Notes to Consolidated Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of business
Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide marketer and supplier of engine and automotive maintenance products and services. Valvoline is one of the most recognized premium consumer brands in the global automotive lubricant industry, known for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed name recognition across multiple product and service channels.
Prior to its initial public offering (the "IPO") in September 2016, the Valvoline business operated as a wholly-owned subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). Valvoline was incorporated in May 2016 and in advance of the IPO, the Valvoline business and certain other legacy Ashland assets and liabilities were transferred from Ashland to Valvoline as a reorganization of entities under common Ashland control (the "Contribution"). In connection with the IPO, Ashland retained 83% of the total outstanding shares of Valvoline's common stock. On May 12, 2017, Ashland distributed its interest in Valvoline to Ashland stockholders through a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017 (the "Distribution"). Based on the shares of Ashland common stock outstanding on the record date, each share of Ashland common stock received 2.745338 shares of Valvoline common stock in the Distribution. The Distribution marked the completion of Valvoline's separation from Ashland as Ashland no longer owned any shares of Valvoline common stock and Valvoline was no longer a controlled and consolidated subsidiary of Ashland.
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and U.S. Securities and Exchange Commission (“SEC”) regulations. The financial statements are presented on a consolidated basis for all periods presented and include the operations of the Company and its majority-owned and controlled subsidiaries. All intercompany transactions and balances within Valvoline have been eliminated in consolidation.
All transactions and balances between Valvoline and Ashland have been reported in the accompanying consolidated financial statements, which reflect the transfer of various assets and liabilities from Ashland on a carryover basis (historical cost). Ashland’s net investment in Valvoline included net income through the completion of the IPO and net cash transfers to and from Ashland through the Distribution. Concurrent with the Distribution, Ashland’s net investment in Valvoline was reduced to zero with a corresponding adjustment to Paid-in capital and Retained deficit.
Certain prior period amounts have been reclassified in the accompanying consolidated financial statements and notes thereto to conform to the current period presentation.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Valvoline’s significant accounting policies, which conform to U.S. GAAP and are applied on a consistent basis in all years presented, except when otherwise disclosed, are described below.
Use of estimates, risks and uncertainties
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent matters. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including intangible assets and goodwill), customer incentives, employee benefit obligations and income taxes. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
Cash and cash equivalents
All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
Valvoline invoices customers once or as performance obligations are satisfied, at which point payment becomes unconditional. As the majority of the Company’s performance obligations are satisfied at a point in time and customers typically do not make material payments in advance, nor does Valvoline have a right to consideration in advance of control transfer, the Company had no contract assets or contract liabilities. The Company recognizes a receivable on its Consolidated Balance Sheet when the Company performs a service or transfers a product in advance of receiving consideration, and the Company’s right to consideration is unconditional and only the passage of time is required before payment of that consideration is due.
Accounts receivable are recorded at net realizable value, and Valvoline records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses for accounts receivable. Valvoline estimates the allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, past transaction history with the customer, and changes in customer payment terms. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible accounts receivable against the allowance for doubtful accounts when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
Inventories
Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method to provide matching of revenues with current costs. Costs include materials, labor and manufacturing overhead related to the purchase and production of inventories. The Company regularly reviews inventory quantities on hand and the estimated utilization of inventory. Excess and obsolete reserves are established when inventory is estimated to not be usable based on forecasted usage, product demand and life cycle, as well as utility.
Property, plant and equipment
Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated principally over 5 to 25 years and machinery and equipment principally over 5 to 30 years. Property, plant and equipment is relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired. Gains or losses on the dispositions of property, plant and equipment are included in the Consolidated Statements of Comprehensive Income and generally reported in Equity and other income, net. Property, plant and equipment carrying values are evaluated for recoverability when impairment indicators are present and are conducted at the lowest identifiable level of cash flows. Such indicators could include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of property, plant and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).
Leases
Certain of Valvoline's properties, including retail, office, blending and warehouse locations, in addition to certain equipment, are leased. The initial terms of these leases vary in length and in many cases, include renewal options and require the payment of taxes, insurance and maintenance, in addition to rent. Certain leases contain escalation clauses and rent allowances, which have been reflected in rent expense on a straight-line basis over the lease term, with the difference recognized as deferred rent. Deferred rent was $5 million and $3 million as of September 30, 2019 and 2018, respectively.
Capital and financing leases are recorded as assets and an obligation at the present value of the minimum lease payments during the lease term. A financing lease is recorded when Valvoline is deemed the owner of the leased property. Capitalized and financing lease obligations are primarily included in Other noncurrent liabilities with related assets in Property, plant and equipment, net within the Consolidated Balance Sheets. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the lease term.
Business combinations
The financial results of the businesses that Valvoline has acquired are included in the Company’s consolidated financial results from the respective dates of the acquisitions. The Company allocates the purchase consideration to the identifiable assets acquired and liabilities assumed in the business combination based on their acquisition-date fair values. The excess of the purchase consideration over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded. Factors giving rise to goodwill generally include synergies that are anticipated as a result of the business combination, including access to new customers and markets. The fair values of identifiable intangible assets acquired in business combinations are generally determined using an income approach, requiring financial forecasts and estimates as well as market participant assumptions.
Goodwill and other intangible assets
Valvoline tests goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current carrying value. Valvoline’s reporting units are Quick Lubes, Core North America, and International.
In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative "step zero" assessment to determine whether further impairment testing is necessary or to perform a quantitative "step one" assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others.
Under the step one assessment, if the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured under "step two" of the impairment analysis. In step two of the analysis, an impairment loss will be recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate, weighted average cost of capital, terminal values and working capital changes. Several of these assumptions vary among reporting units, and the cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies method which is based on earnings multiple data. The Company also performs a reconciliation between market capitalization and the estimate of the aggregate fair value of the reporting units, including consideration of a control premium.
Although there were no circumstances indicating a potential impairment, Valvoline elected to perform a quantitative assessment during fiscal 2019 and determined that the fair values of the Company's reporting units were substantially in excess of carrying values and no impairment existed.
Acquired finite-lived intangible assets principally consist of certain trademarks and trade names, reacquired franchise rights and customer relationships. Intangible assets acquired in an asset acquisition are carried at cost, less accumulated amortization. For intangible assets acquired in a business combination, the estimated fair values of the assets acquired are used to establish the carrying values, which are determined using assumptions from the perspective of a market participant and generally an income approach. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Valvoline evaluates finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, and any assets not expected to be recovered through undiscounted future net cash flows are written down to current fair value.
Equity method investments
Investments in companies, including joint ventures, where Valvoline has the ability to exert significant influence over, but not control, operating and financial policies of the investee are accounted for using the equity method of accounting. Judgment regarding the level of influence over each investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, and participation in policy-making decisions. The Company’s proportionate share of the net income or loss of these companies is included within Equity and other income, net in the Consolidated Statements of Comprehensive Income.
The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time and extent to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.
Pension and other postretirement benefit plans
Valvoline sponsors defined benefit pension and other postretirement plans in the U.S and in certain countries outside the U.S. The majority of these plans were transferred to and assumed by the Company in the Contribution of certain of Ashland’s pension and other postretirement benefit obligations and plan assets in late fiscal 2016. Valvoline accounts for these obligations as single-employer plans for which Valvoline recognizes the net liabilities and the full amount of any costs or gains.
Valvoline recognizes the funded status of each applicable plan on the Consolidated Balance Sheets whereby each underfunded plan is recognized as a liability. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation. Changes in the fair value of plan assets and net actuarial gains or losses are recognized upon remeasurement, which is at least annually as of September 30, the measurement date, and whenever a remeasurement is triggered. The remaining components of pension and other postretirement benefits expense / income are recorded ratably on a quarterly basis. The fair value of plan assets represents the current market value of assets held by irrevocable trust funds for the sole benefit of participants, and the benefit obligation is the actuarial present value of the benefits expected to be paid upon retirement, death, or other distributable event based on estimates. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain key assumptions that require significant judgment, including, but not limited to, estimates of discount rates, rate of compensation increases, interest rates and mortality rates. Actuarial gains and losses may be related to actual results that differ from assumptions as well as changes in assumptions, which may occur each year.
Due to the freeze of U.S. pension benefits effective September 30, 2016, continuing service costs are limited to certain international pension plans, and are reported in the same caption of the Consolidated Statements of Comprehensive Income as the related employee payroll expenses. All components of net periodic benefit cost / income other than service cost are recognized below operating income within Net pension and other postretirement plan expense / income in the Consolidated Statements of Comprehensive Income.
Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.
Revenue recognition
Revenue is recognized for the amount that reflects the consideration the Company is expected to be entitled to based on when control of the promised good or service is transferred to the customer. Revenue recognition is evaluated through the following five steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligation(s) in the contract(s); (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation(s) in the contract(s); and (v) recognition of revenue when or as a performance obligation is satisfied.
Nature of goods and services
Valvoline generates all revenues from contracts with customers, primarily as a result of the sale and service delivery of engine and automotive maintenance products to customers. Valvoline derives its sales from its broad line of products and complementary services through three principal activities managed across its three reportable segments: (i) engine and automotive maintenance products, (ii) company-owned quick-lube operations, and (iii) franchised quick-lube operations. Valvoline’s sales are generally to retail, installer, industrial, distributor, franchise, and end consumers to facilitate vehicle and equipment service and maintenance. Approximately 98% of Valvoline’s net sales are products and services sold at a point in time through either ship-and-bill performance obligations or company-owned quick-lube operations. The remaining 2% of Valvoline’s net sales generally relate to franchise fees.
Below is a summary of the key considerations for Valvoline's material revenue-generating activities:
Engine and automotive maintenance products
Engine and automotive maintenance products primarily include lubricants, antifreeze, chemicals, filters, and other complementary products for use across a wide array of vehicles and engines. The Company’s customers typically enter into a sales agreement which outlines a framework of terms and conditions that apply to all current and future purchase orders for the customer submitted under such sales agreement. In these situations, the Company’s contract with the customer is the sales agreement combined with the customer purchase order as specific products and quantities are not indicated until a purchase order is submitted. As the Company’s contract with the customer is typically for a single purchase order under the supply agreement to be delivered at a point in time, the duration of the contract is almost always one year or less. The Company’s products are distinct and separately identifiable on customer purchase orders, with each product sale representing a separate performance obligation that is generally delivered simultaneously. Valvoline is the principal to these contracts as the Company has control of the products prior to transfer to the customer. Accordingly, revenue is recognized on a gross basis.
The Company determines the point in time at which control is transferred and the performance obligation is satisfied by considering when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product, which generally coincides with the transfer of title and risk of loss to the customer and is typically determined based on delivery terms within the underlying contract.
Customer payment terms vary by region and customer and are generally 30 to 60 days after delivery. Valvoline does not provide extended payment terms greater than one year.
Company-owned quick-lube operations
Performance obligations related to company-owned quick-lube operations primarily include the sale of engine and automotive maintenance products and related services. These performance obligations are distinct and are delivered simultaneously at a point in time. Accordingly, revenue from company-owned quick-lube operations is recognized when payment is tendered at the point of sale, which coincides with the completion of product and service delivery and the transfer of control and benefits from the performance obligations to the customer.
Franchised quick-lube operations
The primary performance obligations related to franchised quick-lube operations include product sales as described above and the license of intellectual property, which provides access to the Valvoline brand and proprietary information to operate service center stores over the term of a franchise agreement. Other franchise performance obligations do not result in material revenue. Each performance obligation is distinct, and franchisees generally receive and consume the benefits provided by the Company’s performance over the course of the franchise agreement, which typically ranges from 10 to 15 years. Billings and payments occur monthly.
In exchange for the license of Valvoline intellectual property, franchisees generally remit initial fees upon opening a service center store and royalties at a contractual rate of the applicable service center store sales over the term of the franchise agreement. The license provides access to the intellectual property over the term of the franchise agreement and is considered a right-to-access license of symbolic intellectual property as substantially all of its utility is derived from association with the Company’s past and ongoing activities. The license granted to operate each franchised service center store is the predominant item to which the royalties relate and represents a distinct performance obligation which is recognized over time as the underlying sales occur, as this is the most appropriate measure of progress toward complete satisfaction of the performance obligation. Franchise revenue included within sales was $44 million, $29 million, and $28 million during fiscal 2019, 2018, and 2017, respectively.
Variable consideration
The Company only offers an assurance-type warranty with regard to the intended functionality of products sold, which does not represent a distinct performance obligation within the context of the contract. Product returns and refunds are generally not material and are not accepted unless the item is defective as manufactured. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which Valvoline expects to receive.
The nature of Valvoline’s contracts with customers often give rise to variable consideration consisting primarily of promotional rebates and customer pricing discounts based on achieving certain levels of sales activity that generally
decrease the transaction price. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration, or amounts payable to the customer when there is a basis to reasonably estimate the amount and it is probable there will not be a significant reversal. Variable consideration is recorded as a reduction of the transaction price at the time of sale and is primarily estimated utilizing the most likely amount method that is expected to be earned as the Company is able to estimate the anticipated discounts within a sufficiently narrow range of possible outcomes based on its extensive historical experience with certain customers, similar programs and management’s judgment with respect to estimating customer participation and performance levels. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.
The reduction of transaction price due to customer incentives was $346 million, $357 million, and $360 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2019, 2018, and 2017, respectively. Reserves for these customer programs and incentives were $72 million and $57 million as of September 30, 2019 and 2018, respectively, and are recorded within Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Allocation of transaction price
In each contract with multiple performance obligations, Valvoline allocates the transaction price, including variable consideration, to each performance obligation on a relative standalone selling price basis, which is generally determined based on the directly observable data of the Company’s standalone sales of the performance obligations in similar circumstances to similar customers. In the absence of directly observable standalone prices, the Company may utilize prices charged by competitors selling similar products or use an expected cost-plus margin approach. The amount allocated to each performance obligation is recognized as revenue as control is transferred to the customer.
Practical expedients and policy elections
•Sales and use-based taxes - The Company excludes taxes collected from customers from net sales. These amounts are, however, reflected in accrued expenses until remitted to the appropriate governmental authority.
•Shipping and handling costs - Valvoline elected to account for shipping and handling activities that occur after the customer has obtained control as fulfillment activities (i.e., an expense) rather than as a performance obligation. Accordingly, amounts billed for shipping and handling are a component of the transaction price included in net sales, while costs incurred are included in cost of sales. Shipping and handling costs recorded in sales were $10 million in both fiscal 2019 and 2018 and $16 million in fiscal 2017.
•Significant financing component - Valvoline does not adjust the promised amount of consideration for the effects of a significant financing component as the period between transfer of a promised product or service to a customer and when the customer pays for that product or service is expected to be one year or less.
•Remaining performance obligations - The Company elected to omit disclosures of remaining performance obligations for contracts which have an initial expected term of one year or less. In addition, the Company has elected to not disclose remaining performance obligations for its franchise agreements with variable consideration based on service center store sales.
•Incremental costs of obtaining a contract - The Company expenses incremental direct costs of obtaining a contract, primarily sales commissions, when incurred due to the short-term nature of individual contracts, which would result in amortization periods of one year or less. These costs are not material and are recorded in Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income.
Expense recognition
Cost of sales are expensed as incurred and include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, and all other distribution network costs. Selling, general and administrative expenses are expensed as incurred and include sales and marketing costs, research and development costs, advertising, customer support, and administrative costs. Advertising costs were $73 million in fiscal 2019, $63 million in fiscal 2018 and $61 million in fiscal 2017, and research and development costs were $13 million in fiscal 2019, $14 million in fiscal 2018 and $13 million in fiscal 2017.
Stock-based compensation
Stock-based compensation expense is recognized within Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income and is principally based on the grant date fair value of new or modified awards over the requisite vesting period. The Company’s outstanding stock-based compensation awards are primarily classified as equity, with certain liability-classified awards based on award terms and conditions. Valvoline accounts for forfeitures when they occur.
Restructuring
The timing of recognition and related measurement of an employee termination benefit liability associated with a non-recurring benefit arrangement depends on whether employees are required to render service beyond a minimum retention period until they are terminated in order to receive the termination benefits. For employees who are not required to render service until they are terminated or provide service beyond the minimum retention period in order to receive the termination benefits, the Company records a liability for the termination benefits at the communication date. If employees are required to render service beyond the minimum retention period until they are terminated in order to receive the termination benefits, the Company measures the liability for termination benefits at the communication date and recognizes the expense and liability ratably over the future service period.
Income taxes
Income tax expense is provided based on income before income taxes. The Company estimates its tax expense based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about the recognition and realization of deferred tax assets and liabilities resulting from the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax laws or rates occur, deferred tax assets and liabilities are adjusted in the period changes are enacted through income tax expense. Valvoline records valuation allowances related to its deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being sustained upon examination by authorities. Interest and penalties related to unrecognized tax benefits are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law and until such time that the related tax benefits are recognized. Interest and penalties were not material to any of the periods presented herein.
Derivatives
Valvoline’s derivative instruments consist of currency exchange contracts, which are accounted for as either assets or liabilities in the Consolidated Balance Sheets at fair value and the resulting gains or losses are recognized as adjustments to earnings. Valvoline does not currently have any derivative instruments that are designated and qualify as hedging instruments. The Company classifies its cash flows for these transactions as investing activities in the Consolidated Statements of Cash Flows.
Fair value measurements
Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance prioritizes the inputs used to measure fair value into the following three-tier fair value hierarchy for which an instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement:
•Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Valvoline's assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which may include the Company's own financial data, such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination requires significant management judgment.
Certain investments which measure fair value using the net asset value (“NAV”) per share practical expedient are not classified within the fair value hierarchy and are separately disclosed.
Valvoline measures its financial assets and financial liabilities at fair value based on one or more of the following three valuation techniques:
•Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
•Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost)
•Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option pricing and excess earnings models)
The Company generally uses a market approach, when practicable, in valuing financial instruments. In certain instances, when observable market data is lacking, the Company uses valuation techniques consistent with the income approach whereby future cash flows are converted to a single discounted amount. The Company uses multiple sources of pricing as well as trading and other market data in its process of reporting fair values. The fair values of accounts receivables and accounts payable approximate their carrying values due to the relatively short-term nature of the instruments.
The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Currency translation
Operations outside the United States are measured primarily using the local currency as the functional currency. Upon consolidation, the results of operations of the subsidiaries and affiliates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates for the year while assets and liabilities are translated at year-end exchange rates. Adjustments to translate assets and liabilities into U.S. dollars are recorded in the stockholders’ equity section of the Consolidated Balance Sheets as a component of Accumulated other comprehensive income and are included in net earnings only upon sale or substantial liquidation of the underlying non-U.S. subsidiary or affiliated company.
Earnings per share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted-average number of common shares outstanding during the reported period. Diluted EPS is calculated similar to basic EPS, except that the weighted-average number of shares outstanding includes the number of shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock appreciation rights and nonvested share-based awards. Nonvested market and performance-based share awards are included in the weighted-average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.
Recent accounting pronouncements
The following standards relevant to Valvoline were either issued or adopted in the current year, or are expected to have a meaningful impact on Valvoline in future periods.
Recently adopted
During fiscal 2019, Valvoline adopted the following:
•In May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, which established a single comprehensive model for entities to use in accounting for revenue from contracts with customers and superseded most industry-specific revenue recognition guidance. This new guidance introduced the five-step model for revenue recognition focused on the transfer of control, as opposed to the transfer of risk and rewards under prior guidance. Valvoline adopted this new revenue recognition guidance on October 1, 2018 using the modified retrospective method applied to those contracts that were not completed at the date of adoption. Under this method, the new revenue recognition guidance has been applied prospectively from the date of adoption, while prior period financial statements continue to be reported in accordance with the previous guidance. The cumulative effect of the changes at adoption was recognized through an increase to retained deficit of $13 million, net of tax, related to the timing of certain sales to distributors. Revenue transactions recorded under the new guidance are substantially consistent with the treatment under prior guidance, and the impact of adoption was not material to the consolidated financial statements as of and for the year ended September 30, 2019 and is not expected to be material on an ongoing basis. As part of the adoption, Valvoline modified certain control procedures and processes, none of which had a material effect on the Company’s internal control over financial reporting. Refer to Note 3 for additional information regarding Valvoline’s adoption of this new guidance.
•In August 2016, the FASB issued new accounting guidance regarding the classification of certain cash receipts and payments in the statement of cash flows. The Company adopted the accounting guidance on October 1, 2018 using a retrospective approach and made an accounting policy election to classify distributions received from equity method investments based on the nature of the activities of the investee that generated the distribution, which is consistent with the Company’s previous classification as cash flows from operating activities. The other cash flow classification matters addressed in this guidance were either not relevant or material to Valvoline’s current activities. The adoption of this guidance did not have a material impact on the Company’s Consolidated Statements of Cash Flows.
•In November 2016, the FASB issued new accounting guidance, which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Valvoline adopted this guidance retrospectively on October 1, 2018. The application of this guidance did not have a material impact on the Consolidated Statements of Cash Flows, nor did it require retrospective adjustment to the prior period financial statements as Valvoline did not have restricted cash or restricted cash equivalents in the prior periods presented. During fiscal 2019, Valvoline held deposits with financial institutions, which was generally restricted and utilized in completing an acquisition. As of September 30, 2019, no significant restricted cash remained in Prepaid expenses and other current assets within the Consolidated Balance Sheet or within the end-of-period balances shown within the Consolidated Statement of Cash Flows for the year ended September 30, 2019.
•In January 2017, the FASB issued new accounting guidance, which clarifies the definition of a business used across several areas of accounting, including the evaluation of whether a transaction should be accounted for as an acquisition (or disposal) of assets or as a business combination. The new guidance clarifies that a business must have at least one substantive process and also narrows the definition of outputs by more closely aligning with how outputs are described in the new revenue recognition standard. Valvoline adopted this guidance on October 1, 2018 with prospective application. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
•In May 2017, the FASB issued accounting guidance that amended the scope of modification accounting for share-based payment awards. The new guidance requires modification accounting if the fair value, vesting condition, or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. Valvoline adopted this guidance prospectively on October 1, 2018, and the Company did have certain modifications of share-based awards in connection with the restructuring activities described in Note 11; however, the award modifications and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
•In August 2018, the FASB issued new accounting guidance related to fees paid by a customer in a cloud computing arrangement, which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service arrangement with the existing capitalization guidance for implementation costs incurred to develop or obtain internal-use software. Valvoline adopted this guidance prospectively on October 1, 2018 and capitalized approximately $4 million of cloud computing arrangement implementation costs during fiscal 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Issued but not yet adopted
In February 2016, the FASB issued new accounting guidance, which outlines a comprehensive lease accounting model that requires lessees to recognize a right-of-use asset and a corresponding lease liability on the balance sheet. The lease liability will be measured at the present value of future lease payments, and the right-of-use asset will be measured at the
lease liability amount, adjusted for prepaid lease payments, lease incentives received and the lessee’s initial direct costs (e.g., commissions). Lease expense will be recognized similar to current accounting guidance with operating leases resulting in straight-line expense and finance leases resulting in accelerated expense recognition similar to the existing accounting for capital leases. The accounting for lessor arrangements is not significantly changed by the new guidance.
Valvoline elected certain practical expedients permitted by the new guidance, including the package of practical expedients that allows for previous accounting conclusions regarding lease identification and classification to be carried forward for leases which commenced prior to adoption, as well as the practical expedient to not separate lease and non-lease components and account for them as a single lease component. The Company did not elect the hindsight or short-term lease practical expedients.
The Company has substantially completed its assessment and implementation efforts, including the identification and assessment of all forms of its leases, implementing an enterprise-wide lease management system, and evaluating additional changes to business processes and internal controls to ensure the reporting and disclosure requirements of the new guidance are met. This new guidance will be adopted with election of the optional transition approach through recognition of the cumulative effect as an adjustment to retained deficit at adoption on October 1, 2019 without retrospective application to prior period financial statements.
On October 1, 2019, the Company expects to recognize operating lease assets and liabilities largely attributed to the Company's service center store locations, derecognize existing finance lease assets and liabilities related to a build-to-suit arrangement in accordance with the transition requirements, and carry forward existing capital lease assets and liabilities. As a result, the Company expects to recognize total incremental lease assets, inclusive of prepaid lease payments, in the range of $220 million to $235 million and lease liabilities in the range of $210 million to $225 million, with an immaterial cumulative effect adjustment to Retained deficit expected primarily as a result of the build-to-suit lease transition guidance. The Company does not currently anticipate a material impact on the Consolidated Statements of Comprehensive Income, Cash Flows, or Stockholders’ Deficit, nor does the Company expect an impact related to compliance with any of its existing debt covenants. While Valvoline is substantially complete with the process of implementing the new guidance, the Company's efforts will be finalized during the first quarter of 2020 and its estimates are subject to change as adoption is finalized.
In June 2016, the FASB issued updated guidance that introduces a forward-looking approach based on expected losses, rather than incurred loses, to estimate credit losses on certain types of financial instruments including trade and other receivables. The estimate of expected credit losses will require entities to incorporate historical, current, and forecasted information. This guidance also includes expanded disclosure requirements and is effective for Valvoline on October 1, 2020. The Company is evaluating the effect of adopting this new accounting guidance, including changes to related processes, but does not expect adoption will have a material impact on the Company’s financial position or results of operations.
The FASB issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on Valvoline’s financial statements, and therefore, is not described above.
NOTE 3 - REVENUE RECOGNITION
As described in Note 2, Valvoline adopted new revenue recognition accounting guidance effective October 1, 2018. The new revenue recognition guidance has been applied prospectively from the date of adoption, while prior period financial statements continue to be reported in accordance with the previous guidance.
Impacts on financial statements
The adoption of the new revenue accounting guidance did not have a significant impact on the Company’s consolidated financial statements. As a result of the Company’s adoption using the modified retrospective adoption approach, the Company recorded an adjustment to its Consolidated Balance Sheet as of October 1, 2018 related to the timing of certain sales to distributors.
The following table reconciles the Consolidated Balance Sheet line items impacted by the cumulative effect of adoption of the new revenue recognition accounting guidance on October 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
September 30, 2018
as reported
|
|
Adjustments
|
|
Balances at October 1, 2018
|
Accounts receivable, net
|
|
$
|
409
|
|
|
$
|
(33)
|
|
|
$
|
376
|
|
Inventory, net
|
|
$
|
176
|
|
|
$
|
14
|
|
|
$
|
190
|
|
Deferred income taxes
|
|
$
|
138
|
|
|
$
|
6
|
|
|
$
|
144
|
|
Retained deficit
|
|
$
|
399
|
|
|
$
|
13
|
|
|
$
|
412
|
|
Most revenue transactions and activities recorded under the new revenue recognition accounting guidance are substantially consistent with the treatment under prior guidance. The following tables summarize the impact of the new revenue accounting guidance on Valvoline’s Consolidated Balance Sheet and Consolidated Statement of Comprehensive Income as of and for the year ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Changes to Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
|
|
(In millions)
|
|
As reported
|
|
|
Adjustments (a)
|
|
Under prior guidance
|
|
Accounts receivable, net
|
|
$
|
401
|
|
|
$
|
37
|
|
|
$
|
438
|
|
Inventories, net
|
|
$
|
194
|
|
|
$
|
(15)
|
|
|
$
|
179
|
|
Deferred income taxes
|
|
$
|
123
|
|
|
$
|
(6)
|
|
|
$
|
117
|
|
Accrued expenses and other liabilities
|
|
$
|
237
|
|
|
$
|
(1)
|
|
|
$
|
236
|
|
Retained deficit
|
|
$
|
284
|
|
|
$
|
(15)
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
(a)Adjustments include the opening retained deficit adjustments as detailed in the table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Changes to Consolidated Statement of Comprehensive Income
|
|
|
|
|
|
|
|
|
Year ended September 30, 2019
|
|
|
|
|
(In millions)
|
|
As reported
|
|
Adjustments
|
|
Under prior guidance
|
Sales
|
|
$
|
2,390
|
|
|
$
|
(50)
|
|
|
$
|
2,340
|
|
Cost of sales
|
|
1,580
|
|
|
(59)
|
|
|
1,521
|
|
Gross profit
|
|
$
|
810
|
|
|
$
|
9
|
|
|
$
|
819
|
|
Selling, general and administrative expenses
|
|
$
|
449
|
|
|
$
|
7
|
|
|
$
|
456
|
|
Equity and other income, net
|
|
$
|
40
|
|
|
$
|
1
|
|
|
$
|
41
|
|
Operating income
|
|
$
|
398
|
|
|
$
|
3
|
|
|
$
|
401
|
|
Income before income taxes
|
|
$
|
265
|
|
|
$
|
3
|
|
|
$
|
268
|
|
Income tax expense
|
|
$
|
57
|
|
|
$
|
1
|
|
|
$
|
58
|
|
Net income
|
|
$
|
208
|
|
|
$
|
2
|
|
|
$
|
210
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.01
|
|
|
$
|
1.11
|
|
Diluted earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.01
|
|
|
$
|
1.11
|
|
Disaggregation of revenue
The following summarizes sales by primary customer channel for the Company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
(In millions)
|
|
September 30, 2019
|
Quick Lubes
|
|
|
Company-owned operations
|
|
$
|
531
|
|
Non-company owned operations
|
|
291
|
Total Quick Lubes
|
|
822
|
|
|
|
Core North America
|
|
|
Retail
|
|
543
|
Installer and other
|
|
451
|
Total Core North America
|
|
994
|
|
|
|
International
|
|
574
|
|
|
|
Consolidated sales
|
|
$
|
2,390
|
|
Sales by reportable segment disaggregated by geographic market follows for the year ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Quick Lubes
|
|
Core North America
|
|
International
|
|
Totals
|
North America (a)
|
|
$
|
822
|
|
|
|
$
|
994
|
|
|
|
$
|
—
|
|
|
|
$
|
1,816
|
|
Europe, Middle East and Africa ("EMEA")
|
|
—
|
|
|
|
—
|
|
|
|
181
|
|
|
|
181
|
|
Asia Pacific
|
|
—
|
|
|
|
—
|
|
|
|
285
|
|
|
|
285
|
|
Latin America (a)
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
|
|
108
|
|
Total
|
|
$
|
822
|
|
|
|
$
|
994
|
|
|
|
$
|
574
|
|
|
|
$
|
2,390
|
|
|
|
|
|
|
|
|
|
|
(a)Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.
The following disaggregates the Company’s sales by timing of revenue recognized:
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
(In millions)
|
|
September 30, 2019
|
Sales at a point in time
|
|
$
|
2,346
|
|
Franchised revenues transferred over time
|
|
44
|
|
Consolidated sales
|
|
$
|
2,390
|
|
NOTE 4 – FAIR VALUE MEASUREMENTS
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair value hierarchy
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
|
|
|
|
|
|
Money market funds
|
|
Level 1
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Time deposits
|
|
Level 2
|
|
|
59
|
|
|
22
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
Currency derivatives
|
|
Level 2
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
|
|
|
|
Non-qualified trust funds
|
|
Level 1
|
|
|
20
|
|
|
25
|
|
Total assets at fair value
|
|
|
|
$
|
79
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
Currency derivatives
|
|
Level 2
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Total liabilities at fair value
|
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Money market funds
Money market funds trade in an active market and are valued using quoted market prices, which are Level 1 inputs.
Time deposits
Time deposits are balances held with financial institutions at face value plus accrued interest, which approximates fair value and are categorized as Level 2. Time deposits with original maturities of three months or less are classified within Cash and cash equivalents and those with original maturities of one year or less are classified within Prepaid expenses and other current assets.
Currency derivatives
The Company uses derivatives not designated as hedging instruments consisting of forward contracts to hedge non-U.S. currency denominated balance sheet exposures and exchange one currency for another for a fixed rate on a future date of one year or less. The Company had outstanding contracts with notional values of $111 million and $74 million as of September 30, 2019 and 2018, respectively. The fair value of these outstanding contracts are recorded as assets and liabilities on a gross basis measured using readily observable market inputs to estimate the fair value for similar derivative instruments and are classified as Level 2. Valvoline has entered into master netting arrangements to mitigate losses in the event of nonperformance by counterparties that allow settlement on a net basis, the effect of which was not material to the recorded assets and liabilities as of September 30, 2019 or 2018.
Gains and losses on these instruments are recognized in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income as exchange rates change the fair value of these instruments and upon settlement to offset the remeasurement gain or loss on the related foreign currency-denominated exposures in the same period. Gains and losses recognized related to these instruments were not material in any period presented herein.
Non-qualified trust funds
The Company maintains a non-qualified trust to fund benefit payments for certain of its U.S. non-qualified pension plans. This fund is classified as Level 1 as it primarily consists of highly liquid fixed income U.S. government bonds that trade with sufficient frequency and volume to enable pricing information to be obtained on an ongoing basis. Gains and losses related to these investments are immediately recognized within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income and were not material in any period presented herein.
Long-term debt
The Company’s outstanding fixed rate senior notes consist of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes”) and 4.375% senior unsecured notes
due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes” and together with the 2024 Notes, the “Senior Notes”).
The fair values of the Senior Notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. Long-term debt is included in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
(In millions)
|
|
Fair value
|
|
Carrying value
|
|
Unamortized discount and issuance costs
|
|
Fair value
|
|
Carrying value
|
|
Unamortized discount and issuance costs
|
2024 Notes
|
|
$
|
390
|
|
|
$
|
371
|
|
|
$
|
(4)
|
|
|
$
|
376
|
|
|
$
|
370
|
|
|
$
|
(5)
|
|
2025 Notes
|
|
407
|
|
|
395
|
|
|
(5)
|
|
|
376
|
|
|
395
|
|
|
(5)
|
|
Total
|
|
$
|
797
|
|
|
$
|
766
|
|
|
$
|
(9)
|
|
|
$
|
752
|
|
|
$
|
765
|
|
|
$
|
(10)
|
|
Refer to Note 12 for details of other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value.
Pension plan assets
Pension plan assets are measured at fair value at least annually on September 30. Refer to Note 15 for disclosures regarding the fair value of plan assets, including classification within the fair value hierarchy.
NOTE 5 – ACQUISITIONS AND DIVESTITURES
Acquisitions
Valvoline acquired 60 service center stores and a lubricant production company during fiscal 2019 for an aggregate purchase price of $78 million. These acquisitions included 31 franchise service center stores in Canada acquired from Oil Changers Inc. on October 31, 2018, five former franchise service centers stores, and 24 service center stores acquired in single and multi-store transactions within the Quick Lubes reportable segment. The Company also acquired an Eastern European lubricant production company, including its manufacturing facility, within the International reportable segment. These acquisitions provide an opportunity to further grow Valvoline's Quick Lubes system within key markets and expand Valvoline’s presence in Eastern Europe, including additional investment in the Company’s regional European supply chain capabilities.
During fiscal 2018, the Company acquired 136 service center stores for an aggregate purchase price of $125 million within the Quick Lubes reportable segment. These acquisitions included 56 former franchise service center stores acquired from Henley Bluewater LLC for $60 million on October 2, 2017 and 73 franchise service center stores acquired from Great Canadian Oil Change Ltd. for $53 million on July 13, 2018. Fiscal 2018 acquisitions also included four former franchise service center stores and three service center stores acquired in single and multi-store transactions.
The Company acquired 43 service center stores within the Quick Lubes reportable segment during fiscal 2017 for an aggregate purchase price of $72 million, of which $4 million was paid in fiscal 2016. These acquisitions included 28 service center stores acquired from Time-It Lube LLC and Time-It Lube of Texas, LP on January 31, 2017 for $49 million. Acquisitions during fiscal 2017 also included 14 former franchise service center stores and one service center store acquired in single and multi-store transactions.
The Company’s acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded. 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.
A summary follows of the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Inventories
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
1
|
|
Other current assets
|
|
—
|
|
|
1
|
|
|
—
|
|
Property, plant and equipment
|
|
19
|
|
|
2
|
|
|
2
|
|
Goodwill (a)
|
|
50
|
|
|
58
|
|
|
60
|
|
Intangible assets (b)
|
|
|
|
|
|
|
Reacquired franchise rights (a) (c)
|
|
5
|
|
|
26
|
|
|
6
|
|
Customer relationships
|
|
6
|
|
|
9
|
|
|
2
|
|
Trademarks and trade names
|
|
1
|
|
|
27
|
|
|
1
|
|
Other
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
(1)
|
|
|
—
|
|
|
—
|
|
Net assets acquired
|
|
82
|
|
|
125
|
|
|
72
|
|
Bargain purchase gain (d)
|
|
(4)
|
|
|
—
|
|
|
—
|
|
Consideration transferred
|
|
$
|
78
|
|
|
$
|
125
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
(a)During fiscal 2018, the preliminary purchase price allocation for the acquisition of certain former franchise service center stores during fiscal 2017 was adjusted to reduce goodwill and increase reacquired franchise rights by $6 million.
(b)Weighted average amortization period of intangible assets acquired in fiscal 2019 is 10 years.
(c)Prior to the acquisition of former franchise service center stores, Valvoline licensed the right to operate franchised quick lube service centers, including use of the Company’s trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately 9 years. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market.
(d)Recorded in Equity and other income, net within the Consolidated Statement of Comprehensive Income.
The fair values above are preliminary for up to one year from the date of acquisition as they are subject to measurement period adjustments as new information is obtained about facts and circumstances that existed as of the acquisition date. The Company does not expect any material changes to the preliminary purchase price allocations summarized above for acquisitions completed during the last twelve months.
The incremental results of operations of acquisitions, which were not material to the Company’s consolidated results, have been included in the consolidated financial statements from the date of each acquisition, and accordingly, pro forma disclosure of financial information has not been presented.
Remaining ownership interest in subsidiary
Valvoline historically owned a 70% controlling interest and consolidated the financial results of its subsidiary in Thailand. In December 2017, Valvoline purchased the remaining 30% interest for total consideration of approximately $16 million, making it a wholly-owned subsidiary of the Company. This interest was not material to the financial statements for presentation and disclosure as a noncontrolling interest, which was eliminated as a result of this purchase through an adjustment to Paid-in capital and Retained deficit.
Dispositions
Valvoline liquidated one of its subsidiaries in fiscal 2019 and recorded a $1 million gain in Equity and other income, net in the Consolidated Statement of Comprehensive Income. During fiscal 2018, Valvoline completed the liquidation of another subsidiary within the International reportable segment and sold two service center stores to a franchisee within the Quick Lubes reportable segment. These transactions resulted in a net gain of $2 million, which was recognized in Equity and other income, net in the Consolidated Statement of Comprehensive Income during the year ended September 30, 2018.
NOTE 6 – EQUITY METHOD INVESTMENTS
Valvoline has a strategic relationship with Cummins, Inc. (“Cummins”), a leading supplier of engines and related component products, which includes co-branding products for heavy duty consumers and a 50% interest in joint ventures in India, China, and Argentina. Valvoline also has joint ventures with other partners in Latin America and China. Valvoline’s
investments in these unconsolidated affiliates were $34 million and $31 million as of September 30, 2019 and 2018, respectively.
Valvoline’s stockholders’ deficit included $32 million and $30 million of undistributed earnings from affiliates accounted for under the equity method as of September 30, 2019 and 2018, respectively. Summarized financial information for Valvoline’s equity method investments follows as of and for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
|
Financial position
|
|
|
|
|
|
|
Current assets
|
|
$
|
123
|
|
|
$
|
116
|
|
|
|
Current liabilities
|
|
(77)
|
|
|
(76)
|
|
|
|
Working capital
|
|
46
|
|
|
40
|
|
|
|
Noncurrent assets
|
|
23
|
|
|
23
|
|
|
|
Noncurrent liabilities
|
|
(2)
|
|
|
(1)
|
|
|
|
Stockholders’ equity
|
|
$
|
67
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Results of operations
|
|
|
|
|
|
|
Sales
|
|
$
|
309
|
|
|
$
|
313
|
|
|
$
|
289
|
|
Income from operations
|
|
$
|
59
|
|
|
$
|
62
|
|
|
$
|
53
|
|
Net income
|
|
$
|
24
|
|
|
$
|
27
|
|
|
$
|
25
|
|
The Company’s transactions with affiliate companies accounted for under the equity method were as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Equity income (a)
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
12
|
|
Distributions received
|
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
8
|
|
Royalty income (a)
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
7
|
|
Sales to
|
|
$
|
12
|
|
|
|
$
|
12
|
|
|
|
$
|
12
|
|
Purchases from
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
(a)Equity and royalty income are recognized in Equity and other income, net in the Consolidated Statements of Comprehensive Income and are primarily recorded within the International reportable segment.
Valvoline has outstanding receivable balances with affiliates accounted for under the equity method of $6 million for the years ended September 30, 2019 and 2018, which are included in Accounts receivable, net within the Consolidated Balance Sheets.
NOTE 7 - ACCOUNTS RECEIVABLE
The following summarizes Valvoline’s accounts receivable in the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
Trade
|
|
$
|
392
|
|
|
$
|
390
|
|
Other
|
|
15
|
|
|
26
|
|
Accounts receivable, gross
|
|
407
|
|
|
416
|
|
Allowance for doubtful accounts
|
|
(6)
|
|
|
(7)
|
|
Total accounts receivable, net
|
|
$
|
401
|
|
|
$
|
409
|
|
Valvoline is party to an agreement to sell certain trade accounts receivable in the form of drafts or bills of exchange to a financial institution. Each draft constitutes an order to pay Valvoline for obligations of the customer arising from the sale of goods. The intention of the arrangement is to decrease the time accounts receivable is outstanding and increase cash
flows. During the years ended September 30, 2019 and 2018, Valvoline sold $75 million and $129 million, respectively, of accounts receivable to the financial institution.
NOTE 8 – INVENTORIES
Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants with a replacement cost of $107 million at September 30, 2019 and $89 million at September 30, 2018 are valued at the lower of cost or market using the LIFO method.
The following summarizes Valvoline’s inventories in the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
Finished products
|
|
$
|
203
|
|
|
$
|
186
|
|
Raw materials, supplies and work in process
|
|
32
|
|
|
30
|
|
Reserve for LIFO cost valuation
|
|
(41)
|
|
|
(40)
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
194
|
|
|
$
|
176
|
|
NOTE 9 – PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the various components of property, plant and equipment within the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
Land
|
|
$
|
58
|
|
|
$
|
51
|
|
Buildings (a)
|
|
348
|
|
|
292
|
|
Machinery and equipment
|
|
475
|
|
|
442
|
|
Construction in progress
|
|
72
|
|
|
62
|
|
Total property, plant and equipment
|
|
953
|
|
|
847
|
|
Accumulated depreciation (b)
|
|
(455)
|
|
|
(427)
|
|
Net property, plant and equipment
|
|
$
|
498
|
|
|
$
|
420
|
|
|
|
|
|
|
(a)Includes $61 million and $54 million of assets under capitalized and financing leases as of September 30, 2019 and 2018 respectively.
(b)Includes $11 million and $7 million for assets under capitalized and financing leases as of September 30, 2019 and 2018, respectively.
Non-cash accruals included in total property, plant and equipment were $10 million and $13 million during the years ended September 30, 2019 and 2018, respectively.
The following summarizes property, plant and equipment charges included within the Consolidated Statements of Comprehensive Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Depreciation (includes capital and financing leases)
|
|
$
|
52
|
|
|
$
|
49
|
|
|
$
|
42
|
|
NOTE 10 – GOODWILL AND OTHER INTANGIBLES
Goodwill
The following summarizes the changes in the carrying amount of goodwill for each reportable segment and in total during fiscal 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Quick Lubes
|
|
Core North America
|
|
International
|
|
Total
|
Balance at September 30, 2017
|
|
$
|
201
|
|
|
$
|
89
|
|
|
$
|
40
|
|
|
$
|
330
|
|
Acquisitions (a)
|
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Dispositions (b)
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
$
|
(1)
|
|
Balance at September 30, 2018
|
|
252
|
|
|
89
|
|
|
40
|
|
|
381
|
|
Acquisitions (c)
|
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Currency translation
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
Balance at September 30, 2019
|
|
$
|
301
|
|
|
$
|
89
|
|
|
$
|
40
|
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
(a)Activity associated with the acquisitions of Great Canadian Oil Change, Henley Bluewater, seven additional service center stores, and adjustments related to prior year acquisitions. Refer to Note 5 for further details.
(b)Activity associated with the derecognition of goodwill as a result of the sale and disposition of two quick lube service center stores. Refer to Note 5 for details regarding the disposition.
(c)Activity associated with the acquisitions of Oil Changers and 29 additional service center stores. Refer to Note 5 for further details.
Other intangible assets
Valvoline’s purchased intangible assets were specifically identified when acquired, have finite lives, and are reported in Goodwill and intangibles, net on the Consolidated Balance Sheets. The following summarizes the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
Definite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
$
|
30
|
|
|
$
|
(4)
|
|
|
$
|
26
|
|
|
$
|
29
|
|
|
$
|
(2)
|
|
|
$
|
27
|
|
Reacquired franchise rights
|
|
37
|
|
|
(8)
|
|
|
29
|
|
|
32
|
|
|
(4)
|
|
|
28
|
|
Customer relationships
|
|
22
|
|
|
(5)
|
|
|
17
|
|
|
14
|
|
|
(3)
|
|
|
11
|
|
Other intangible assets
|
|
3
|
|
|
(1)
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total definite-lived intangible assets
|
|
$
|
92
|
|
|
$
|
(18)
|
|
|
$
|
74
|
|
|
$
|
76
|
|
|
$
|
(9)
|
|
|
$
|
67
|
|
The table that follows summarizes amortization expense (actual and estimated) for intangible assets, assuming no additional amortizable intangible assets, for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Estimated
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Amortization expense
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
7
|
|
NOTE 11 - RESTRUCTURING ACTIVITIES
In the second fiscal quarter of 2019, Valvoline outlined a broad-based restructuring and cost-savings program that is expected to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. Part of this program includes employee separation actions, which were generally completed during fiscal 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020.
During the year ended September 30, 2019, Valvoline recognized $12 million of expense for employee termination benefits, which includes severance and other benefits provided to employees pursuant to the restructuring program. These expenses were recognized in Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income. The Company expects that it will incur additional employee termination expenses of approximately $1 million during the first fiscal quarter of 2020.
The results by segment, as disclosed in Note 21, do not include these restructuring expenses, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses are included in Unallocated and other.
The following table represents the expenses recognized related to employee termination benefits during the year ended September 30, 2019 and the estimated remaining liability, which is included in the Consolidated Balance Sheet primarily within Accrued expenses and other liabilities:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Employee Termination Benefits
|
Balance at September 30, 2018
|
|
$
|
—
|
|
Expenses recognized during the period
|
|
13
|
|
Payments
|
|
(3)
|
|
Changes in estimates (a)
|
|
(1)
|
|
Balance at September 30, 2019
|
|
$
|
9
|
|
|
|
|
(a)Changes in estimate of previously-recognized expenses primarily due to modifications of employee remaining service periods.
NOTE 12 – DEBT
The following table summarizes Valvoline’s debt as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
2025 Notes
|
|
$
|
400
|
|
|
$
|
400
|
|
2024 Notes
|
|
375
|
|
|
$
|
375
|
|
Term Loans
|
|
575
|
|
|
270
|
|
Revolvers
|
|
—
|
|
|
147
|
|
Trade Receivables Facility
|
|
—
|
|
|
140
|
|
Other (a)
|
|
(8)
|
|
|
(10)
|
|
Total debt
|
|
$
|
1,342
|
|
|
$
|
1,322
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
15
|
|
|
30
|
|
Long-term debt
|
|
$
|
1,327
|
|
|
$
|
1,292
|
|
|
|
|
|
|
(a)As of September 30, 2019 and 2018, other includes $9 million and $11 million of debt issuance costs and discounts, respectively and $1 million of debt primarily acquired through acquisitions.
Senior Notes
During August 2017, Valvoline completed the issuance of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million. The net proceeds from the offering of the 2025 Notes were $394 million (after deducting
initial purchasers' discounts and debt issuance costs), which were used to make a voluntary contribution to the Company's qualified U.S. pension plan.
During July 2016, Valvoline completed the issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million. The net proceeds from the offering of the 2024 Notes was $370 million (after deducting initial purchasers' discounts and debt issuance costs), which were transferred to Valvoline's former parent, Ashland.
The Senior Notes are subject to customary events of default for similar debt securities, which if triggered may accelerate the payment of principal, premium, if any, and accrued but unpaid interest on the notes. Such events of default include non-payment of principal and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change of control repurchase event occurs, Valvoline may be required to offer to purchase the Senior Notes from the holders thereof. The Senior Notes are not otherwise required to be repaid prior to maturity, although they may be redeemed at the option of Valvoline at any time prior to their maturity in the manner specified in the governing indentures. The Senior Notes are guaranteed by each of Valvoline’s subsidiaries that guarantee obligations under the existing senior credit facility described below.
Valvoline completed registered exchange offers for the Senior Notes in December 2017 for which no additional proceeds were received.
Senior Credit Agreement
In fiscal 2016, Valvoline entered into a Senior Credit Agreement (the “2016 Credit Agreement”), which provided an aggregate principal amount of $1,325 million in senior secured credit facilities, comprised of (i) a five-year $875 million term loan facility (the “2016 Term Loan”) and (ii) a five-year $450 million revolving credit facility (the “2016 Revolver”), including a $100 million letter of credit sublimit. As of September 30, 2018, the 2016 Term Loan had an outstanding principal balance of $270 million, and there was $147 million outstanding on the 2016 Revolver.
On April 12, 2019, Valvoline amended the 2016 Credit Agreement (the 2016 Credit Agreement, as amended, the “2019 Credit Agreement”) to extend the maturity to 2024, provide additional capacity under the revolving facility, and lower interest rates, among other modifications. This 2019 Credit Agreement provides for an aggregate principal amount of $1,050 million in senior secured credit facilities, comprised of (i) a five-year $575 million term loan facility (the “2019 Term Loan”) and (ii) a five-year $475 million revolving credit facility (the “2019 Revolver”), including a $100 million letter of credit sublimit. As a result of the amendment, the Company recognized immaterial expense related to the accelerated amortization of previously capitalized debt issuance costs, which is included in Net interest and other financing expenses in the Consolidated Statements of Comprehensive Income for the year ended September 30, 2019.
Prior to the amendment in fiscal 2019, the Company made payments of $15 million to the 2016 Term Loan consistent with its payment schedule and had net borrowings of $39 million under the 2016 Revolver. The 2019 Term Loan proceeds of $575 million were used to pay the outstanding principal balance of the 2016 Term Loan of $255 million, the outstanding 2016 Revolver balance of $186 million, and $120 million on the Trade Receivables Facility, as defined below, in addition to accrued and unpaid interest and fees, as well as expenses related to the amendment. Remaining proceeds, including the remaining capacity under the 2019 Revolver, are expected to fund general corporate purposes and working capital needs. During the year ended September 30, 2019, the Company borrowed and repaid $6 million on the 2019 Revolver. As of September 30, 2019, there were no amounts outstanding under the 2019 Revolver, which had total borrowing capacity remaining of $466 million due to a reduction of $9 million for letters of credit outstanding.
The outstanding principal balance of the 2019 Term Loan is required to be repaid in quarterly installments of approximately $7 million beginning June 30, 2020 and approximately $14 million beginning June 30, 2021, with the balance due at maturity on April 12, 2024, and prepayment due in the amount of the net cash proceeds from certain events. Amounts outstanding under the 2019 Credit Agreement may be prepaid at any time, and from time to time, in whole or part, without premium or penalty. At Valvoline’s option, amounts outstanding under the 2019 Credit Agreement bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate fluctuates between LIBOR plus 1.375% per annum and LIBOR plus 2.000% per annum (or between the alternate base rate plus 0.375% per annum and the alternate base rate plus 1.000% per annum), based upon Valvoline’s corporate credit ratings or its consolidated net leverage ratio, whichever yields the lowest rate.
Valvoline’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, non-U.S. subsidiaries and certain other subsidiaries) guarantee the 2019 Credit Agreement, which is also secured by a first-priority security interest in substantially all the personal property assets, and certain real property assets, of Valvoline and the guarantors, including all or a portion of the equity interests of certain
of Valvoline’s domestic subsidiaries and first-tier non-U.S. subsidiaries, and in certain cases, a portion of the equity interests of other non-U.S. subsidiaries.
The 2019 Credit Agreement contains usual and customary representations, warranties, events of default, and affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as the maintenance of financial covenants as of the end of each fiscal quarter, including a maximum consolidated net leverage ratio of 4.5 and a minimum consolidated interest coverage ratio of 3.0. As of September 30, 2019, Valvoline was in compliance with all covenants under the 2019 Credit Agreement.
Trade Receivables Facility
On November 29, 2016, Valvoline entered into a $125 million, one-year revolving trade receivables securitization facility (“Trade Receivables Facility”) with certain financial institutions. On November 20, 2017, the Company amended the Trade Receivables Facility to extend the maturity date to November 19, 2020 and increase the maximum funding under the facility to $175 million based on the availability of eligible receivables and other customary factors and conditions.
Under the Trade Receivables Facility, Valvoline sells and/or transfers a majority of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary (in the form of cash or letters of credit) are secured by those trade receivables. Accordingly, the Company accounts for borrowings under the Trade Receivables Facility as secured borrowings. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the Trade Receivables Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its consolidated financial statements.
As of September 30, 2019, there were no amounts outstanding under the Trade Receivables Facility, and as of September 30, 2018, there was $140 million outstanding. During the year ended September 30, 2019, Valvoline borrowed $84 million and made payments of $224 million, including the payment made with a portion of the proceeds from the 2019 Term Loan.
Based on the availability of eligible receivables, the total borrowing capacity of the Trade Receivables Facility at September 30, 2019 was $168 million. The financing subsidiary owned $259 million and $275 million of outstanding accounts receivable as of September 30, 2019 and 2018, respectively, and these amounts are included in Accounts receivable, net in the Company’s Consolidated Balance Sheets.
The financing subsidiary pays customary fees to the lenders, and advances by a lender under the Trade Receivables Facility accrue interest for which the weighted average interest rates were 3.4% and 2.8% for the years ended September 30, 2019 and 2018, respectively. The Trade Receivables Facility contains various customary affirmative and negative covenants and default and termination provisions, which provide for acceleration of amounts owed under the Trade Receivables Facility in circumstances including, but not limited to, the failure to pay interest or other amounts when due, defaults on certain other indebtedness, certain insolvency events, and breach of representation.
Long-term debt maturities
The future maturities of debt outstanding as of September 30, 2019, excluding debt issuance costs and discounts, are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Years ending September 30
|
|
|
2020
|
|
$
|
15
|
|
2021
|
|
43
|
|
2022
|
|
58
|
|
2023
|
|
58
|
|
2024
|
|
777
|
|
Thereafter
|
|
400
|
|
Total
|
|
$
|
1,351
|
|
NOTE 13 – LEASE COMMITMENTS
Future minimum lease payments for noncancelable operating and capital leases and financing obligations as of September 30, 2019 are as follows for the fiscal years ending September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating leases (a)
|
|
Capital leases and financing obligations
|
2020
|
|
$
|
36
|
|
|
$
|
6
|
|
2021
|
|
32
|
|
|
7
|
|
2022
|
|
29
|
|
|
7
|
|
2023
|
|
27
|
|
|
7
|
|
2024
|
|
23
|
|
|
7
|
|
Thereafter
|
|
120
|
|
|
50
|
|
Total future minimum lease payments
|
|
$
|
267
|
|
|
84
|
|
Imputed interest
|
|
|
|
29
|
|
Present value of minimum lease payments
|
|
|
|
$
|
55
|
|
|
|
|
|
|
(a)Minimum payments have not been reduced by minimum sublease rental income of approximately $26 million due under future noncancelable subleases.
The composition of net rent expense for all operating leases, including leases of property and equipment, was as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Minimum rentals
|
|
$
|
34
|
|
|
$
|
25
|
|
|
$
|
18
|
|
Contingent rentals
|
|
2
|
|
|
2
|
|
|
2
|
|
Sublease rental income
|
|
(5)
|
|
|
(2)
|
|
|
(1)
|
|
Net rent expense
|
|
$
|
31
|
|
|
$
|
25
|
|
|
$
|
19
|
|
NOTE 14 – INCOME TAXES
Components of income tax expense
Income tax expense consisted of the following for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
|
Federal (a)
|
|
$
|
10
|
|
|
$
|
(2)
|
|
|
$
|
47
|
|
State
|
|
5
|
|
|
6
|
|
|
8
|
|
Non-U.S.
|
|
19
|
|
|
17
|
|
|
14
|
|
|
|
34
|
|
|
21
|
|
|
69
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
24
|
|
|
136
|
|
|
106
|
|
State
|
|
—
|
|
|
9
|
|
|
12
|
|
Non-U.S.
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
|
|
23
|
|
|
145
|
|
|
117
|
|
Income tax expense
|
|
$
|
57
|
|
|
$
|
166
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
(a)Benefit from favorable settlement with tax authorities in fiscal 2018.
The following table presents pre-tax income and the principal components of the reconciliation between the effective tax rate and the U.S. federal statutory income tax rate in effect for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Income before income taxes
|
|
|
|
|
|
|
United States
|
|
$
|
212
|
|
|
$
|
282
|
|
|
$
|
433
|
|
Non-U.S.
|
|
53
|
|
|
50
|
|
|
57
|
|
Total income before income taxes
|
|
$
|
265
|
|
|
$
|
332
|
|
|
$
|
490
|
|
|
|
|
|
|
|
|
U.S. statutory tax rate (a)
|
|
21.0
|
%
|
|
24.5
|
%
|
|
35.0
|
%
|
Income taxes computed at U.S. statutory tax rate
|
|
$
|
56
|
|
|
$
|
81
|
|
|
$
|
171
|
|
Increase (decrease) in amount computed resulting from:
|
|
|
|
|
|
|
Unrecognized tax benefits
|
|
5
|
|
|
—
|
|
|
2
|
|
State taxes, net of federal benefit
|
|
9
|
|
|
14
|
|
|
21
|
|
International rate differential
|
|
2
|
|
|
—
|
|
|
(7)
|
|
Permanent items
|
|
(3)
|
|
|
(3)
|
|
|
(8)
|
|
Remeasurement of net deferred taxes
|
|
(4)
|
|
|
73
|
|
|
—
|
|
Return-to-provision adjustments
|
|
(6)
|
|
|
—
|
|
|
1
|
|
Deemed repatriation
|
|
—
|
|
|
4
|
|
|
—
|
|
Change in valuation allowance
|
|
(4)
|
|
|
1
|
|
|
(4)
|
|
Tax Matters Agreement activity
|
|
1
|
|
|
(2)
|
|
|
10
|
|
Other
|
|
1
|
|
|
(2)
|
|
|
—
|
|
Income tax expense
|
|
$
|
57
|
|
|
$
|
166
|
|
|
$
|
186
|
|
Effective tax rate
|
|
21.5
|
%
|
|
50.0
|
%
|
|
38.0
|
%
|
|
|
|
|
|
|
|
(a)As a result of U.S. tax reform legislation which generally became effective January 1, 2018, the federal corporate income tax rate was lowered from 35% to 21%. Based on the effective date of the rate reduction, the Company's federal corporate statutory income tax rate was a blended rate of 24.5% for fiscal 2018.
The decreases in income tax expense and the effective tax rate in fiscal 2019 from the prior year periods were principally driven by the prior year enactment of U.S. and Kentucky tax reform legislation, which resulted in the full year benefit of lower corporate statutory income tax rates in fiscal 2019, benefits from accelerated deductions permitted by the provisions of U.S. tax reform, a benefit related to the expected utilization of tax attributes as a result of the clarification of certain provisions of Kentucky tax reform legislation during fiscal 2019, and reduced tax expense of approximately $78 million related to the prior year enactment of tax reform legislation. Additionally, a benefit of $4 million was recognized in fiscal 2019 as a result of the release of a valuation allowance.
Tax reform legislation
U.S. tax reform legislation was signed into law on December 22, 2017, and the Company recorded its provisional estimates of enactment during fiscal 2018. Valvoline's provisional estimates were finalized during the first fiscal quarter of 2019, which resulted in no significant adjustments. In response to U.S. tax reform legislation, many states also enacted state-specific tax reform. In general, these impacts were not material to the Company’s financial statements. Valvoline is incorporated in Kentucky, which enacted income tax reform legislation on April 13, 2018. Kentucky tax reform generally became effective in fiscal 2019 and included a number of provisions, notably lowering the corporate income tax rate from a maximum of 6% to 5%.
During the year ended September 30, 2018, enactment of U.S. and Kentucky tax reform legislation resulted in the following:
•A net $71 million increase in income tax expense primarily related to the remeasurement of net deferred tax assets at the lower enacted corporate tax rates;
•Income tax expense of $4 million related to the deemed repatriation tax on undistributed non-U.S. earnings and profits and $2 million for withholding taxes due to the Company’s change in indefinite reinvestment assertion regarding its undistributed earnings; and
•Increased pre-tax expense of $3 million and income tax expense of $1 million related to the remeasurement of net indemnity liabilities associated with the Tax Matters Agreement primarily due to the reduced federal benefit of state tax deductions, which drove increases in the higher expected utilization of tax attributes payable to Ashland.
As a result of the clarification of specific provisions of Kentucky tax reform legislation in fiscal 2019, a tax benefit of $5 million and pre-tax expense of $3 million was recognized related to the higher expected utilization of tax attributes, which included certain legacy tax attributes.
Deferred taxes
Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting purposes. A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
Deferred tax assets
|
|
|
|
|
Non-U.S. net operating loss carryforwards (a)
|
|
$
|
2
|
|
|
$
|
2
|
|
State net operating loss carryforwards (b)
|
|
19
|
|
|
19
|
|
Employee benefit obligations
|
|
98
|
|
|
86
|
|
Compensation accruals
|
|
21
|
|
|
21
|
|
Credit carryforwards (c)
|
|
19
|
|
|
36
|
|
Other (d)
|
|
22
|
|
|
9
|
|
Valuation allowances (e)
|
|
(2)
|
|
|
(7)
|
|
Net deferred tax assets
|
|
179
|
|
|
166
|
|
Deferred tax liabilities
|
|
|
|
|
Goodwill and other intangibles
|
|
9
|
|
|
3
|
|
Property, plant and equipment
|
|
46
|
|
|
23
|
|
Undistributed earnings
|
|
2
|
|
|
2
|
|
Total deferred tax liabilities
|
|
57
|
|
|
28
|
|
Total net deferred tax assets
|
|
$
|
122
|
|
|
$
|
138
|
|
|
|
|
|
|
(a)Gross non-U.S. net operating loss carryforwards of $2 million expire in fiscal years 2020 to 2033, with $4 million that has no expiration.
(b)Apportioned gross state net operating loss carryforwards of $233 million expire in fiscal years 2022 through 2037.
(c)Credit carryforwards consist primarily of U.S. tax credits that generally expire in fiscal years 2025 through 2029.
(d)Due to netting of deferred tax assets and liabilities by jurisdiction, a $1 million liability included in this deferred tax asset balance is included in Other noncurrent liabilities on the Consolidated Balance Sheet as of September 30, 2019.
(e)Valuation allowances primarily relate to non-U.S. net operating loss carryforwards and certain other deferred tax assets that are not expected to be realized or realizable.
Undistributed earnings
Prior to U.S. tax reform, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its non-U.S. subsidiaries as it was the Company’s intention for these tax basis differences to remain indefinitely reinvested. Valvoline began to record estimated incremental withholding taxes during fiscal 2018 and account for certain of its non-U.S. subsidiaries as being immediately subject to tax, while certain other outside basis differences restricted by regulations, operational or investing needs for non-U.S. subsidiaries remained indefinitely reinvested. If these outside basis differences were no longer to be indefinitely reinvested in the future, the Company may be subject to additional income and withholding taxes, which are not practicable to estimate.
Tax Matters Agreement
The Tax Matters Agreement was entered into on September 22, 2016 between Ashland and Valvoline (the “Tax Matters Agreement”) and generally provides that Valvoline is required to indemnify Ashland for the following items:
•Taxes of Valvoline for all taxable periods that begin on or after the day after the date of the Distribution;
•Taxes of Valvoline for the period between the IPO and Distribution that are not attributable to Ashland Group Returns (as defined below);
•Taxes for the pre-IPO period that arise on audit or examination and are directly attributable to the Valvoline business;
•Certain U.S. federal, state or local taxes for the pre-IPO period of Ashland and/or its subsidiaries that arise on audit or examination and are directly attributable to neither the Valvoline business nor the Ashland chemicals business;
•Certain tax attributes inherited from Ashland as the result of the Contribution from Ashland; and
•Taxes and expenses resulting from the failure of the Contribution or Distribution to qualify for their intended tax-free treatment.
For the periods prior to the Distribution, Valvoline was included in Ashland’s consolidated U.S. and state income tax returns and in the income tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). For the taxable periods that began on and after the Distribution, Valvoline has not been included in the Ashland Group Returns and files tax returns that include only Valvoline and/or its subsidiaries, as appropriate. Portions of the Tax Matters Agreement obligation relative to the tax attributes transferred in the Contribution will be settled with Ashland five years following the filing of the last taxable period Valvoline was included within the Ashland Group Returns.
Under the Tax Matters Agreement, Valvoline made tax-sharing payments to Ashland, inclusive of tax attributes utilized, generally determined as if Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed their own consolidated, combined or separate tax returns for the period from the IPO to the Distribution. Valvoline made $48 million of net tax-sharing payments to Ashland during fiscal 2017. Valvoline has joint and several liability with Ashland to the U.S. Internal Revenue Service (“IRS”) for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland Group Returns. Valvoline has joint control with Ashland, over any audit or examination related to taxes for which Valvoline is required to indemnify Ashland. Accordingly, these portions of the Tax Matters Agreement will be settled as examinations of the pre-Distribution periods are completed.
Adjustments to the net obligations to Ashland under the Tax Matters Agreement are recorded within Legacy and separation-related expenses, net, with any resulting impacts to Valvoline's stand-alone income tax provision due to taxing authorities recorded in Income tax expense within the Consolidated Statements of Comprehensive Income. Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement are primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets and were $66 million as of September 30, 2019 and 2018.
Based on information available at this time, the Company has established adequate accruals for its obligations under the Tax Matters Agreement. In certain circumstances, the actual amounts ultimately required to satisfy these obligations could significantly exceed those currently reflected in the consolidated financial statements. Such estimates cannot currently be made given the uncertainty with regard to the nature and extent of items that could arise upon examination of the pre-Distribution periods, which include the Contribution and Distribution transactions. For example, if the tax-free nature of the Contribution and/or Distribution transactions is not sustained, if certain reorganization transactions undertaken in connection with the separation and the Distribution are determined to be taxable, or if additional matters arise upon examination of the pre-Distribution periods, Valvoline could have a substantial indemnification obligation to Ashland in excess of those currently provided.
Unrecognized tax benefits
The aggregate changes in the balance of gross unrecognized tax benefits were as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Gross unrecognized tax benefits as of October 1
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
8
|
|
Increases related to tax positions from prior years
|
|
5
|
|
|
2
|
|
|
—
|
|
Increases related to tax positions taken during the current year
|
|
—
|
|
|
1
|
|
|
2
|
|
Settlements with tax authorities
|
|
—
|
|
|
(2)
|
|
|
—
|
|
Lapses of statutes of limitation
|
|
(1)
|
|
|
(1)
|
|
|
—
|
|
Gross unrecognized tax benefits as of September 30 (a)
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
(a)These unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Accruals for interest and penalties were $2 million and $1 million as of September 30, 2019 and 2018, respectively.
The Company's U.S. federal income tax returns remain open to examination from fiscal 2014 forward and certain U.S. state jurisdictions remain open from fiscal 2011 forward. With certain exceptions, years beginning on or after fiscal 2007 generally remain open to examination by certain non-U.S. taxing authorities.
Because Valvoline is routinely under examination by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next twelve months. An estimate of the amount or range of such change cannot be made at this time. However, the Company does not expect the change, if any, to have a material effect on the Company’s consolidated financial statements within the next twelve months. Given the indemnification of Ashland and the years remaining open to examination, a significant portion of the Company’s liability for unrecognized tax benefits as of September 30, 2019 and 2018 is included in the Tax Matters Agreement obligation to Ashland summarized above within Other noncurrent liabilities in the Consolidated Balance Sheets.
NOTE 15 – EMPLOYEE BENEFIT PLANS
Pension and other postretirement plans
The Company's U.S. pension plans are closed to new participants and the accrual of pension benefits has been frozen since September 30, 2016. In addition, most international pension plans are closed to new participants while those that remain open relate to areas where local laws require plans to operate within the applicable country.
Valvoline also sponsors healthcare and life insurance plans for certain qualifying retired or disabled employees. These other benefit plans were amended to reduce retiree life and medical benefits effective October 1, 2016 and January 1, 2017, respectively. These plans have limited the annual per capita costs to an amount equivalent to base year per capita costs, plus annual increases of up to 1.5% per year for costs incurred. As a result, health care cost trend rates do not have a significant impact on the Company’s future obligations for these plans. The assumed pre-65 health care cost trend rate as of September 30, 2019 was 6.9% and continues to be reduced to 4.2% in 2037 and thereafter.
Components of net periodic benefit costs / income
The following table summarizes the components of pension and other postretirement plans net periodic benefit costs / income and the assumptions used in this determination for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension benefits
|
|
|
|
|
|
Other postretirement benefits
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Net periodic benefit costs (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
81
|
|
|
75
|
|
|
86
|
|
|
2
|
|
|
2
|
|
|
1
|
|
Expected return on plan assets
|
|
(80)
|
|
|
(103)
|
|
|
(145)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit (a)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
(12)
|
|
|
(12)
|
|
Actuarial loss (gain)
|
|
61
|
|
|
38
|
|
|
(63)
|
|
|
8
|
|
|
—
|
|
|
(5)
|
|
Net periodic benefit costs (income)
|
|
$
|
64
|
|
|
$
|
12
|
|
|
$
|
(120)
|
|
|
$
|
(2)
|
|
|
$
|
(10)
|
|
|
$
|
(16)
|
|
Weighted-average plan assumptions (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for service cost
|
|
2.92
|
%
|
|
2.94
|
%
|
|
2.15
|
%
|
|
3.98
|
%
|
|
4.05
|
%
|
|
2.95
|
%
|
Discount rate for interest cost
|
|
4.00
|
%
|
|
3.23
|
%
|
|
2.84
|
%
|
|
3.83
|
%
|
|
3.11
|
%
|
|
2.64
|
%
|
Rate of compensation increase
|
|
3.06
|
%
|
|
3.05
|
%
|
|
2.99
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected long-term rate of return on plan assets
|
|
4.66
|
%
|
|
5.17
|
%
|
|
6.56
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Other postretirement plan amendments noted above resulted in negative plan amendments that are amortized within this caption during all periods presented.
(b)The plan assumptions are a blended weighted-average rate for Valvoline’s U.S. and non-U.S. plans. The U.S. pension plans represented approximately 97% of the total pension projected benefit obligation as of September 30, 2019. Other postretirement benefit plans consist of U.S. and Canada, with the U.S. plan representing approximately 77% of the total other postretirement projected benefit obligation as of September 30, 2019. Non-U.S. plans use assumptions generally consistent with those of U.S. plans.
The following table summarizes the net periodic benefit costs / income and the amortization of prior service credit recognized in accumulated other comprehensive income during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
|
Other postretirement benefits
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit recognized in accumulated other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs (income)
|
|
64
|
|
|
12
|
|
|
(2)
|
|
|
(10)
|
|
Total amount recognized in net periodic benefit costs and accumulated other comprehensive income
|
|
$
|
64
|
|
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
2
|
|
Obligations and funded status
The following table summarizes the changes in benefit obligations and the fair value of plan assets, as well as key assumptions used to determine the benefit obligations, and the amounts recognized in the Consolidated Balance Sheets as of September 30, 2019 and 2018 for the Company’s pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension benefits
|
|
|
|
Other postretirement benefits
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
Benefit obligations as of October 1
|
|
$
|
2,087
|
|
|
$
|
2,381
|
|
|
$
|
51
|
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Interest cost
|
|
81
|
|
|
75
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(140)
|
|
|
(146)
|
|
|
(6)
|
|
|
(7)
|
|
Actuarial loss (gain)
|
|
253
|
|
|
(95)
|
|
|
8
|
|
|
—
|
|
Currency exchange rate changes
|
|
(2)
|
|
|
(3)
|
|
|
—
|
|
|
(1)
|
|
Transfers in
|
|
6
|
|
|
9
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
(136)
|
|
|
—
|
|
|
—
|
|
Benefit obligations as of September 30
|
|
$
|
2,287
|
|
|
$
|
2,087
|
|
|
$
|
55
|
|
|
$
|
51
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets as of October 1
|
|
$
|
1,792
|
|
|
$
|
2,081
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
273
|
|
|
(30)
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
14
|
|
|
16
|
|
|
6
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(140)
|
|
|
(146)
|
|
|
(6)
|
|
|
(7)
|
|
Currency exchange rate changes
|
|
(2)
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
(136)
|
|
|
—
|
|
|
—
|
|
Transfers in
|
|
6
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets as of September 30
|
|
$
|
1,943
|
|
|
$
|
1,792
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Unfunded status of the plans as of September 30
|
|
$
|
344
|
|
|
$
|
295
|
|
|
$
|
55
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
Current benefit liabilities
|
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Noncurrent benefit liabilities
|
|
335
|
|
|
285
|
|
|
49
|
|
|
45
|
|
Net amount recognized
|
|
$
|
344
|
|
|
$
|
295
|
|
|
$
|
55
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
(45)
|
|
|
$
|
(56)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average plan assumptions
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.10
|
%
|
|
4.28
|
%
|
|
2.95
|
%
|
|
4.08
|
%
|
Rate of compensation increase
|
|
3.06
|
%
|
|
3.10
|
%
|
|
—
|
|
|
—
|
|
Valvoline recognizes the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. Such gains and losses are reported within Net pension and other postretirement plan expense in the Consolidated Statements of Comprehensive Income and included a loss of $69 million and $38 million for the years ended September 30, 2019 and 2018, respectively.
The fiscal 2019 loss was primarily attributed to decreases in discount rates, which were partially offset by higher than expected returns on plan assets and favorable changes in mortality assumptions. The fiscal 2018 loss was generally
attributed to lower than expected returns on plan assets, which were partially offset by the benefit obligation actuarial gain for increases in discount rates and reduced mortality improvements.
Pension settlement program
During 2018, Valvoline offered the option of receiving a lump sum payment to certain participants with vested qualified U.S. pension plan retirement benefits in lieu of receiving monthly annuity payments. Approximately 2,600 participants elected to receive the settlement, and lump sum payments were made from plan assets to these participants in September 2018 for approximately $134 million. The benefit obligation settled approximated payments to plan participants and did not generate a material settlement adjustment during fiscal 2018.
Accumulated benefit obligation
The accumulated benefit obligation for all pension plans was $2.3 billion as of September 30, 2019 and $2.1 billion as of September 30, 2018. Information for pension plans with a benefit obligation in excess of the fair value of plan assets follows for the Company’s plans as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
|
|
2018
|
|
|
|
|
Benefit obligation
|
|
Plan assets
|
|
Benefit obligation
|
|
Plan assets
|
Plans with projected benefit obligation in excess of plan assets
|
|
$
|
2,242
|
|
|
$
|
1,898
|
|
|
$
|
2,045
|
|
|
$
|
1,749
|
|
Plans with accumulated benefit obligation in excess of plan assets
|
|
$
|
2,229
|
|
|
$
|
1,889
|
|
|
$
|
2,034
|
|
|
$
|
1,741
|
|
Plan assets
The following table summarizes the various investment categories that the pension plan assets are invested in and the applicable fair value hierarchy as described in Note 2 that the financial instruments are classified within these investment categories as of September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Total fair value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets measured at NAV
|
|
|
Cash and cash equivalents
|
|
$
|
166
|
|
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
U.S. government securities and futures
|
|
162
|
|
|
—
|
|
|
162
|
|
|
—
|
|
|
—
|
|
|
|
Other government securities
|
|
41
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
—
|
|
|
|
Corporate debt instruments
|
|
1,075
|
|
|
—
|
|
|
1,075
|
|
|
—
|
|
|
—
|
|
|
|
Insurance contracts
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
|
Private equity and hedge funds
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
|
Common collective trusts
|
|
474
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
474
|
|
|
|
Other investments
|
|
3
|
|
|
—
|
|
3
|
|
|
—
|
|
—
|
|
|
|
Total assets at fair value
|
|
$
|
1,943
|
|
|
$
|
166
|
|
|
$
|
1,281
|
|
|
$
|
7
|
|
|
$
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Total fair value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets measured at NAV
|
Cash and cash equivalents
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government securities and futures (a)
|
|
74
|
|
|
(3)
|
|
|
77
|
|
|
—
|
|
|
—
|
|
Other government securities
|
|
92
|
|
|
1
|
|
|
91
|
|
|
—
|
|
|
—
|
|
Corporate debt instruments (b)
|
|
1,056
|
|
|
—
|
|
|
1,056
|
|
|
—
|
|
|
—
|
|
Insurance contracts
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Private equity and hedge funds
|
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Common collective trusts
|
|
406
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
406
|
|
Total assets at fair value
|
|
$
|
1,792
|
|
|
$
|
98
|
|
|
$
|
1,224
|
|
|
$
|
4
|
|
|
$
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Level 1 investments are in a liability position as of September 30, 2018 and represent exchange-traded futures contracts that are used to manage the interest rate risk in the plan asset portfolio.
Cash and cash equivalents
The carrying value of cash and cash equivalents approximates fair value.
Government securities
Government securities that trade in an active market are valued using quoted market prices, which are Level 1 inputs. Other government securities are valued based on Level 2 inputs, which include yields available on comparable securities of issuers with similar credit ratings. Treasury futures are used to manage interest rate risk and are valued at the closing price reported on the exchange market for exchange-traded futures, which is a Level 1 input.
Corporate debt instruments
Corporate debt instruments are valued based on Level 2 inputs that are observable in the market or may be derived principally from, or corroborated by, recently executed transactions, observable market data such as pricing for similar securities, cash flow models with yield curves, counterparty credit rating, and credit spreads applied to the terms of the debt instrument (maturity and coupon interest rate).
Insurance contracts
Insurance contracts are arrangements with insurance companies that guarantee the payment of the pension entitlements and are valued based on Level 3 inputs, which are neither quoted prices nor observable inputs for pricing. Insurance contracts are valued at cash surrender value, which approximates fair value.
Private equity and hedge funds
Private equity and hedge funds primarily represent alternative investments not traded on an active market which are valued at the NAV per share determined by the manager of the fund based on the fair value of the underlying net assets owned by the fund divided by the number of shares or units outstanding.
Common collective trusts
Common collective trusts are comprised of a diversified portfolio of investments across various asset classes, including U.S. and international equities, fixed-income securities, commodities and currencies. The collective trust funds are valued using a NAV provided by the manager of each fund, which is based on the underlying net assets owned by the fund, divided by the number of shares outstanding.
The following table provides a reconciliation of the beginning and ending balances for Level 3 plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Total Level 3 assets
|
Balance at September 30, 2017
|
|
|
|
|
$
|
16
|
|
Purchases
|
|
|
|
|
3
|
|
Sales (a)
|
|
|
|
|
(8)
|
|
Actual return on assets held at end of year
|
|
|
|
|
1
|
|
Actual return on assets sold during year
|
|
|
|
|
(8)
|
|
Balance at September 30, 2018
|
|
|
|
|
4
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
1
|
|
|
|
|
|
|
|
Actual return on assets held at end of year
|
|
|
|
|
2
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
|
|
$
|
7
|
|
|
|
|
|
|
|
(a) Level 3 assets that were liquidated during fiscal 2018 represented real estate investments that were valued using DCF and unobservable inputs, including future rentals, expenses and residual values from a market participant view of the highest and best use of the real estate.
The following table summarizes investments for which fair value is measured using the NAV per share practical expedient as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair value at NAV
|
|
Unfunded commitments
|
|
Redemption frequency (if currently eligible)
|
|
Redemption notice period
|
Long/short hedge funds
|
|
$
|
3
|
|
|
$
|
—
|
|
|
None (a)
|
|
None (a)
|
Relative value hedge funds
|
|
4
|
|
|
—
|
|
|
None (b)
|
|
None (b)
|
Multi-strategy hedge funds
|
|
—
|
|
|
—
|
|
|
None (b)
|
|
None (b)
|
Event driven hedge funds
|
|
1
|
|
|
—
|
|
|
None (b)
|
|
None (b)
|
Common collective trusts
|
|
453
|
|
|
—
|
|
|
Daily
|
|
Up to 3 days
|
|
|
13
|
|
|
—
|
|
|
Monthly
|
|
5 days
|
|
|
8
|
|
|
—
|
|
|
N/A (c)
|
|
N/A (c)
|
Private equity
|
|
7
|
|
|
2
|
|
|
None (d)
|
|
None (d)
|
|
|
$
|
489
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)These hedge funds are in the process of liquidation over the next year.
(b)These hedge funds are in the process of liquidation and the timing of such is unknown.
(c)These assets are held in Australia and are investments in funds that include a diversified portfolio across various asset classes. The time period for redemption of these assets is not determinable.
(d)These private equity instruments are estimated to be liquidated over the next 1 to 5 years.
Investments and strategy
In developing an investment strategy for its defined benefit plans, Valvoline considered the following factors: the nature of the plans’ liabilities, the allocation of liabilities between active, deferred and retired plan participants, the funded status of the plans, the applicable investment horizon, the respective size of the plans and historical and expected investment returns. Valvoline’s U.S. pension plan assets are managed by outside investment managers, which are monitored against investment return benchmarks and Valvoline’s established investment strategy. Investment managers are selected based on an analysis of, among other things, their investment process, historical investment results, frequency of management turnover, cost structure and assets under management. Assets are periodically reallocated between investment managers to maintain an appropriate asset mix and diversification of investments and to optimize returns.
The current target asset allocation for the U.S. plans is 75% fixed income securities and 25% equity-based securities. Fixed income securities are liability matching assets that primarily include long duration high grade corporate debt obligations. Equity-based securities are return-seeking assets that include both traditional equities as well as a mix of non-traditional assets such as hedge and commingled funds and private equity. Investment managers may employ a limited use of futures or other derivatives to manage risk within the portfolio through efficient exposure to markets. Valvoline’s
pension plans hold a variety of investments designed to diversify risk and achieve an adequate net investment return to provide for future benefit payments to its participants.
Valvoline’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are consistent with those for U.S. plans, except in those countries where the investment of plan assets is dictated by applicable regulations. The weighted-average asset allocations for Valvoline’s U.S. and non-U.S. plans by asset category follow as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
2019
|
|
2018
|
Plan assets allocation
|
|
|
|
|
|
|
Equity securities
|
|
15-25%
|
|
17
|
%
|
|
23
|
%
|
Debt securities
|
|
65-85%
|
|
81
|
%
|
|
76
|
%
|
Other
|
|
0-20%
|
|
2
|
%
|
|
1
|
%
|
Total
|
|
|
|
100
|
%
|
|
100
|
%
|
The basis for determining the expected long-term rate of return is a combination of future return assumptions for the various asset classes in Valvoline’s investment portfolio based on active management, historical analysis of previous returns, market indices, and a projection of inflation, net of plan expenses.
Funding and benefit payments
Valvoline contributed $14 million and $16 million to its pension plans during fiscal 2019 and 2018, respectively. Contributions during fiscal 2019 included $4 million of non-cash contributions from the Company's non-qualified trust assets. Valvoline does not plan to contribute to the U.S. qualified pension plan in fiscal 2020, but expects to contribute approximately $14 million, $5 million of which is expected to be non-cash, to its U.S. non-qualified and non-U.S. pension plans.
The following benefit payments, which reflect future service expectations, are projected to be paid in each of the next five fiscal years and the five fiscal years thereafter in aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension benefits
|
|
Other postretirement benefits
|
2020
|
|
$
|
143
|
|
|
$
|
6
|
|
2021
|
|
143
|
|
|
5
|
|
2022
|
|
143
|
|
|
4
|
|
2023
|
|
142
|
|
|
4
|
|
2024
|
|
140
|
|
|
3
|
|
2025 - 2029
|
|
688
|
|
|
15
|
|
Total
|
|
$
|
1,399
|
|
|
$
|
37
|
|
Other plans
Defined contribution and other defined benefit plans
Valvoline's savings plan provides matching contributions subject to a maximum percentage. Expense associated with this plan was $14 million in each fiscal year 2019, 2018 and 2017.
Valvoline also sponsors various other benefit plans, some of which are required by local laws within certain countries. Total current and noncurrent liabilities associated with these plans were $1 million and $3 million, respectively, as of September 30, 2019 and 2018.
Multiemployer pension plans
Valvoline participates in two multiemployer pension plans that provide pension benefits to certain union-represented employees under the terms of collective bargaining agreements. Valvoline assumed responsibility for contributions to
these plans in connection with the separation from Ashland. Contributions to these plans were not material for fiscal 2019, 2018 or 2017.
In April 2018, Valvoline received a demand for payment of a partial withdrawal liability assessment related to the sale of a business by Ashland in fiscal 2011 and the associated reduction in contributions and the number of employees covered by one of the multiemployer pension plans. The Company vigorously contested the assessment and the calculation method utilized by the plan in its determination and settled the matter consistent with its reserve at a cost that is not material to the consolidated financial statements as of and for the periods ended September 30, 2019.
Incentive plans
Reserves for incentive plans were $25 million and $19 million as of September 30, 2019 and 2018, respectively.
NOTE 16 – 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 immaterial for the periods presented as reflected in the consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, Valvoline discloses matters for which management believes a material loss is at least reasonably possible.
In all instances, management has assessed each matter based on current information available and made a judgment concerning its potential outcome, giving due consideration to the amount and nature of the claim and the probability of success. As disclosed herein, 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 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 consolidated financial statements.
NOTE 17 - STOCK-BASED COMPENSATION PLANS
Valvoline has approved incentive plans that authorize 21 million shares to be issued, with approximately 16 million remaining available for issuance as of September 30, 2019. The Valvoline incentive plans authorize the grant of stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and other nonvested stock awards. The Compensation Committee of the Board of Directors administers the Valvoline incentive plans and has the authority to determine the individuals to whom awards will be made, the amount of those awards, and other terms and conditions of the awards.
Certain original grants were modified, including the vesting conditions and the number of awards outstanding, in connection with the restructuring activities described in Note 11. Valvoline estimated its pre- and post-modification fair value and updated its expense over the remaining service period for each modified award, as appropriate, which did not result in material adjustments to expense.
In connection with the Distribution on May 12, 2017, outstanding Ashland share-based awards held by Valvoline employees and directors were converted to equivalent share-based awards of Valvoline based on an exchange ratio of Ashland’s fair market value prior to the Distribution in relation to Valvoline’s fair market value post-Distribution. This conversion modified the number of awards outstanding, as well as certain terms and conditions of the original grants relative to performance and market measures. The conversion was treated as a modification for accounting purposes, and accordingly, Valvoline estimated its pre- and post-modification fair value, which resulted in an increase in the incremental fair value of the awards that was not material and is being expensed ratably over the remaining vesting period for each award.
The following is a summary of stock-based compensation expense recognized by the Company during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017 (b)
|
Stock appreciation rights
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Nonvested stock awards
|
|
8
|
|
|
9
|
|
|
5
|
|
Performance awards
|
|
1
|
|
|
1
|
|
|
2
|
|
Total stock-based compensation expense, pre-tax (a)
|
|
10
|
|
|
12
|
|
|
10
|
|
Tax benefit
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
(a)Includes approximately $1 million in each period presented related to certain awards that are cash-settled and liability-classified; therefore, fair value is remeasured at the end of each reporting period until settlement.
(b)Stock-based compensation expense in fiscal 2017 includes $4 million that was allocated from Ashland prior to the Distribution.
Stock Appreciation Rights
SARs were granted to certain Valvoline employees to provide award holders with the ability to profit from the appreciation in value of a set number of shares of common stock over a period of time by exercising their award and receiving the sum of the increase in shares. SARs were granted at a price equal to the fair market value of the stock on the date of grant and typically vest and become exercisable over a period of one to three years. Unexercised SARs generally lapse ten years after the grant date.
The following table summarizes the activity relative to SARs for the year ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(in thousands)
|
|
Weighted average exercise price per share
|
|
Weighted average remaining term
(in years)
|
|
Aggregate intrinsic value
(in millions)
|
SARs outstanding as of September 30, 2018
|
|
1,798
|
|
|
$
|
18.54
|
|
|
6.7 years
|
|
$
|
6
|
|
Granted
|
|
240
|
|
|
$
|
20.37
|
|
|
|
|
|
Exercised
|
|
(185)
|
|
|
$
|
17.19
|
|
|
|
|
$
|
1
|
|
Forfeited
|
|
(38)
|
|
|
$
|
20.35
|
|
|
|
|
|
SARs outstanding as of September 30, 2019
|
|
1,815
|
|
|
$
|
18.88
|
|
|
6.2 years
|
|
$
|
6
|
|
SARs exercisable as of September 30, 2019
|
|
1,342
|
|
|
$
|
18.15
|
|
|
5.4 years
|
|
$
|
5
|
|
The aggregate intrinsic value of SARs exercised (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the SAR) was $1 million during fiscal 2019, $2 million during fiscal 2018, and less than $1 million during fiscal 2017. As of September 30, 2019, there was $1 million of total unrecognized compensation cost related to SARs, which is expected to be recognized over a weighted average period of 1.9 years.
Stock-based compensation expense for SARs was computed using the Black-Scholes option-pricing model to estimate the grant date fair value of new or modified awards with the following key assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted average grant date fair value per share
|
|
$
|
5.36
|
|
|
$
|
5.56
|
|
|
$
|
7.44
|
|
Assumptions (weighted average)
|
|
|
|
|
|
|
Risk-free interest rate (a)
|
|
2.9
|
%
|
|
2.2
|
%
|
|
1.7
|
%
|
Expected dividend yield
|
|
1.5
|
%
|
|
0.9
|
%
|
|
0.9
|
%
|
Expected volatility (b)
|
|
26.8
|
%
|
|
23.3
|
%
|
|
22.8
|
%
|
Expected term (in years) (c)
|
|
5.88
|
|
5.88
|
|
7.45
|
|
|
|
|
|
|
|
(a)Based on the U.S. Treasury yield curve in effect at the time of grant or modification for the expected term of the award. The range of risk-free interest rates used for SARs converted at Distribution in fiscal 2017 was 1.1% to 1.9%.
(b)Due to the lack of historical data for Valvoline, expected volatility is based on the average of peer companies’ historical daily equity volatilities with look-back periods commensurate with the expected term. The range of expected volatility used for SARs converted at Distribution in fiscal 2017 was 21.5% to 24.4%.
(c)Due to the lack of historical data for Valvoline, the expected term is based on the mid-point between the vesting date and the end of the contractual term.
Nonvested stock awards
Nonvested stock awards in the form of Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) were granted to certain Valvoline employees and directors. These awards were granted at a price equal to the fair market value of the underlying common stock on the grant date, generally vest over a one to three-year period, and are subject to forfeiture upon termination of service before the vesting period ends. These awards were primarily granted as RSUs that settle in shares upon vesting, while RSAs result in share issuance at grant, which entitle award holders to voting rights that are restricted until vesting. Dividends on nonvested stock awards are generally granted in the form of additional units or shares of nonvested stock awards, which are subject to vesting and forfeiture provisions.
The following table summarizes nonvested share activity for the year ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(in thousands)
|
|
Weighted average grant date fair value per share
|
Unvested shares as of September 30, 2018
|
|
1,278
|
|
|
$
|
23.07
|
|
Granted
|
|
345
|
|
|
$
|
20.41
|
|
Vested
|
|
(443)
|
|
|
$
|
22.62
|
|
Forfeited
|
|
(97)
|
|
|
$
|
21.52
|
|
Unvested shares as of September 30, 2019
|
|
1,083
|
|
|
$
|
21.52
|
|
The total grant date fair value of shares vested was $10 million, $6 million and less than $1 million for the years ended September 30, 2019, 2018 and 2017, respectively. The weighted average grant date fair value for nonvested stock awards granted in fiscal 2018 and fiscal 2017 was $23.17 and $22.82, respectively. As of September 30, 2019, there was $5 million of total unrecognized compensation costs related to nonvested stock awards, which is expected to be recognized over a weighted average period of 3.2 years. The aggregate intrinsic value of nonvested stock awards as of September 30, 2019 is $24 million.
Performance awards
Performance share units were awarded to certain key Valvoline employees that are tied to overall financial performance relative to selected industry peer groups and/or internal targets. Awards are granted annually, with each award typically covering a three-year performance and vesting period. Each performance share unit is convertible to one share of common stock, and the actual number of shares issuable upon vesting is determined based upon performance compared to market and financial performance targets. Nonvested performance share units generally do not entitle employees to vote or to receive any dividends thereon.
The following table summarizes performance award activity for the year ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(in thousands)
|
|
Weighted average grant date fair value per share
|
Unvested shares as of September 30, 2018
|
|
327
|
|
|
$
|
22.64
|
|
Granted
|
|
195
|
|
|
$
|
21.22
|
|
Vested
|
|
(66)
|
|
|
$
|
30.66
|
|
Forfeited
|
|
(33)
|
|
|
$
|
21.80
|
|
Unvested shares as of September 30, 2019
|
|
423
|
|
|
$
|
22.31
|
|
As of September 30, 2019, there was $3 million of unrecognized compensation costs related to nonvested performance share awards, which is expected to be recognized over a weighted average period of approximately 1.8 years. The aggregate intrinsic value of the performance-based nonvested stock awards as of September 30, 2019 is $9 million.
With regard to the performance conditions, the fair value of new or modified awards is equal to the grant date fair market value of Valvoline’s common stock, and compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied. For market conditions, compensation cost is recognized regardless of whether the conditions are satisfied and based on the grant date fair value of new or modified awards using a Monte Carlo simulation valuation model using the following key assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted average grant date fair value per share
|
|
$
|
21.22
|
|
|
$
|
23.82
|
|
|
|
$
|
18.44
|
|
Assumptions (weighted average)
|
|
|
|
|
|
|
Risk-free interest rates (a)
|
|
2.8
|
%
|
|
1.7
|
%
|
|
1.2
|
%
|
Expected dividend yield
|
|
1.3
|
%
|
|
1.0
|
%
|
|
1.0
|
%
|
Expected volatility (b)
|
|
26.8
|
%
|
|
24.2
|
%
|
|
21.0
|
%
|
Expected term (in years)
|
|
3.0
|
|
3.0
|
|
1.9
|
|
|
|
|
|
|
|
(a)Based on the U.S. Treasury yield curve in effect at the time of grant or modification for the expected term of the award. The range of risk-free interest rates used for performance awards was 1.6% to 1.8% in fiscal 2018 and 0.9% to 1.5% in fiscal 2017 for awards converted at Distribution.
(b)Due to the lack of historical data for Valvoline, expected volatility is based on the average of peer companies’ historical volatilities with look-back periods commensurate with the expected term. The range of expected volatility used for performance awards converted at Distribution in fiscal 2017 was 18.9% to 22.4%.
NOTE 18 - EARNINGS PER SHARE
The following is the summary of basic and diluted EPS for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
2019
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
Net income
|
|
$
|
208
|
|
|
$
|
166
|
|
|
$
|
304
|
|
Denominator
|
|
|
|
|
|
|
Weighted average shares common shares outstanding
|
|
189
|
|
|
197
|
|
|
204
|
|
Effect of potentially dilutive securities (a)
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average diluted shares outstanding
|
|
189
|
|
|
197
|
|
|
204
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
Basic
|
|
$
|
1.10
|
|
|
$
|
0.84
|
|
|
$
|
1.49
|
|
Diluted
|
|
$
|
1.10
|
|
|
$
|
0.84
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
(a)During the year ended September 30, 2017, share-based awards that were previously denominated in Ashland common stock were converted to Valvoline common stock concurrent with the Distribution. There was not a significant dilutive impact in any year from potential common shares associated with the Company's share-based awards.
NOTE 19 - STOCKHOLDERS’ DEFICIT
Stockholder dividends
Since the first fiscal quarter of 2017, the Company has issued a quarterly cash dividend. The Company’s dividend activity was as follows during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
2019
|
|
2018
|
|
2017
|
Cash outlay
|
|
$
|
80
|
|
|
$
|
58
|
|
|
$
|
40
|
|
Dividend per share
|
|
$
|
0.424
|
|
|
$
|
0.298
|
|
|
$
|
0.196
|
|
Accumulated other comprehensive income
Changes in accumulated other comprehensive income by component for fiscal years 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Unamortized benefit plan credits
|
|
Currency translation adjustments
|
|
Total
|
Balance as of September 30, 2016
|
|
$
|
52
|
|
|
$
|
(55)
|
|
|
$
|
(3)
|
|
Fiscal 2017 activity, net of tax
|
|
(8)
|
|
|
54
|
|
|
46
|
|
Balance as of September 30, 2017
|
|
44
|
|
|
(1)
|
|
|
43
|
|
Fiscal 2018 activity, net of tax
|
|
(1)
|
|
|
(10)
|
|
|
(11)
|
|
Balance as of September 30, 2018
|
|
43
|
|
|
(11)
|
|
|
32
|
|
Fiscal 2019 activity, net of tax
|
|
(9)
|
|
|
(12)
|
|
|
(21)
|
|
Balance as of September 30, 2019
|
|
$
|
34
|
|
|
$
|
(23)
|
|
|
$
|
11
|
|
Amounts reclassified from accumulated other comprehensive income for the years ended September 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2019
|
|
2018
|
|
2017
|
Amortization of pension and other postretirement plan prior service credit (a)
|
|
$
|
(12)
|
|
|
$
|
(12)
|
|
|
$
|
(12)
|
|
(Gain) loss on liquidation of subsidiary (b)
|
|
(1)
|
|
|
1
|
|
|
—
|
|
Tax effect of reclassifications
|
|
3
|
|
|
2
|
|
|
4
|
|
Net of tax
|
|
(10)
|
|
|
(9)
|
|
|
(8)
|
|
Reclassification of income tax effects of U.S. tax reform (c)
|
|
—
|
|
|
8
|
|
|
—
|
|
Total amounts reclassified, net of tax
|
|
$
|
(10)
|
|
|
$
|
(1)
|
|
|
$
|
(8)
|
|
|
|
|
|
|
|
|
(a)Amortization of unrecognized prior service credits included in net periodic benefit income for pension and other postretirement plans was reported in Net pension and other postretirement plan expense (income) within the Consolidated Statements of Comprehensive Income.
(b)Represents the realization of cumulative translation adjustments in Equity and other income, net within the Consolidated Statements of Comprehensive Income as a result of the liquidation of certain non-U.S. subsidiaries.
(c)Represents the reclassification of stranded income tax effects of U.S. tax reform resulting from the change in the federal corporate tax rate to Retained deficit in the Consolidated Balance Sheet.
The Company generally releases the income tax effects from accumulated other comprehensive income as benefit plan credits are amortized into earnings.
Share repurchases
During fiscal 2017, Valvoline’s Board of Directors (the "Board") authorized the repurchase of $150 million of the Company’s common stock for which the shares were repurchased during fiscal 2017 and 2018. In January 2018, the Board authorized the repurchase of up to $300 million of the Company’s common stock through September 30, 2020. As of September 30, 2019, the remaining amount available for repurchase was $75 million. Upon repurchase, shares were retired and recorded as a reduction in Common stock for par value with the price paid in excess of par value recorded as an increase in Retained deficit. The following table summarizes the Company’s share repurchase activity during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Total cost
|
|
$
|
—
|
|
|
|
$
|
325
|
|
|
|
$
|
50
|
|
Shares repurchased
|
|
—
|
|
|
15
|
|
|
2
|
|
NOTE 20 – TRANSACTIONS WITH ASHLAND
Payable to Ashland
Valvoline had total net obligations due to Ashland of $78 million and $79 million as of September 30, 2019 and 2018, respectively, which were primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets. These liabilities generally relate to net obligations due to Ashland under the Tax Matters Agreement as well as reimbursements
payable to Ashland for certain other contractual obligations, including those intended to transfer to Valvoline as part of the Distribution. Refer to Note 14 for additional details regarding the Tax Matters Agreement and related obligations.
Transition Services Agreements
Valvoline entered into a Transition Services Agreement (“TSA”) and Reverse Transition Services Agreement (“RTSA”) as well as certain other arrangements in connection with the separation from Ashland, which provided for certain continued corporate support services provided by Valvoline and Ashland to one another following the IPO. Valvoline began to set up its own corporate functions in connection with the IPO, and Ashland provided various corporate support services for Valvoline pursuant to the TSA, including certain accounting, human resources, information technology, office and building, risk, security, tax and treasury services. Pursuant to the RTSA, Valvoline provided Ashland with various corporate support services, including certain human resources, information technology, office and building, security, tax services, and certain regulatory compliance services. The term of these agreements generally expired two years after the IPO, and the charges associated with these services were not material during the years presented herein. The costs were consistent with expenses that Ashland had historically allocated or Valvoline incurred with respect to such services, plus a mark-up of five percent.
Separation from Ashland
Immediately prior to the Distribution, Ashland owned 170 million shares of Valvoline common stock, which represented approximately 83% of the outstanding shares of Valvoline common stock. Effective upon the Distribution, Ashland no longer held any shares of Valvoline common stock. Refer to Note 1 for further information on the separation from Ashland. Also refer to Note 17 for information regarding the conversion of share-based awards from Ashland to Valvoline at Distribution.
NOTE 21 – REPORTABLE SEGMENT INFORMATION
Valvoline manages and reports within the following three segments:
•Quick Lubes - services the passenger car and light truck quick lube market through company-owned and independent franchised retail quick lube service center stores and independent Express Care stores that service vehicles with Valvoline products, as well as through investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.
•Core North America - sells engine and automotive maintenance products in the United States and Canada to retailers, installers, and heavy-duty customers to service vehicles and equipment.
•International - sells engine and automotive products in more than 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment.
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company’s resources. Sales and operating income are the primary U.S. GAAP measures evaluated in assessing each reportable segment’s financial performance. Operating income by segment includes the allocation of shared corporate costs, which are allocated consistently based on each segment’s proportional contribution to various financial measures. Intersegment sales are not material, and assets are not allocated and included in the assessment of segment performance; consequently, these items are not disclosed by segment herein.
To maintain operating focus on business performance, certain corporate and non-operational items, including restructuring and related expenses, as well as adjustments related to legacy businesses that no longer are attributed to Valvoline, are excluded from the segment operating results utilized by the chief operating decision maker in evaluating segment performance and are separately delineated within Unallocated and other to reconcile to total reported Operating income as shown in the table below.
Valvoline did not have a single customer that represented 10% or more of consolidated net sales in fiscal 2019, 2018 or 2017.
Reportable segment results
The following table presents sales, operating income, and depreciation and amortization by reportable segment for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
|
|
|
|
|
Quick Lubes
|
|
$
|
822
|
|
|
$
|
660
|
|
|
$
|
541
|
|
Core North America
|
|
994
|
|
|
1,035
|
|
|
1,004
|
|
International
|
|
574
|
|
|
590
|
|
|
539
|
|
Consolidated sales
|
|
$
|
2,390
|
|
|
$
|
2,285
|
|
|
$
|
2,084
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
Quick Lubes
|
|
$
|
178
|
|
|
$
|
153
|
|
|
$
|
130
|
|
Core North America
|
|
152
|
|
|
172
|
|
|
199
|
|
International
|
|
85
|
|
|
84
|
|
|
76
|
|
Total operating segments
|
|
415
|
|
|
409
|
|
|
405
|
|
Unallocated and other (a)
|
|
(17)
|
|
|
(14)
|
|
|
(11)
|
|
Consolidated operating income
|
|
$
|
398
|
|
|
$
|
395
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Quick Lubes
|
|
$
|
36
|
|
|
$
|
30
|
|
|
$
|
22
|
|
Core North America
|
|
18
|
|
|
18
|
|
|
15
|
|
International
|
|
7
|
|
|
6
|
|
|
5
|
|
Consolidated depreciation and amortization
|
|
$
|
61
|
|
|
$
|
54
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
(a)Unallocated and other includes Legacy and separation-related expenses, net and restructuring and related expenses.
Entity-wide disclosures
The following table summarizes sales by category for each reportable segment for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by category
|
|
|
|
|
|
|
|
|
|
|
|
|
Quick Lubes
|
|
|
|
Core North America
|
|
|
|
International
|
|
|
|
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Lubricants
|
|
84
|
%
|
85
|
%
|
84
|
%
|
|
86
|
%
|
85
|
%
|
86
|
%
|
|
88
|
%
|
89
|
%
|
89
|
%
|
Antifreeze
|
|
1
|
%
|
1
|
%
|
1
|
%
|
|
9
|
%
|
8
|
%
|
7
|
%
|
|
5
|
%
|
5
|
%
|
6
|
%
|
Filters
|
|
8
|
%
|
8
|
%
|
8
|
%
|
|
1
|
%
|
3
|
%
|
3
|
%
|
|
1
|
%
|
3
|
%
|
1
|
%
|
Chemicals and other
|
|
2
|
%
|
2
|
%
|
2
|
%
|
|
4
|
%
|
4
|
%
|
4
|
%
|
|
6
|
%
|
3
|
%
|
4
|
%
|
Franchise
|
|
5
|
%
|
4
|
%
|
5
|
%
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
|
100
|
%
|
100
|
%
|
100
|
%
|
|
100
|
%
|
100
|
%
|
100
|
%
|
Sales and net property, plant and equipment are attributed to the geographic area or country to which product is delivered and the assets physically reside, respectively. The following table presents sales and net property, plant and equipment by geographic area for Valvoline for the years ended and as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from external customers
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
2019
|
|
2018
|
United States
|
|
$
|
1,766
|
|
|
$
|
1,652
|
|
|
$
|
1,504
|
|
|
|
|
|
|
$
|
431
|
|
|
$
|
384
|
|
International
|
|
624
|
|
|
633
|
|
|
580
|
|
|
|
|
|
|
67
|
|
|
36
|
|
Total
|
|
$
|
2,390
|
|
|
$
|
2,285
|
|
|
$
|
2,084
|
|
|
|
|
|
|
$
|
498
|
|
|
$
|
420
|
|
Sales by geography expressed as a percentage of total consolidated sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended September 30
|
|
|
|
|
Sales by geography
|
|
2019
|
|
2018
|
|
2017
|
North America (a)
|
|
76
|
%
|
|
74
|
%
|
|
74
|
%
|
EMEA
|
|
8
|
%
|
|
8
|
%
|
|
7
|
%
|
Asia Pacific
|
|
12
|
%
|
|
13
|
%
|
|
14
|
%
|
Latin America (a)
|
|
4
|
%
|
|
5
|
%
|
|
5
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
(a)Valvoline includes the United States and Canada in its North American region. Mexico is included within the Latin America region.
NOTE 22 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents quarterly financial information and per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
Third Quarter
|
|
|
|
|
|
Fourth Quarter
|
|
|
|
|
(In millions, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
557
|
|
|
|
$
|
545
|
|
|
|
$
|
591
|
|
|
|
$
|
569
|
|
|
|
$
|
613
|
|
|
|
$
|
577
|
|
|
|
$
|
629
|
|
|
|
$
|
594
|
|
|
Gross profit (a)
|
|
$
|
183
|
|
|
|
$
|
195
|
|
|
|
$
|
203
|
|
|
|
$
|
207
|
|
|
|
$
|
207
|
|
|
|
$
|
201
|
|
|
|
$
|
217
|
|
|
|
$
|
203
|
|
|
Operating income (b)
|
|
$
|
87
|
|
|
|
$
|
88
|
|
|
|
$
|
96
|
|
|
|
$
|
100
|
|
|
|
$
|
102
|
|
|
|
$
|
102
|
|
|
|
$
|
113
|
|
|
|
$
|
105
|
|
|
Income before income taxes (b) (c)
|
|
$
|
72
|
|
|
|
$
|
84
|
|
|
|
$
|
80
|
|
|
|
$
|
94
|
|
|
|
$
|
85
|
|
|
|
$
|
97
|
|
|
|
$
|
28
|
|
|
|
$
|
57
|
|
|
Net income (loss) (d)
|
|
$
|
53
|
|
|
|
$
|
(10)
|
|
|
|
$
|
63
|
|
|
|
$
|
67
|
|
|
|
$
|
65
|
|
|
|
$
|
64
|
|
|
|
$
|
27
|
|
|
|
$
|
45
|
|
|
Net income (loss) per common share (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
|
|
$
|
(0.05)
|
|
|
|
$
|
0.33
|
|
|
|
$
|
0.33
|
|
|
|
$
|
0.34
|
|
|
|
$
|
0.33
|
|
|
|
$
|
0.14
|
|
|
|
$
|
0.23
|
|
|
Diluted
|
|
$
|
0.28
|
|
|
|
$
|
(0.05)
|
|
|
|
$
|
0.33
|
|
|
|
$
|
0.33
|
|
|
|
$
|
0.34
|
|
|
|
$
|
0.33
|
|
|
|
$
|
0.14
|
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Gross profit included business interruption expenses recorded in Cost of sales of $1 million in the second fiscal quarter of 2019 and $5 million in the third fiscal quarter of 2019.
(b)Operating and pre-tax income included restructuring expenses recorded in Selling, general and administrative expenses of $8 million in the second quarter of 2019, $4 million in the third fiscal quarter of 2019 and $2 million in the fourth fiscal quarter of 2019. Also included in operating and pre-tax income are Legacy and separation-related expenses, net of $3 million in the second fiscal quarter of 2019, $9 million in the first fiscal quarter of 2018, $8 million in the second fiscal quarter of 2018, and $3 million of income in the third fiscal quarter of 2018. Acquisition and divestiture-related gains and losses also recognized in operating and pre-tax income were a gain of $4 million in the fourth fiscal quarter of 2019 recorded in Equity and other income, net, and losses of $2 million and $1 million in the third and fourth fiscal quarters of 2018, respectively, recorded in Selling, general and administrative expenses.
(c)Income before income taxes includes pension other postretirement plan remeasurement losses of $69 million and $38 million in the fourth fiscal quarters of 2019 and 2018, respectively.
(d)Net income includes $2 million of income tax benefit recognized in the second fiscal quarter of 2019 related to Kentucky tax reform. Net (loss) income for fiscal 2018 includes additional income tax expense related to U.S. and Kentucky tax reform enacted during the year of $71 million in the first quarter of fiscal 2018, $2 million in the second fiscal quarter of 2018, $3 million in the third fiscal quarter of 2018, and $2 million in the fourth fiscal quarter of 2018.
(e)Net income (loss) per share in each quarter is computed using the weighted average number of shares outstanding during that quarter while net income per share for the full year is computed using the weighted average number of shares outstanding during the year. Thus, the sum of the four quarters’ net income (loss) per share will not necessarily equal the full-year net income per share.
NOTE 23 – GUARANTOR FINANCIAL INFORMATION
The Senior Notes are general unsecured senior obligations of Valvoline Inc. and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the combined “Guarantor Subsidiaries.” Other subsidiaries (the “Non-Guarantor Subsidiaries”) largely represent the international operations of the Company, which do not guarantee the Senior Notes. Under the terms of the indentures, Valvoline Inc. and the Guarantor Subsidiaries each fully and unconditionally, jointly and severally, guarantee the payment of interest, principal and premium, if any, on each of the notes included in the Senior Notes. Refer to Note 12 for additional information.
The Guarantor Subsidiaries are subject to release in certain circumstances, including (i) the sale of all of the capital stock of the subsidiary, (ii) the designation of the subsidiary as an “Unrestricted Subsidiary” under the indenture governing the Senior Notes; or (iii) the release of the subsidiary as a guarantor from the Company’s 2019 Credit Agreement described further in Note 12.
In connection with the registered exchange offers for the Senior Notes completed in December 2017, the Company is required to comply with Rule 3-10 of SEC Regulation S-X (“Rule 3-10”), and has therefore included the accompanying condensed consolidating financial statements in accordance with Rule 3-10(f) of SEC Regulation S-X.
The following tables should be read in conjunction with the consolidated financial statements herein and present, on a consolidating basis, the statements of comprehensive income; balance sheets; and statements of cash flows for the parent issuer of these Senior Notes, the Guarantor Subsidiaries on a combined basis, the Non-Guarantor Subsidiaries on a combined basis and the eliminations necessary to arrive at the Company’s consolidated results. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted for its investments in its subsidiaries under the equity method.
In connection with the restructuring steps that occurred immediately prior to Valvoline's IPO as described in Note 1, certain subsidiaries were created and contributed to Valvoline which formed a new organizational structure to affect the separation from Ashland, which was completed in May 2017. Activity for the parent issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries has been presented herein to reflect the guarantee structure in place at September 30, 2017 for all periods presented based upon the historical activity that occurred within Valvoline's legal structure that existed in each respective period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Sales
|
|
$
|
—
|
|
|
$
|
1,896
|
|
|
$
|
557
|
|
|
$
|
(63)
|
|
|
$
|
2,390
|
|
Cost of sales
|
|
—
|
|
|
1,241
|
|
|
402
|
|
|
(63)
|
|
|
1,580
|
|
Gross profit
|
|
—
|
|
|
655
|
|
|
155
|
|
|
—
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
10
|
|
|
348
|
|
|
91
|
|
|
—
|
|
|
449
|
|
Net legacy and separation-related expenses
|
|
2
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Equity and other (income) expenses, net
|
|
—
|
|
|
(57)
|
|
|
17
|
|
|
—
|
|
|
(40)
|
|
Operating (loss) income
|
|
(12)
|
|
|
363
|
|
|
47
|
|
|
—
|
|
|
398
|
|
Net pension and other postretirement plan expense
|
|
—
|
|
|
57
|
|
|
3
|
|
|
—
|
|
|
60
|
|
Net interest and other financing expenses
|
|
63
|
|
|
7
|
|
|
3
|
|
|
—
|
|
|
73
|
|
(Loss) income before income taxes
|
|
(75)
|
|
|
299
|
|
|
41
|
|
|
—
|
|
|
265
|
|
Income tax (benefit) expense
|
|
(31)
|
|
|
77
|
|
|
11
|
|
|
—
|
|
|
57
|
|
Equity in net income of subsidiaries
|
|
(252)
|
|
|
(30)
|
|
|
—
|
|
|
282
|
|
|
—
|
|
Net income
|
|
$
|
208
|
|
|
$
|
252
|
|
|
$
|
30
|
|
|
$
|
(282)
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
187
|
|
|
$
|
231
|
|
|
$
|
18
|
|
|
$
|
(249)
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Sales
|
|
$
|
—
|
|
|
$
|
1,782
|
|
|
$
|
558
|
|
|
$
|
(55)
|
|
|
$
|
2,285
|
|
Cost of sales
|
|
—
|
|
|
1,132
|
|
|
402
|
|
|
(55)
|
|
|
1,479
|
|
Gross profit
|
|
—
|
|
|
650
|
|
|
156
|
|
|
—
|
|
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
11
|
|
|
327
|
|
|
92
|
|
|
—
|
|
|
430
|
|
Net legacy and separation-related expenses
|
|
8
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Equity and other (income) expenses, net
|
|
—
|
|
|
(50)
|
|
|
17
|
|
|
—
|
|
|
(33)
|
|
Operating (loss) income
|
|
(19)
|
|
|
367
|
|
|
47
|
|
|
—
|
|
|
395
|
|
Net pension and other postretirement plan expense (income)
|
|
—
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
Net interest and other financing expenses
|
|
53
|
|
|
6
|
|
|
4
|
|
|
—
|
|
|
63
|
|
(Loss) income before income taxes
|
|
(72)
|
|
|
360
|
|
|
44
|
|
|
—
|
|
|
332
|
|
Income tax expense
|
|
14
|
|
|
140
|
|
|
12
|
|
|
—
|
|
|
166
|
|
Equity in net income of subsidiaries
|
|
(252)
|
|
|
(32)
|
|
|
—
|
|
|
284
|
|
|
—
|
|
Net income
|
|
$
|
166
|
|
|
$
|
252
|
|
|
$
|
32
|
|
|
$
|
(284)
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
147
|
|
|
$
|
234
|
|
|
$
|
25
|
|
|
$
|
(259)
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Sales
|
|
$
|
—
|
|
|
$
|
1,618
|
|
|
$
|
523
|
|
|
$
|
(57)
|
|
|
$
|
2,084
|
|
Cost of sales
|
|
—
|
|
|
986
|
|
|
379
|
|
|
(57)
|
|
|
1,308
|
|
Gross profit
|
|
—
|
|
|
632
|
|
|
144
|
|
|
—
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
9
|
|
|
296
|
|
|
91
|
|
|
—
|
|
|
396
|
|
Net legacy and separation-related expenses
|
|
(15)
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Equity and other (income) expenses, net
|
|
—
|
|
|
(37)
|
|
|
12
|
|
|
—
|
|
|
(25)
|
|
Operating income
|
|
6
|
|
|
347
|
|
|
41
|
|
|
—
|
|
|
394
|
|
Net pension and other postretirement plan income
|
|
—
|
|
|
(134)
|
|
|
(4)
|
|
|
—
|
|
|
(138)
|
|
Net interest and other financing expenses
|
|
36
|
|
|
4
|
|
|
2
|
|
|
—
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
(30)
|
|
|
477
|
|
|
43
|
|
|
—
|
|
|
490
|
|
Income tax (benefit) expense
|
|
(3)
|
|
|
178
|
|
|
11
|
|
|
—
|
|
|
186
|
|
Equity in net income of subsidiaries
|
|
(331)
|
|
|
(32)
|
|
|
—
|
|
|
363
|
|
|
—
|
|
Net income
|
|
$
|
304
|
|
|
$
|
331
|
|
|
$
|
32
|
|
|
$
|
(363)
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
303
|
|
|
$
|
330
|
|
|
$
|
43
|
|
|
$
|
373
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
159
|
|
Accounts receivable, net
|
|
—
|
|
|
181
|
|
|
338
|
|
|
(118)
|
|
|
401
|
|
Inventories, net
|
|
—
|
|
|
110
|
|
|
84
|
|
|
—
|
|
|
194
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
35
|
|
|
8
|
|
|
—
|
|
|
43
|
|
Total current assets
|
|
—
|
|
|
385
|
|
|
530
|
|
|
(118)
|
|
|
797
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
—
|
|
|
431
|
|
|
67
|
|
|
—
|
|
|
498
|
|
Goodwill and intangibles, net
|
|
—
|
|
|
423
|
|
|
81
|
|
|
—
|
|
|
504
|
|
Equity method investments
|
|
—
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
Investment in subsidiaries
|
|
1,157
|
|
|
546
|
|
|
—
|
|
|
(1,703)
|
|
|
—
|
|
Deferred income taxes
|
|
48
|
|
|
61
|
|
|
14
|
|
|
—
|
|
|
123
|
|
Other noncurrent assets
|
|
3
|
|
|
96
|
|
|
9
|
|
|
—
|
|
|
108
|
|
Total noncurrent assets
|
|
1,208
|
|
|
1,591
|
|
|
171
|
|
|
(1,703)
|
|
|
1,267
|
|
Total assets
|
|
$
|
1,208
|
|
|
$
|
1,976
|
|
|
$
|
701
|
|
|
$
|
(1,821)
|
|
|
$
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
Trade and other payables
|
|
80
|
|
|
127
|
|
|
82
|
|
|
(118)
|
|
|
171
|
|
Accrued expenses and other liabilities
|
|
9
|
|
|
175
|
|
|
53
|
|
|
—
|
|
|
237
|
|
Total current liabilities
|
|
104
|
|
|
302
|
|
|
135
|
|
|
(118)
|
|
|
423
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,326
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1,327
|
|
Employee benefit obligations
|
|
—
|
|
|
369
|
|
|
18
|
|
|
—
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
36
|
|
|
147
|
|
|
2
|
|
|
—
|
|
|
185
|
|
Total noncurrent liabilities
|
|
1,362
|
|
|
517
|
|
|
20
|
|
|
—
|
|
|
1,899
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ (deficit) equity
|
|
(258)
|
|
|
1,157
|
|
|
546
|
|
|
(1,703)
|
|
|
(258)
|
|
Total liabilities and stockholders’ deficit / equity
|
|
$
|
1,208
|
|
|
$
|
1,976
|
|
|
$
|
701
|
|
|
$
|
(1,821)
|
|
|
$
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
76
|
|
|
$
|
—
|
|
|
$
|
96
|
|
Accounts receivable, net
|
|
—
|
|
|
48
|
|
|
480
|
|
|
(119)
|
|
|
409
|
|
Inventories, net
|
|
—
|
|
|
95
|
|
|
81
|
|
|
—
|
|
|
176
|
|
Prepaid expenses and other current assets
|
|
1
|
|
|
38
|
|
|
5
|
|
|
—
|
|
|
44
|
|
Total current assets
|
|
1
|
|
|
201
|
|
|
642
|
|
|
(119)
|
|
|
725
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
—
|
|
|
384
|
|
|
36
|
|
|
—
|
|
|
420
|
|
Goodwill and intangibles, net
|
|
—
|
|
|
396
|
|
|
52
|
|
|
—
|
|
|
448
|
|
Equity method investments
|
|
—
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Investment in subsidiaries
|
|
801
|
|
|
509
|
|
|
—
|
|
|
(1,310)
|
|
|
—
|
|
Deferred income taxes
|
|
62
|
|
|
63
|
|
|
13
|
|
|
—
|
|
|
138
|
|
Other noncurrent assets
|
|
2
|
|
|
85
|
|
|
5
|
|
|
—
|
|
|
92
|
|
Total noncurrent assets
|
|
865
|
|
|
1,468
|
|
|
106
|
|
|
(1,310)
|
|
|
1,129
|
|
Total assets
|
|
$
|
866
|
|
|
$
|
1,669
|
|
|
$
|
748
|
|
|
$
|
(1,429)
|
|
|
$
|
1,854
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Trade and other payables
|
|
3
|
|
|
241
|
|
|
53
|
|
|
(119)
|
|
|
178
|
|
Accrued expenses and other liabilities
|
|
7
|
|
|
168
|
|
|
28
|
|
|
—
|
|
|
203
|
|
Total current liabilities
|
|
40
|
|
|
409
|
|
|
81
|
|
|
(119)
|
|
|
411
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,151
|
|
|
1
|
|
|
140
|
|
|
—
|
|
|
1,292
|
|
Employee benefit obligations
|
|
—
|
|
|
317
|
|
|
16
|
|
|
—
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
33
|
|
|
141
|
|
|
2
|
|
|
—
|
|
|
176
|
|
Total noncurrent liabilities
|
|
1,184
|
|
|
459
|
|
|
158
|
|
|
—
|
|
|
1,801
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ (deficit) equity
|
|
(358)
|
|
|
801
|
|
|
509
|
|
|
(1,310)
|
|
|
(358)
|
|
Total liabilities and stockholders’ deficit / equity
|
|
$
|
866
|
|
|
$
|
1,669
|
|
|
$
|
748
|
|
|
$
|
(1,429)
|
|
|
$
|
1,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Cash flows (used in) provided by operating activities
|
|
$
|
(73)
|
|
|
$
|
166
|
|
|
$
|
232
|
|
|
$
|
—
|
|
|
$
|
325
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
—
|
|
|
(90)
|
|
|
(18)
|
|
|
—
|
|
|
(108)
|
|
Acquisitions, net of cash acquired
|
|
—
|
|
|
(34)
|
|
|
(44)
|
|
|
—
|
|
|
(78)
|
|
Other investing activities, net
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
—
|
|
|
(124)
|
|
|
(64)
|
|
|
—
|
|
|
(188)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings, net of issuance costs
|
|
666
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
750
|
|
Repayments on borrowings
|
|
(510)
|
|
|
—
|
|
|
(224)
|
|
|
—
|
|
|
(734)
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of additional ownership in subsidiary
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Cash dividends paid
|
|
(80)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(80)
|
|
Other financing activities
|
|
(3)
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities
|
|
73
|
|
|
(3)
|
|
|
(141)
|
|
|
—
|
|
|
(71)
|
|
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(3)
|
|
Increase in cash, cash equivalents, and restricted cash
|
|
—
|
|
|
39
|
|
|
24
|
|
|
—
|
|
|
63
|
|
Cash, cash equivalents, and restricted cash - beginning of year
|
|
—
|
|
|
20
|
|
|
76
|
|
|
—
|
|
|
96
|
|
Cash, cash equivalents, and restricted cash - end of year
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Cash flows (used in) provided by operating activities
|
|
$
|
(57)
|
|
|
$
|
390
|
|
|
$
|
(13)
|
|
|
$
|
—
|
|
|
$
|
320
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
—
|
|
|
(88)
|
|
|
(5)
|
|
|
—
|
|
|
(93)
|
|
Acquisitions, net of cash acquired
|
|
—
|
|
|
(72)
|
|
|
(53)
|
|
|
—
|
|
|
(125)
|
|
Other investing activities, net
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Return of advance from subsidiary
|
|
312
|
|
|
—
|
|
|
—
|
|
|
(312)
|
|
|
—
|
|
Cash flows provided by (used in) investing activities
|
|
312
|
|
|
(155)
|
|
|
(58)
|
|
|
(312)
|
|
|
(213)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings, net of issuance costs
|
|
203
|
|
|
—
|
|
|
101
|
|
|
—
|
|
|
304
|
|
Repayments on borrowings
|
|
(72)
|
|
|
—
|
|
|
(36)
|
|
|
—
|
|
|
(108)
|
|
Repurchases of common stock
|
|
(325)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(325)
|
|
Purchase of additional ownership in subsidiary
|
|
—
|
|
|
—
|
|
|
(15)
|
|
|
—
|
|
|
(15)
|
|
Cash dividends paid
|
|
(58)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(58)
|
|
Other financing activities
|
|
(3)
|
|
|
(2)
|
|
|
(2)
|
|
|
—
|
|
|
(7)
|
|
Other intercompany activity, net
|
|
—
|
|
|
(312)
|
|
|
—
|
|
|
312
|
|
|
—
|
|
Cash flows (used in) provided by financing activities
|
|
(255)
|
|
|
(314)
|
|
|
48
|
|
|
312
|
|
|
(209)
|
|
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(3)
|
|
Decrease in cash, cash equivalents and restricted cash
|
|
—
|
|
|
(79)
|
|
|
(26)
|
|
|
—
|
|
|
(105)
|
|
Cash, cash equivalents, and restricted cash - beginning of year
|
|
—
|
|
|
99
|
|
|
102
|
|
|
—
|
|
|
201
|
|
Cash, cash equivalents, and restricted cash - end of year
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
76
|
|
|
$
|
—
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Cash flows provided by (used in) operating activities
|
|
$
|
97
|
|
|
$
|
(180)
|
|
|
$
|
(47)
|
|
|
$
|
—
|
|
|
$
|
(130)
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
—
|
|
|
(64)
|
|
|
(4)
|
|
|
—
|
|
|
(68)
|
|
Acquisitions, net of cash acquired
|
|
—
|
|
|
(68)
|
|
|
—
|
|
|
—
|
|
|
(68)
|
|
Other investing activities, net
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Advance to subsidiary
|
|
(312)
|
|
|
—
|
|
|
—
|
|
|
312
|
|
|
—
|
|
Cash flows used in investing activities
|
|
(312)
|
|
|
(131)
|
|
|
(4)
|
|
|
312
|
|
|
(135)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from Ashland
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Proceeds from borrowings, net of issuance costs
|
|
395
|
|
|
—
|
|
|
75
|
|
|
—
|
|
|
470
|
|
Repayments on borrowings
|
|
(90)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(90)
|
|
Repurchases of common stock
|
|
(50)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50)
|
|
Cash dividends paid
|
|
(40)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40)
|
|
Other intercompany activity, net
|
|
(5)
|
|
|
317
|
|
|
—
|
|
|
(312)
|
|
|
—
|
|
Cash flows provided by financing activities
|
|
215
|
|
|
317
|
|
|
75
|
|
|
(312)
|
|
|
295
|
|
Effect of currency exchange rate changes on cash and cash equivalents
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Increase in cash, cash equivalents, and restricted cash
|
|
—
|
|
|
6
|
|
|
23
|
|
|
—
|
|
|
29
|
|
Cash, cash equivalents, and restricted cash - beginning of year
|
|
—
|
|
|
93
|
|
|
79
|
|
|
—
|
|
|
172
|
|
Cash, cash equivalents, and restricted cash - end of year
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
201
|
|
NOTE 24 – SUBSEQUENT EVENTS
Dividend declared
On November 14, 2019 the Company’s Board of Directors approved a quarterly cash dividend of $0.113 per share of common stock. The dividend is payable December 16, 2019 to shareholders of record on November 29, 2019.