintain operations before discretionary investments in growth. Free cash flow ~~has~~and discretionary free cash flow have certain limitations, including that ~~it does~~they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt ~~repayments~~. 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, net income and cash flows from operating activities should primarily be relied upon as determined in accordance with U.S. GAAP, and EBITDA, Adjusted EBITDA, and free cash flow should only be used as supplements. In evaluating EBITDA, Adjusted EBITDA, and free cash flow, one should be aware that in the future Valvoline may recognize 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~~company-operated and franchised store counts and ~~same-store sales;~~SSS, and 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~~Retail Services 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. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store ~~counts and activity. Same-store-sales ("SSS")~~counts. SSS is defined as sales by U.S. ~~Quick Lubes~~Retail Services service center stores ~~(company-owned,~~(company-operated, franchised and the combination of these for system-wide SSS), with new stores including franchised conversions, 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~~Retail Services sales are limited to sales at ~~company-owned~~company-operated 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~~market position relative to competitors and overall store and segment 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.performance.

Management ~~also evaluates~~believes lubricant volumes sold in gallons by ~~each of~~ its ~~reportable segments and premium lubricant percentage, defined as premium lubricant gallons sold as~~consolidated subsidiaries is a percentage of segment 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 tomeasure in evaluating and understanding ~~Valvoline’s~~the operating ~~performance.~~performance of the Global Products segment. Volumes sold in other units of measure, including liters, are converted to gallons utilizing standard conversions.

RESULTS OF OPERATIONS

Consolidated review

The following ~~table~~ summarizes the results of the Company’s ~~operations:~~operations for the three months ended December 31:


		Three months ended December 31
		2020			2019			2021		2020				Variance
(In millions)	(In millions)			% of Sales			% of Sales		(In millions)	Amount		% of Sales		Amount		% of Sales		Amount		%
Sales	Sales	$	653	100.0%	$	607	100.0%		Sales	$	858	100.0	%	$	653	100.0	%	$	205	31.4	%
Gross profit	Gross profit	$	228	34.9%	$	211	34.8%		Gross profit	$	244	28.4	%	$	228	34.9	%	$	16	7.0	%
Net operating expenses	Net operating expenses	$	104	15.9%	$	107	17.6%		Net operating expenses	$	123	14.3	%	$	104	15.9	%	$	19	18.3	%
Operating income	Operating income	$	124	19.0%	$	104	17.1%		Operating income	$	121	14.1	%	$	124	19.0	%	$	(3)	(2.4)	%
Net income	Net income	$	87	13.3%	$	73	12.0%		Net income	$	87	10.1	%	$	87	13.3	%	$	—	—	%

Sales

~~Sales for the three months ended December 31, 2020 increased $46 million, or 8%, compared to the three months ended December 31, 2019.~~ The following ~~table~~ provides a reconciliation of the ~~changes:~~increase in sales from the prior year:


	~~Year over year~~Year-over-year change
(In millions)	Three months ended December 31, ~~2020~~2021
Volume and mix	$	25104

Price	590

~~Currency exchange~~	5
Acquisitions	11
Change in sales	$	46205

~~The Quick Lubes~~Volumes grew across the business and ~~International reportable segments delivered higher volumes~~product mix improved, leading to top-line expansion, as demand for Valvoline’s products and ~~mix improvements~~services remains robust and ~~drove~~market share gains benefited both segments. Additionally, the increase in sales for the three months ended December 31, 2020 compared to the prior year period. In addition, benefits from acquisitions and pricing in Quick Lubes and favorable currency exchange in International contributed further to year-over-year sales growth. These increases were partially offset by declinesCompany made ongoing progress in the ~~Core North America reportable segment, primarily attributed~~price pass-through of raw material cost increases, which further drove higher sales. Retail Services sales were 36% higher led by SSS that increased nearly 25% across the system, in addition to ~~lower volumes.~~growth from unit additions and acquisitions. Global Products sales increased 28% with 13% volume growth and top-line expansion across all regions.

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 increased $17 million for the three months ended December 31, 2020 compared to the same period in the prior year.~~ The table below provides a reconciliation of the ~~changes:~~increase in gross profit from the prior year:


	~~Year over year~~Year-over-year change
(In millions)	Three months ended December 31, ~~2020~~2021
Volume and mix	$	1550

~~Price and cost~~Change in LIFO reserve	(2)
~~Currency exchange~~Price and cost	2 (33)

Acquisitions	21

Change in gross profit	$	1716

The increase in gross profit ~~for the three months ended December 31, 2020 compared to the prior year period~~ was primarily driven by higher volumes and mix improvements in ~~the Quick Lubes and International reportable~~both segments, ~~favorable mix in each segment, the benefits of acquisitions in Quick Lubes, and favorable currency exchange,~~ partially offset by ~~an unfavorable~~the lag ~~between price~~in passing through raw material cost increases, transitory supply chain inefficiencies that included higher logistics and ~~cost.~~manufacturing costs, and to a lesser degree, the negative impact of LIFO adjustments in the rising cost environment. Acquisitions contributed a muted benefit to gross profit due to new store ramp up costs.

~~Gross~~The declines in gross profit margin ~~was relatively flat for~~rates were primarily the ~~three months ended December 31, 2020 compared~~result of higher raw material costs, supply chain challenges, and the dilutive impact from passing through cost increases, which more than offset mix improvements. Management continues to closely monitor the ~~prior year period. Favorable channel~~raw material cost environment and ~~product mix~~make progress in ~~Core North America~~passing through the cost increases that began in ~~combination with product and geographic mix benefits in International offset margin deleverage in Quick Lubes.~~fiscal 2021.

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

The table below ~~provides details of~~summarizes the components of net operating ~~expenses:~~

Three months ended December 31
2020 2019
(In millions) % of Sales % of Sales
Selling, general and administrative expenses $ 117 17.9 % $ 117 19.3 %
Net legacy and separation-related expenses (income) 1 0.1 % (1) (0.2) %
Equity and other income, net (14) (2.1) % (9) (1.5) %
Net operating expenses $ 104 15.9 % $ 107 17.6 %

~~Selling, general and administrative~~ expenses were flat in the three months ended December 31, 2020 compared to the prior year period. Declines from reduced travel expenses due to continued restrictions during the COVID-19 pandemic were offset by smaller increases across a number of areas, including amortization and transaction costs from recent acquisitions of Quick Lubes service center stores, wage and benefit inflation, and advertising in the Quick Lubes segment.

Increases in Net legacy and separation-related expenses of $2 million compared to the prior year period were primarily related to adjustments of indemnities estimated to be due to Valvoline's former parent, which increased in the current year compared to favorable activity in the prior year period.

~~Equity and other income, net increased $5 million~~ for the three months ended December ~~31, 2020 compared~~31:


	2021				2020				Variance
(In millions)	Amount		% of Sales		Amount		% of Sales		Amount		%
Selling, general and administrative expenses	$	135	15.7	%	$	117	17.9	%	$	18	15.4	%
Legacy and separation-related expenses	3		0.3	%	1		0.1	%	$	2	200.0	%
Equity and other income, net	(15)		(1.7)	%	(14)		(2.1)	%	(1)		7.1	%
Net operating expenses	$	123	14.3	%	$	104	15.9	%	$	19	18.3	%

Selling, general and administrative expenses increased primarily related to investments made to support future growth, including advertising and promotion, information technology, and acquisition-related costs.

Legacy and separation-related expenses increased primarily due to to costs incurred in the ~~prior~~current year ~~period.~~in planning for the separation of the Retail Services and Global Products segments. The Company expects to incur incremental costs during fiscal 2022 associated with planning for the proposed separation, including legal, tax and accounting, and other professional advisory and consulting fees. These costs cannot currently reasonably be estimated given the uncertainties in the manner and timing of separation.

The increase in Equity and other income, net was primarily driven by ~~increased equity and royalty~~ income ~~attributed to the improved performance of the Company's unconsolidated joint ventures, particularly in India and China. Additional smaller increases related to~~for research lab testing, which was partially offset by lower insurance recoveries ~~realized during~~in the ~~quarter.~~current year.

Net pension and other postretirement plan income

Net pension and other postretirement plan income ~~for the three months ended December 31, 2020 increased~~ decreased $4 million from the prior ~~year period.~~year. This ~~increase is driven by~~decline was due to lower ~~interest cost and improved asset performance~~expected returns on plan assets as a result of the ~~most recent annual remeasurement~~shift in asset allocation of the ~~plans.~~U.S. qualified plans toward a higher mix of fixed income securities, in addition to a reduction in the amortization of prior service credits into income from certain other postretirement plan amendments that ceased amortization beginning in fiscal 2022.

Net interest and other financing expenses

Net interest and other financing expenses ~~increased $4~~ decreased $3 million ~~during the three months ended December 31, 2020~~ related to lower outstanding borrowings compared to the prior ~~year period due to higher outstanding borrowings in the current~~ year.

Income tax expense

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


		Three months ended December 31						Three months ended December 31
(In millions)	(In millions)	2020			2019				(In millions)	2021			2020
Income tax expense	Income tax expense	$	30		$	24			Income tax expense	$	26		$	30
Effective tax rate percentage	Effective tax rate percentage	25.6		%	24.7		%		Effective tax rate percentage	23.0		%	25.6		%

From a combination of statute expirations and anticipated audit settlements in the next twelve months, Valvoline currently estimates a decrease in the range of $25 to $35 million in indemnity obligations due to the Company's former parent, which is expected to include certain unrecognized tax benefits.

EBITDA and Adjusted EBITDA

The following table reconciles net income to EBITDA and Adjusted EBITDA:


		Three months ended December 31				Three months ended December 31
(In millions)	(In millions)	2020		2019			(In millions)	2021		2020
Net income	Net income	$	87	$	73		Net income	$	87	$	87
Income tax expense	Income tax expense	30		24			Income tax expense	26		30
Net interest and other financing expenses	Net interest and other financing expenses	20		16			Net interest and other financing expenses	17		20
Depreciation and amortization	Depreciation and amortization	21		16			Depreciation and amortization	25		21
EBITDA	EBITDA	158		129			EBITDA	155		158
Net pension and other postretirement plan income (a)	Net pension and other postretirement plan income (a)	(13)		(9)			Net pension and other postretirement plan income (a)	(9)		(13)
Net legacy and separation-related expenses (income)		1		(1)
Legacy and separation-related expenses							Legacy and separation-related expenses	3		1
LIFO charge							LIFO charge	6		4
Information technology transition costs							Information technology transition costs	1		—
Business interruption recovery							Business interruption recovery	—		(1)

Business interruption recovery		(1)		—
Restructuring and related expenses		—		1

Adjusted EBITDA	Adjusted EBITDA	$	145	$	120		Adjusted EBITDA	$	156	$	149

(a)Net 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.~~credits. Refer to Note 76 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 ~~increased $25~~improved $7 million ~~for~~from the ~~three months ended December 31, 2020~~prior year driven by ~~the~~strong top-line growth across both segments from higher volumes and ongoing ~~strength of same-store sales~~progress in passing through raw material cost increases. Top-line growth and ~~store additions~~profit expansion in ~~Quick Lubes; favorable channel~~Retail Services were partially offset by price-cost lag and ~~product mix coupled with lower expenses~~supply chain inefficiencies, in ~~Core North America; and volume growth, the benefits of improved geographic and product mix, and a higher contribution from unconsolidated joint ventures in International.~~addition to increased operating expenses.

Reportable segment review

~~Valvoline’s~~The Company manages its business ~~is managed within~~through the following ~~three~~two reportable segments:

•~~Quick Lubes~~Retail Services - services the passenger car and light truck quick lube market in the United States and Canada with a broad array of preventive maintenance services and capabilities performed through ~~company-owned~~Valvoline’s retail network of company-operated and independent franchised ~~retail quick lube~~ service center stores, ~~and~~in addition to independent Express Care stores that service vehicles with Valvoline products.

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

•~~International~~Global Products - sells engine and automotive preventive maintenance products in more than 140 countries ~~outside of the United States~~to retailers, installers, and ~~Canada for the maintenance of consumer~~commercial customers, including OEMs, to service light- and ~~commercial~~heavy-duty vehicles and equipment.

~~Valvoline’s reportable~~These segments ~~are measured~~represent components of the Company for ~~profitability based~~which separate financial information is available that is utilized on a regular basis by the chief operating ~~income; therefore,~~decision maker in allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline ~~does not generally allocate items to each reportable~~defines as segment ~~below~~ operating income ~~such as net pension~~adjusted for depreciation and ~~other postretirement plan income, net interest~~amortization and ~~other financing expenses, or income tax expense. Operating income~~certain key items impacting comparability.

Costs to support corporate functions and certain non-operational and corporate activity that is not directly attributable to a particular segment are not included in the segment operating results regularly utilized by ~~segment includes~~ the ~~allocation of shared corporate costs, which are allocated consistently based on each segment’s proportional contribution~~chief operating decision maker. This activity is separately delineated within Corporate to ~~various financial measures.Valvoline does not allocate certain significant corporate and non-operational matters, including, but not limited~~reconcile 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.~~ consolidated results.

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.

~~Quick Lubes~~Retail Services

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

Company-owned
First Quarter 2021 Fourth Quarter 2020 Third Quarter 2020 Second Quarter 2020 First Quarter 2020
Beginning of period 584 548 536 524 519
Opened 10 22 5 7 2
Acquired 42 2 2 1 7
Net conversions between company-owned and franchised 27 12 5 4 (4)
End of period 663 584 548 536 524

Franchised (a)
First Quarter 2021 Fourth Quarter 2020 Third Quarter 2020 Second Quarter 2020 First Quarter 2020
Beginning of period 878 884 883 883 866
Opened 8 7 8 8 13
Acquired 12 — — — —
Net conversions between company-owned and franchised (27) (12) (5) (4) 4
Closed (1) (1) (2) (4) —
End of period (b)
870 878 884 883 883
Total stores 1,533 1,462 1,432 1,419 1,407






















	System-wide stores (a)
	First Quarter 2022	Fourth Quarter 2021	Third Quarter 2021	Second Quarter 2021	First Quarter 2021
Beginning of period	1,594	1,569	1,548	1,533	1,462
Opened	32	21	17	13	18
Acquired	12	7	5	3	54
Closed	(3)	(3)	(1)	(1)	(1)
End of period	1,635	1,594	1,569	1,548	1,533

	Number of stores at end of period
	First Quarter 2022	Fourth Quarter 2021	Third Quarter 2021	Second Quarter 2021	First Quarter 2021
Company-owned	738	719	698	673	663
Franchised	897	875	871	875	870

(a)~~Valvoline’s franchisees~~System-wide store count includes franchised service center stores. Valvoline franchises are ~~distinct~~independent legal entities, and Valvoline does not consolidate the results of operations of its franchisees.

~~(b)~~Included in the store counts at the end of the second, third and fourth quarters of fiscal 2020 were certain service center stores temporarily closed at the discretion of the respective independent operators due to the impacts of COVID-19. There were no service center stores temporarily closed as of December 31, 2020. As of September 30, 2020, 1 franchised service center store was temporarily closed, 5 franchised service center stores were temporarily closed as of June 30, 2020, and 26 franchised service center stores were temporarily closed as of March 31, 2020.

The year over year change ~~resulted in 126 net~~of 102 net new ~~company-owned~~company-operated and franchised stores ~~as a~~was the result ~~of 67 net~~of 75 net openings and 5927 acquired stores. Organic service center store growth was ~~primarily related to new company-owned service center store openings and franchisee expansion in key markets.~~driven by 25 net company-operated

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service center store openings and 50 net new franchisee store openings from expansion in key markets. In addition, 23 net stores converted within the system from franchise to company-operated.

The following ~~table~~ summarizes the results of the ~~Quick Lubes~~Retail Services reportable segment:

Three months ended December 31
(In millions) 2020 2019
Sales $ 254 $ 218
Operating income $ 43 $ 38
Depreciation and amortization $ 15 $ 10
Gross profit as a percent of sales (a)
35.0 % 37.3 %
Operating income as a percent of sales 16.9 % 17.4 %
Operating information
Lubricant sales gallons 7.7 7.3
Premium lubricants (percent of U.S. branded volumes) 69.4 % 66.5 %
Same-store sales growth (b) - Company-owned
6.1 % 6.3 %
Same-store sales growth (b) - Franchised (c)
6.0 % 9.9 %
Same-store sales growth (b) - Combined (c)
6.0 % 8.4 %


	Three months ended December 31						Favorable (Unfavorable)
(In millions)	2021			2020
Financial information
Retail Services segment sales	$	346		$	254		36	%



Operating income (b)	$	81		$	56		45	%
Key items	—			—
Depreciation and amortization	17			14			21	%
Adjusted EBITDA	$	98		$	70		40	%

Operating margin (c)	23.4		%	22.0		%	140	bps
Adjusted EBITDA margin (c)	28.3		%	27.6		%	70	bps

				Three months ended December 31
				2021			2020
Same-store sales growth
Company-operated (c)				22.1		%	6.1	%
Franchised (a) (d)				26.8		%	6.0	%
System-wide (a) (d)				24.7		%	6.0	%

(a)~~Gross profit~~Measure includes Valvoline franchisees, which are independent legal entities. Valvoline does not consolidate the results of operations of its franchisees.

(b)Valvoline does not generally allocate activity below operating income to its operating segments; therefore, the table above reconciles operating income to adjusted EBITDA.

(c)Operating margin is calculated as ~~a percent of~~operating income divided by sales, and adjusted EBITDA margin is ~~defined~~calculated as ~~sales, less cost of sales,~~adjusted EBITDA divided by sales.

~~(b)~~(d)Valvoline determines ~~same-store sales~~SSS growth ~~("SSS")~~ as sales by U.S. ~~Quick Lubes~~Retail Services service center stores, with new stores, including franchise conversions, excluded from the metric until the completion of their first full fiscal year in operation. ~~Previously, SSS was determined as~~

Retail Services sales by U.S. Quick Lubes service center stores, with stores new to the U.S. Quick Lubes system excluded from the metric until completion of their first full year in operation. Prior period measures have been revised to conform to the current basis of presentation.

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

~~Quick Lubes sales increased $36 million, or 17%,~~increased 36% for the first ~~fiscal~~ quarter compared to the prior year ~~period led by contributions from organic~~primarily due to strong SSS performance and unit ~~growth through acquisitions.~~ ~~While~~additions. System-wide SSS varied with softer results in the middle of the quarter believed to be due to the increased COVID-19 restrictions and the related impact on miles driven, since November, SSS results have been strong and grew ~~6.0% system-wide for the quarter~~24.7% compared to the prior ~~year.~~ ~~This growth was driven~~year led by ~~mix benefits from premiumization, as well as strong operations and in‐store execution with~~ increased ~~non-oil change services, improved pricing,~~transactions where leveraging data analytics capabilities drove customer base ~~expansion,~~expansion. Solid contributions from growth in average ticket were largely due to pricing and ~~higher transactions.~~premiumization that further contributed to system-wide SSS performance and highlighted in-store service delivery. The addition of ~~126~~102 net new stores to the system through acquisitions and new service center store openings also contributed to ~~revenue~~sales growth from the prior ~~year period.~~

~~Gross profit margin~~ ~~decreased~~ 2.3% in the three months ended December 31, 2020 compared to the prior year period primarily related to higher costs associated with adding new and acquired service center stores to the company-owned system, particularly those within the early phases of their operation. Gross profit margin was unfavorably impacted to a lesser extent by unproductive labor and other costs related to the Company's COVID-19 protocols designed to protect its employees and customers.year.

Operating income and adjusted EBITDA increased ~~$5 million during the three months ended December 31, 2020 compared to~~from the prior year ~~period primarily related~~outpacing sales growth and driving margin expansion. This growth was driven by the strong top-line performance and improved leverage from mature stores that have been open greater than three years and combined to ~~higher volumes~~more than offset the ramp up costs of new stores and ~~mix benefits, which offset margin rate declines.~~challenges of the raw material cost environment.

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~~Core North America~~Global Products

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

Three months ended December 31
(In millions) 2020 2019
Sales $ 235 $ 248
Operating income $ 47 $ 46
Depreciation and amortization $ 4 $ 4
Gross profit as a percent of sales (a)
37.6 % 36.3 %
Operating income as a percent of sales 20.0 % 18.5 %
Operating information
Lubricant sales gallons 21.2 21.4
Premium lubricants (percent of U.S. branded volumes) 59.7 % 56.0 %


	Three months ended December 31						Favorable (Unfavorable)
(In millions)	2021			2020


Financial information
Sales by geographic region
North America (a)	$	304		$	235		29	%
Europe, Middle East and Africa ("EMEA")	67			51			31	%
Asia Pacific	104			83			25	%
Latin America (a)	37			30			23	%
Global Products segment sales	$	512		$	399		28	%

Operating income (b)	$	70		$	88		(20)	%
Key items	—			—
Depreciation and amortization	7			6			17	%
Adjusted EBITDA	$	77		$	94		(18)	%

Operating margin (c)	13.7		%	22.1		%	(840)	bps
Adjusted EBITDA margin (c)	15.0		%	23.6		%	(860)	bps

Volume information
Lubricant sales (gallons)	43.1			38.0			13	%

~~(a)Gross profit as a percent of sales is defined as sales, less cost of~~


(a)			Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.
(b)			Valvoline does not generally allocate activity below operating income to its operating segments; therefore, the table above reconciles operating income to adjusted EBITDA.
(c)			Operating margin is calculated as operating income divided by sales, and adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales.

~~Core North America~~Global Products sales ~~decreased $13 million, or 5%, in the first fiscal quarter compared to~~increased from the prior year ~~period primarily related~~due to ~~lower~~growth across all regions. The ongoing progress in price pass-through of raw material cost increases drove sales growth that outpaced volumes, ~~in the installer channel,~~ which ~~has been running modestly ahead of miles driven trends as new business partially offset the slower pace of recovery~~were up 13% from the ~~continued impacts of COVID-19.~~

~~Gross profit margin increased 1.3% in the three months ended December 31, 2020 compared to the~~ prior year period due to favorable channel and product mix, which was partially offset by unfavorable price-cost lag. Actions taken to optimize promotional performance as well as effective marketing support drove solid progress in the retail channel where volumesyear. Volume increases were led by ~~branded products~~expanded distribution in North America and ~~increased modestly, improving channel and product~~growth in Asia Pacific, notably China, in addition to higher volumes in EMEA. Favorable mix further contributed to the increase in sales over the prior ~~year. These benefits partly countered the short-term margin pressure from higher raw material costs where actions continue to pass through these cost increases.~~

~~Operating income improved $1~~ ~~million during the three months ended December 31, 2020 compared to the prior~~ year ~~period primarily due to reduced operating expenses~~ as a result of ~~travel restrictions~~higher branded and ~~margin improvements resulting from favorable~~premium product mix.

~~International~~

~~The following table summarizes the results of the International reportable segment:~~

Three months ended December 31
(In millions) 2020 2019
Sales $ 164 $ 141
Operating income $ 34 $ 20
Depreciation and amortization $ 2 $ 2
Gross profit as a percent of sales (a)
30.9 % 28.7 %
Operating income as a percent of sales 20.7 % 14.2 %
Operating information
Lubricant sales gallons (b)
16.8 14.7
Lubricant sales gallons, including unconsolidated joint ventures (c)
30.3 25.5
Premium lubricants (percent of lubricant volume) 27.1 % 25.8 %

~~(a)Gross profit as a percent of sales is defined as sales, less cost of sales, divided by sales.~~

~~(b)Excludes volumes sold by unconsolidated subsidiaries.~~

~~(c)Valvoline's unconsolidated joint ventures are distinct legal entities and Valvoline does not consolidate the result of operations of its unconsolidated joint ventures.~~

International sales increased $23 million, or 16%, for the three months ended December 31, 2020 compared to the prior year period due to solid performances and volume growth across all regions, including notably strong results in Latin America and Asia Pacific led by China. Volume growth in the quarter was driven by a combination of organic growth and restocking due to COVID-19. Organic growth was attributed to a number of key actions to optimize distribution, add value to customers, and amplify brand building focused in key markets. Currency exchange and favorable geographic and product mix also contributed to a lesser extent to sales growth in the current year.

~~Gross profit margin increased 2.2% for the three months ended December 31, 2020 primarily driven by geographic and product mix benefits and favorable currency exchange.~~

Operating income ~~increased $14 million during the three months ended December 31, 2020~~and adjusted EBITDA decreased primarily related to price-cost lag due to raw material cost increases and supply chain disruptions that were partially offset by higher volumes and ~~margin improvements, as well as increased contributions from unconsolidated joint ventures and lower operating costs largely driven by reduced travel expenses as a result of COVID-19 restrictions.~~product mix benefits. Valvoline expects to continue to passing through pricing to recover raw material cost increases.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company closely manages its liquidity and capital resources. Valvoline’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’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’s business and growth strategies and returning capital to shareholders, while funding ongoing operations.

Cash flows

~~Valvoline’s cash~~Cash flows as reflected in the Condensed Consolidated Statements of Cash Flows are summarized as follows for the three months ended December 31:


(In millions)	(In millions)	2020		2019		(In millions)	2021		2020
Cash, cash equivalents, and restricted cash - beginning of period		$	761	$	159
Cash, cash equivalents and restricted cash - beginning of period						Cash, cash equivalents and restricted cash - beginning of period	$	231	$	761

Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	79		59		Operating activities	32		79
Investing activities	Investing activities	(245)		(35)		Investing activities	(46)		(245)
Financing activities	Financing activities	(73)		(23)		Financing activities	(63)		(73)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash		6		3
(Decrease) increase in cash, cash equivalents, and restricted cash		(233)		4
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash						Effect of currency exchange rate changes on cash, cash equivalents and restricted cash	—		6
Decrease increase in cash, cash equivalents and restricted cash						Decrease increase in cash, cash equivalents and restricted cash	(77)		(233)

Cash, cash equivalents, and restricted cash - end of period		$	528	$	163
Cash, cash equivalents and restricted cash - end of period						Cash, cash equivalents and restricted cash - end of period	$	154	$	528

Operating activities

The ~~increase~~decrease in ~~operating~~ cash flows provided by operating activities ~~for the three months ended December 31, 2020 compared to~~of $47 million from the prior year was primarily due to ~~higher~~a timing-related unfavorable increase in net working capital, largely attributed to growth in accounts receivable from top-line expansion. In the current year period, net working capital (current assets, excluding cash ~~earnings, which was partially offset by higher interest payments of $9 million.~~and cash equivalents, minus current liabilities, excluding long-term debt due within one year) increased $85 million compared to a $35 million increase in the prior year.

Investing activities

The ~~increase~~decrease in cash flows used in investing activities ~~for the three months ended December 31, 2020 compared to the prior year~~of $199 million was primarily due to ~~increased investments in Quick Lubes growth through the expansion~~lower current year acquisition activity of its store network via acquisition and new company-owned service center store openings. During the three months ended December 31, 2020, Valvoline acquired 81 and opened 10 service center stores compared to nine and two, respectively,$204 million, which was partially offset by repayments of franchisee COVID relief loans that were $6 million higher in the prior year period. Additionally, capital expenditures increased modestly in the current year related to the Company's blending and packaging plant in China where production began in early December 2020. The plant remains on schedule to produce substantially all of the Company's lubricant volume for the China market by the end of fiscal 2021.

~~Valvoline is currently forecasting approximately $160 million to $170 million of capital expenditures for full year fiscal 2021, funded primarily from operating cash flows.~~year.

Financing activities

The ~~increase~~decrease in cash flows used in financing activities ~~for~~of $10 million was primarily due to $27 million of lower share repurchases in the ~~three months ended December 31, 2020 compared~~current year, which were partially offset by net proceeds from borrowings that were $12 million higher in the prior year. Lower share repurchases were the result of shifting to a consistent share buyback strategy in the second half of fiscal 2021, and higher net proceeds from borrowings in the prior year ~~period was primarily driven by increased cash returned~~largely related to ~~shareholders through share repurchases and dividends, partially offset by proceeds from borrowings on~~ the China ~~Credit Facility.~~Construction Facility as the blending and packaging plant began production in December 2020.

Free cash flow ~~and other liquidity information~~

The following ~~table~~ sets forth free cash flow and discretionary free cash flow and reconciles cash flows from operating activities to ~~free cash flow. As previously noted,~~both measures. These free cash flow ~~has~~measures have certain limitations, including that ~~it does~~they do not reflect adjustments for certain ~~non-~~

~~discretionary~~non-discretionary cash flows, such as mandatory debt repayments. Refer to the “Use of Non-GAAP Measures” section included above in this Item 2 for additional ~~information.~~information regarding these non-GAAP measures.


		Three months ended December 31					Three months ended December 31
(In millions)	(In millions)	2020		2019		(In millions)	2021		2020
Cash flows provided by operating activities	Cash flows provided by operating activities	$	79	$	59	Cash flows provided by operating activities	$	32	$	79

Additions to property, plant and equipment		(35)		(28)
Less: Maintenance capital expenditures						Less: Maintenance capital expenditures	(6)		(5)
Discretionary free cash flow						Discretionary free cash flow	26		74
Less: Growth capital expenditures						Less: Growth capital expenditures	(29)		(30)
Free cash flow	Free cash flow	$	44	$	31	Free cash flow	$	(3)	$	44

As of December 31, 2020, working capital (current assets minus current liabilities, excluding long-term debt due within one year) was $796 million compared to $994 million as of September 30, 2020. Liquid assets (cash, cash equivalents, and receivables) were 189% of current liabilities as of December 31, 2020 and 269% at September 30, 2020. The decrease in ~~working capital is primarily~~free cash flow over the prior year was driven by lower cash flows provided by operating activities as maintenance and growth capital expenditures were relatively flat. Management continues to expect strong free cash ~~equivalents utilized~~flow generation in fiscal 2022 of $260 million to ~~fund investments in Quick Lubes expansion through acquisition.~~$300 million.

Debt

AsInclusive of ~~December 31, 2020 and September 30, 2020,~~ the ~~Company had long-term debt (including the current portion and debt issuance costs and discounts) of $2.0 billion comprised of loans and revolving facilities. Approximately 88%~~interest rate swap agreements, approximately 87% of Valvoline's outstanding borrowings ~~inclusive of its interest rate swap agreements,~~at December 31, 2021 had fixed interest rates, ~~as of December 31, 2020.~~with the remainder bearing variable rates. Valvoline was in compliance with all covenants of its debt obligations as of December 31, ~~2020~~2021 and had a combined total of ~~$506~~$587 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility. Credit facilities in place in China had ~~$33~~approximately $28 million of combined borrowing capacity remaining, ~~$23~~$24 million under the China Working Capital Facility and ~~$10~~$4 million under the China ~~Credit~~Construction Facility. Refer to Note 54 of the Notes to Condensed Consolidated Financial Statements for additional details regarding the Company’s debt instruments.

In January 2021, the Company completed the issuance of the 2031 Notes and used the net proceeds of $528 million, together with cash and cash equivalents on hand, to fully redeem the 2025 Notes, with a total aggregate redemption price of $840 million. These transactions will reduce Valvoline's gross leverage and cost of capital, resulting in lower ongoing interest expense. As of January 31, 2021, the Company had total available liquidity of approximately $700 million including cash and cash equivalents on hand of over $200 million after using $312 million in January to redeem the 2025 Notes.

Dividend payments and share repurchases

During the three months ended December 31, ~~2020,~~2021, the Company paid cash dividends of $0.125 per common share for $23 million and repurchased ~~over 2~~nearly 1 million shares of its common stock for ~~$58~~$31 million pursuant to the ~~2020~~May 2021 Board authorization to repurchase up to $300 million of common stock through September 30, 2024 (the “2021 Share Repurchase ~~Authorization.~~Authorization”).

OnOn January ~~28, 2021,~~24, 2022, the Board ~~of Directors of Valvoline~~ declared a quarterly cash dividend of $0.125 per share of Valvoline common stock. The dividend is payable on March 15, ~~2021~~2022 to shareholders of record on February ~~26, 2021. The~~28, 2022. Additionally, the Company repurchased ~~more than 1 million~~ shares of ~~its~~Valvoline common stock for ~~$33~~$10 million induring January 2022, leaving the ~~period from January 1, 2021 through January 31, 2021, leaving Valvoline~~Company with $9$232 million in aggregate share repurchase authority remaining under the ~~2020~~2021 Share Repurchase Authorization as of ~~January 31, 2021.~~February 1, 2022.

The dividend and share repurchase authorization is part of a broader capital allocation framework to deliver value to shareholders by first driving growth in the business, organically and through acquisitions, and then returning excess cash to shareholders through dividends and share repurchases. Future declarations of quarterly dividends are subject to approval by the Board and may be adjusted as business needs or market conditions change, while the timing and amount of any future share repurchases will be based on the level of Valvoline's liquidity, general business and market conditions and other factors, including alternative investment opportunities.

~~Guarantor financial information~~

The 2025 Notes are general unsecured senior obligations of Valvoline Inc. and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by Valvoline Inc. and wholly-owned subsidiaries of

the Company (the "Guarantor Subsidiaries") collectively referred to as the "Obligor Group." Refer to Exhibit 22 for a summary of the Company's Guarantor Subsidiaries. Other subsidiaries (the "Non-guarantor Subsidiaries") largely represent the international operations of the Company, which do not guarantee the 2025 Notes. Refer to Note 5 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q as well as Valvoline's Annual Report on Form 10-K for the year ended September 30, 2020 for additional details on the 2025 Notes.

~~The following table presents the Obligor Group's summarized statement of comprehensive income for the three months ended December 31, 2020:~~


~~(In millions)~~	~~Obligor Group~~
~~Revenue~~	$	~~495~~
~~Intercompany revenue with non-obligor subsidiaries, net~~	$	10
~~Gross profit~~	$	~~179~~
~~Operating income~~	$	~~107~~
~~Net income attributable to group~~	$	72

~~The following table presents the Obligor Group's summarized balance sheets as of:~~

(In millions) December 31, 2020 September 30, 2020
Assets
Current assets $ 670 $ 863
Intercompany receivable $ 45 $ 42
Noncurrent assets $ 1,676 $ 1,365
Liabilities
Current liabilities $ 303 $ 334
Noncurrent liabilities $ 2,626 $ 2,534

~~Off-balance sheet arrangements~~

As of December 31, 2020, Valvoline has no contractual obligations that are reasonably likely to have a material effect on the Company’s condensed consolidated financial statements that are not fully recorded within the Condensed Consolidated Balance Sheets or fully disclosed in the Notes to Condensed Consolidated Financial Statements in Item I of Part I of this Quarterly Report on Form 10-Q. As part of Valvoline’s normal course of business, it is a party to certain financial guarantees and other commitments, and while these arrangements involve elements of performance and credit risk, such risk is not currently considered reasonably likely to have a material effect on the Company’s condensed consolidated financial statements. The possibility that Valvoline would have to make actual cash expenditures in connection with these obligations is largely dependent on the performance of the party whose obligations Valvoline guarantees, or the occurrence of future events.

Summary

As of December 31, ~~2020,~~2021, cash and cash equivalents totaled ~~$527~~$152 million, total debt was ~~$2.0~~$1.7 billion, and total remaining borrowing capacity under the Company’s Revolver and Trade Receivables Facility was ~~$506~~$586 million. Valvoline’s ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in the industry, and is subject to the business and other risk factors described in Item 1A of Part I of the Annual Report on Form 10-K for the year ended September 30, ~~2020.~~2021. 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.

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

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postretirement plan contributions, debt servicing obligations, tax-related and other ~~contractual commitments,~~material cash and operating requirements for the next twelve months.

NEW ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING ~~POLICIES AND~~ ESTIMATES

The Company’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, ~~2020.~~2021. Management reassessed the critical accounting ~~policies~~estimates as disclosed in the Annual Report on Form 10-K and determined there were no changes ~~to critical accounting policies and estimates~~ in the three months ended December 31, ~~2020.~~2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’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, ~~2020.~~2021. Management reassessed the quantitative and qualitative market risk disclosures as described in the Annual Report on Form 10-K and determined there were no material changes to market risks in the three months ended December 31, ~~2020.~~2021.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Valvoline’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the assistance of management, have evaluated the effectiveness of the Company’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 (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’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, and that such information is accumulated and communicated to Valvoline’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 fiscal quarter ended December 31, ~~2020~~2021 that materially affected, or are reasonably likely to materially affect, Valvoline’s internal control over financial reporting.

3330

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. For a description of Valvoline's legal proceedings, refer to Note 87 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

During the period covered by this report, there were no material changes from the risk factors previously disclosed in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020.~~2021.

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

The Company repurchased ~~2.5 million~~ shares of its common stock for ~~$58~~$31 million during the three months ended December 31, ~~2020~~2021 pursuant to the ~~2020~~2021 Share Repurchase Authorization.

Share repurchase activity during the three months ended December 31, ~~2020~~2021 follows:

Monthly period Total number of shares purchase Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Dollar value of shares that may yet be purchased under the plans or programs (in millions)
October 1, 2020 - October 31, 2020 — $ — — $ —
November 1, 2020 - November 30, 2020 555,904 $ 22.94 555,904 $ 87
December 1, 2020 - December 31, 2020 1,963,475 $ 23.22 1,963,475 $ 42
Total 2,519,379 $ 23.16 2,519,379


Monthly Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Dollar value of shares that may yet be purchased under the plans or programs (in millions)
October 1, 2021 - October 31, 2021	325,186	$	33.55	325,186	$	262
November 1, 2021 - November 30, 2021	284,916	$	35.37	284,916	$	252
December 1, 2021 - December 31, 2021	294,475	$	35.55	294,475	$	242
Total	904,577	$	34.78	904,577

3431

ITEM 6. EXHIBITS

Exhibits 10.1 through 10.3 are management compensatory plans or arrangements.













2210.1*			~~List~~Form of ~~Guarantors Subsidiaries (incorporated by reference~~Outside Director Restricted Stock Unit Award Agreement pursuant to ~~Exhibit 22 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed on November 24, 2020).~~the 2016 Valvoline Inc. Incentive Plan.
10.2*			Valvoline Severance Pay Plan, as amended and restated, effective January 1, 2022.
10.3*			Valvoline Change in Control Severance Plan, as amended and restated, effective January 1, 2022.
31.1*			Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*			Certification of Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**			Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, and Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			XBRL Taxonomy Extension Schema Document.
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.
104			Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

* Filed herewith.

** Furnished herewith.

™ Trademark, Valvoline or its subsidiaries, registered in various countries.

~~® Register mark, Car Wash Partners, Inc., registered in United States~~

3532

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)

February ~~4, 2021~~9, 2022	By:	/s/ Mary E. Meixelsperger
		Mary E. Meixelsperger
		Chief Financial Officer

3633


Index to Notes to Condensed Consolidated Financial Statements			Page

Note 1 - Basis of Presentation and Significant Accounting Policies			8
Note 2 - Fair Value Measurements			9
Note 3 - Acquisitions ~~and Divestitures~~			10

Note 4 - ~~Intangible Assets~~Debt			11
Note 5 - ~~Debt~~Income Taxes			12
Note 6 - ~~Income Taxes~~Employee Benefit Plans			12
Note 7 - Litigation, Claims and Contingencies			13
Note 78 - ~~Employee Benefit Plans~~Earnings Per Share			14
~~Note~~ 8 ~~- Litigation, Claims and Contingencies~~			1413
Note 9 - ~~Earnings Per Share~~Reportable Segment Information			14
Note 1 0 ~~- Reportable Segment Information~~			15
~~Note 1~~1 - Supplemental Financial Information			16
Note 1 21 - Subsequent Events			1817


			Page
PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

Condensed Consolidated Statements of Comprehensive Income			3

Condensed Consolidated Balance Sheets			4

Condensed Consolidated Statements of ~~Stockholders~~’ ~~Deficit~~Stockholders' Equity (Deficit)			5

Condensed Consolidated Statements of Cash Flows			6

Notes to Condensed Consolidated Financial Statements			7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			1918

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			3330

ITEM 4. CONTROLS AND PROCEDURES			3330

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			3431

ITEM 1A. RISK FACTORS			3431

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			3431

ITEM 6. EXHIBITS			3532

SIGNATURE			3633


	December 31, 2020						September 30, 2020
(In millions)	Fair value		Carrying value		Unamortized discounts and issuance costs		Fair value		Carrying value		Unamortized discounts and issuance costs

2025 Notes	$	826	$	790	$	(10)	$	827	$	790	$	(10)
2030 Notes	635		592		(7)		613		592		(8)
Total	$	1,461	$	1,382	$	(17)	$	1,440	$	1,382	$	(18)


	Actual		Estimated
	Three months ended December 31		Years ended September 30
(In millions)	2020		2021		2022		2023		2024		2025
Amortization expense	$	3	$	15	$	14	$	14	$	13	$	11


	Company-owned
	First Quarter 2021	Fourth Quarter 2020	Third Quarter 2020	Second Quarter 2020	First Quarter 2020
Beginning of period	584	548	536	524	519
Opened	10	22	5	7	2
Acquired	42	2	2	1	7
Net conversions between company-owned and franchised	27	12	5	4	(4)

End of period	663	584	548	536	524

	Franchised (a)
	First Quarter 2021	Fourth Quarter 2020	Third Quarter 2020	Second Quarter 2020	First Quarter 2020
Beginning of period	878	884	883	883	866
Opened	8	7	8	8	13
Acquired	12	—	—	—	—
Net conversions between company-owned and franchised	(27)	(12)	(5)	(4)	4
Closed	(1)	(1)	(2)	(4)	—
End of period (b)	870	878	884	883	883

Total stores	1,533	1,462	1,432	1,419	1,407


Monthly period	Total number of shares purchase	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Dollar value of shares that may yet be purchased under the plans or programs (in millions)
October 1, 2020 - October 31, 2020	—	$	—	—	$	—
November 1, 2020 - November 30, 2020	555,904	$	22.94	555,904	$	87
December 1, 2020 - December 31, 2020	1,963,475	$	23.22	1,963,475	$	42
Total	2,519,379	$	23.16	2,519,379