0001674910-20-000036.txt : 20200204 0001674910-20-000036.hdr.sgml : 20200204 20200204170611 ACCESSION NUMBER: 0001674910-20-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 87 CONFORMED PERIOD OF REPORT: 20191231 FILED AS OF DATE: 20200204 DATE AS OF CHANGE: 20200204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALVOLINE INC CENTRAL INDEX KEY: 0001674910 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRODUCTS OF PETROLEUM & COAL [2990] IRS NUMBER: 300939371 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37884 FILM NUMBER: 20574750 BUSINESS ADDRESS: STREET 1: 100 VALVOLINE WAY CITY: LEXINGTON STATE: KY ZIP: 40509 BUSINESS PHONE: 859-357-2591 MAIL ADDRESS: STREET 1: 100 VALVOLINE WAY CITY: LEXINGTON STATE: KY ZIP: 40509 10-Q 1 vvv-20191231.htm 10-Q vvv-20191231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
______________________
FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 001-37884
VALVOLINE INC.

vvv-20191231_g1.jpg

Kentucky

30-0939371

(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
Telephone Number (859) 357-7777
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareVVVNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes þ     No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).         Yes þ     No  o

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

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes      No þ
At January 31, 2020, there were 188,448,171 shares of the registrants common stock outstanding.



VALVOLINE INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS




PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Three months ended December 31
(In millions, except per share data - unaudited) 20192018
Sales$607  $557  
Cost of sales396  374  
Gross profit211  183  
Selling, general and administrative expenses117  105  
Net legacy and separation-related income(1)   
Equity and other income, net(9) (9) 
Operating income104  87  
Net pension and other postretirement plan income(9) (2) 
Net interest and other financing expenses16  17  
Income before income taxes97  72  
Income tax expense24  19  
Net income$73  $53  
NET INCOME PER SHARE
Basic$0.39  $0.28  
Diluted$0.39  $0.28  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic189  188  
Diluted189  189  
COMPREHENSIVE INCOME
Net income$73  $53  
Other comprehensive income (loss), net of tax
Currency translation adjustments8  (4) 
Amortization of pension and other postretirement plan prior service credit(2) (2) 
Other comprehensive income (loss)6  (6) 
Comprehensive income$79  $47  

See Notes to Condensed Consolidated Financial Statements.
3


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except per share amounts - unaudited)December 31
2019
September 30
2019
Assets
Current assets
Cash and cash equivalents$162  $159  
Accounts receivable, net395  401  
Inventories, net194  194  
Prepaid expenses and other current assets43  43  
Total current assets794  797  
Noncurrent assets
Property, plant and equipment, net479  498  
Operating lease assets253    
Goodwill and intangibles, net507  504  
Equity method investments39  34  
Deferred income taxes116  123  
Other noncurrent assets109  108  
Total noncurrent assets1,503  1,267  
Total assets$2,297  $2,064  
Liabilities and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt$22  $15  
Trade and other payables153  171  
Accrued expenses and other liabilities246  237  
Total current liabilities421  423  
Noncurrent liabilities
Long-term debt1,320  1,327  
Employee benefit obligations376  387  
Operating lease liabilities224    
Other noncurrent liabilities152  185  
Total noncurrent liabilities2,072  1,899  
Commitments and contingencies
Stockholders deficit
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
    
Common stock, par value $0.01 per share, 400 shares authorized; 188 shares issued and outstanding at December 31, 2019 and September 30, 2019
2  2  
Paid-in capital16  13  
Retained deficit(231) (284) 
Accumulated other comprehensive income17  11  
Total stockholders’ deficit(196) (258) 
Total liabilities and stockholders deficit
$2,297  $2,064  

See Notes to Condensed Consolidated Financial Statements.
4


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit

Three months ended December 31, 2019
Accumulated other comprehensive income
(In millions, except per share amounts)Common stockPaid-in capitalRetained deficit
(Unaudited)SharesAmountTotals
Balance at September 30, 2019188  $2  $13  $(284) $11  $(258) 
Net income—  —  —  73  —  73  
Dividends paid, $0.113 per common share
—  —  —  (21) —  (21) 
Stock-based compensation, net of issuances—  —  3  —  —  3  
Cumulative effect of adoption of new leasing standard, net of tax—  —  —  1  —  1  
Currency translation adjustments—  —  —  —  8  8  
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (2) (2) 
Balance at December 31, 2019188  $2  $16  $(231) $17  $(196) 

Three months ended December 31, 2018
Accumulated other comprehensive income
(In millions, except per share amounts)Common stockPaid-in capitalRetained deficit
(Unaudited)SharesAmountTotals
Balance at September 30, 2018188  $2  $7  $(399) $32  $(358) 
Net income—  —  —  53  —  53  
Dividends paid, $0.106 per common share
—  —  —  (20) —  (20) 
Stock-based compensation, net of issuances—  —  1  —  —  1  
Cumulative effect of adoption of new revenue standard, net of tax—  —  —  (13) —  (13) 
Currency translation adjustments—  —  —  —  (4) (4) 
Amortization of pension and other postretirement prior service credits in income, net of tax—  —  —  —  (2) (2) 
Balance at December 31, 2018188  $2  $8  $(379) $26  $(343) 

See Notes to Condensed Consolidated Financial Statements.
5


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three months ended
December 31
(In millions - unaudited)20192018
Cash flows from operating activities
Net income$73  $53  
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization16  14  
Equity income from unconsolidated affiliates, net of distributions
(2)   
Pension contributions(4) (2) 
Stock-based compensation expense4  3  
Other, net2    
Change in assets and liabilities
Accounts receivable7  43  
Inventories4  (13) 
Payables and accrued liabilities(47) (19) 
Other assets and liabilities6  6  
Total cash provided by operating activities59  85  
Cash flows from investing activities
Additions to property, plant and equipment(28) (27) 
Acquisitions, net of cash acquired(6) (30) 
Other investing activities, net(1) 1  
Total cash used in investing activities(35) (56) 
Cash flows from financing activities
Proceeds from borrowings  100  
Repayments on borrowings  (101) 
Cash dividends paid(21) (20) 
Other financing activities(2) (4) 
Total cash used in financing activities(23) (25) 
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash3  (1) 
Increase in cash, cash equivalents, and restricted cash4  3  
Cash, cash equivalents, and restricted cash - beginning of period159  96  
Cash, cash equivalents, and restricted cash - end of period$163  $99  

See Notes to Condensed Consolidated Financial Statements.

6



7


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

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for interim periods are not necessarily indicative of those to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current presentation.

Recent accounting pronouncements

The following standards relevant to Valvoline were either issued or adopted in the current year, or are expected to have a meaningful impact on Valvoline in future periods.

Recently adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued accounting guidance, which outlined a comprehensive lease accounting model that requires lessees to recognize a right-of-use asset and a corresponding lease liability on the balance sheet and superseded previous lease accounting guidance. Valvoline adopted this new lease accounting guidance on October 1, 2019 using the optional transition approach. Under this approach, the new lease accounting guidance has been applied prospectively from the date of adoption, while prior period financial statements continue to be reported in accordance with the previous guidance. Lease expense is recognized similar to prior accounting guidance with operating leases resulting in straight-line expense and finance leases resulting in accelerated expense recognition similar to the prior accounting for capital leases. The accounting for lessor arrangements is not significantly changed by the new guidance.

Valvoline elected certain practical expedients permitted by the new guidance, including the package of practical expedients that allows for previous accounting conclusions regarding lease identification and classification to be carried forward for leases which commenced prior to adoption, as well as the practical expedient to not separate lease and non-lease components and account for them as a single lease component. The Company did not elect the hindsight or short-term lease practical expedients.

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

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Issued but not yet adopted

In June 2016, the FASB issued updated guidance that introduces a forward-looking approach based on expected losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments including trade and other receivables. The new guidance will require entities to incorporate historical, current, and forecasted information into their estimates of expected credit losses. This guidance also includes expanded disclosure requirements and will become effective for Valvoline on October 1, 2020. The Company is evaluating the effect of adopting this new accounting guidance, including changes to its related processes, and does not currently expect adoption will have a material impact on its Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Comprehensive Income.

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

NOTE 2 - LEASING

As described in Note 1, Valvoline adopted new lease accounting guidance effective October 1, 2019 and changed its policy for lease accounting prospectively for lease agreements entered into or reassessed from the date of adoption as described herein.

Lessee arrangements

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

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

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

The following table presents the Company's lease balances:

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(In millions)Location in Condensed Consolidated Balance SheetDecember 31, 2019
Assets
   Operating lease assetsOperating lease assets$253  
   Finance lease assets Property, plant and equipment, net29  
   Amortization of finance lease assetsProperty, plant and equipment, net(7) 
Total leased assets$275  
Liabilities
Current:
   Operating lease liabilitiesAccrued expenses and other liabilities$30  
   Finance lease liabilitiesAccrued expenses and other liabilities1  
Noncurrent:
   Operating lease liabilitiesOperating lease liabilities224  
   Finance lease liabilitiesOther noncurrent liabilities24  
Total lease liabilities$279  

The following table presents the components of total lease costs:

(In millions)Location in Condensed Consolidated Statement of Comprehensive IncomeThree months ended
December 31, 2019
Operating lease cost
Cost of sales and Selling, general and administrative expenses (a)
$11  
Finance lease costs
Amortization of lease assets
Cost of sales (a)
  
Interest on lease liabilitiesNet interest and other financing expenses1  
Variable lease cost
Cost of sales and Selling, general and administrative expenses (a)
1  
Sublease incomeEquity and other income, net(1) 
Total lease cost$12  
(a) Supply chain and retail-related amounts are included in Cost of sales.


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Other information related to the Company's leases follows:

(In millions)Three months ended
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (a)
$10  
Operating cash flows from finance leases$1  
Financing cash flow from finance leases$  
Lease assets obtained in exchange for lease obligations:
Operating leases$15  
Finance leases$  
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statement of Cash Flows offset by noncash operating lease asset amortization and liability accretion.

The following table reconciles the undiscounted cash flows for the next five fiscal years ended September 30 and thereafter to the operating and finance lease liabilities recorded on the Condensed Consolidated Balance Sheet as of December 31, 2019:

(In millions) Operating leasesFinance leases
Remainder of 2020$30  $3  
202137  4  
202235  3  
202331  4  
202428  4  
Thereafter154  26  
Total future lease payments315  44  
Imputed interest61  19  
Present value of lease liabilities$254  $25  

As of December 31, 2019, Valvoline has additional leases primarily related to its quick lube service center stores that have not yet commenced with approximately $45 million in undiscounted future lease payments that are not included in the table above. These leases are expected to commence in fiscal 2020 and generally have lease terms of 15 years.

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

The future minimum lease payments by fiscal year as determined prior to the adoption of the new lease accounting guidance under the previously designated capital, financing and operating leases as of the fiscal year ended September 30, 2019, were as follows:

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


The following table presents the weighted average remaining lease term and interest rate as of December 31, 2019:

Weighted average remaining lease term (in years):
Operating leases10.0
Finance leases10.7
Weighted average discount rate:
Operating leases4.13 %
Finance leases11.57 %

Lessor arrangements

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

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NOTE 3 - FAIR VALUE MEASUREMENTS

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

(In millions)Fair Value HierarchyDecember 31 2019September 30
2019
Cash and cash equivalents
Money market fundsLevel 1  $1  $  
Time depositsLevel 2  62  59  
Prepaid expenses and other current assets
Currency derivatives (a)
Level 2  1    
Other noncurrent assets
Non-qualified trust fundsLevel 1  20  20  
Total assets at fair value$84  $79  
Accrued expenses and other liabilities
Currency derivatives (a)
Level 2  $1  $  
Total liabilities at fair value$1  $  
(a) The Company had outstanding contracts with notional values of $128 million and $111 million as of December 31, 2019 and September 30, 2019, respectively.

There were no material gains or losses recognized in earnings during the three months ended December 31, 2019 or 2018 related to these assets and liabilities.

Long-term debt

The fair values of the Company’s outstanding fixed rate senior notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. Long-term debt is included in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.
December 31, 2019September 30, 2019
(In millions)Fair valueCarrying valueUnamortized discount and
issuance costs
Fair valueCarrying valueUnamortized
discount and
issuance costs
2024 Notes$389  $371  $(4) $390  $371  $(4) 
2025 Notes416  396  (4) 407  395  (5) 
Total$805  $767  $(8) $797  $766  $(9) 

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

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NOTE 4 - ACQUISITIONS AND DIVESTITURES

Quick Lubes store acquisitions

During the three months ended December 31, 2019, the Company acquired nine service center stores in single and multi-store transactions, including two former franchise service center stores, for a total of $6 million. During the three months ended December 31, 2018, the Company acquired 35 service center stores for a total of $30 million.

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. 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 three months ended December 31:
(In millions)20192018
Property, plant and equipment$  $1  
Goodwill5  21  
Intangible assets (a)
Reacquired franchise rights1  4  
Customer relationships  3  
Trademarks and trade names  1  
Net assets acquired$6  $30  
(a) Intangible assets acquired during the three months ended December 31, 2019 have a weighted average amortization period of 6 years.

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

The incremental results of operations of the acquired stores, which were not material to the Company’s consolidated results, have been included in the condensed consolidated financial statements from the date of each acquisition, and accordingly, pro forma disclosure of financial information has not been presented.

Dispositions

During the first fiscal quarter of 2020, the Company sold six service center stores to a franchisee within the Quick Lubes reportable segment. Valvoline received proceeds of approximately $3 million, with no material gain or loss recognized.

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NOTE 5 - INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill by reportable segment and in total during the three months ended December 31, 2019:
(In millions)Quick LubesCore North AmericaInternationalTotal
Balance at September 30, 2019$301  $89  $40  $430  
Acquisitions (a)
5      5  
Currency translation1      1  
Dispositions (a)
(3)     (3) 
Balance at December 31, 2019$304  $89  $40  $433  
(a) Refer to Note 4 for details regarding acquisitions and dispositions completed during the three months ended December 31, 2019.

NOTE 6 - RESTRUCTURING ACTIVITIES

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

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

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

The following table presents the expenses recognized related to employee termination benefits during the three months ended December 31, 2019 and the estimated remaining liability, which is included in the Condensed Consolidated Balance Sheet within Accrued expenses and other liabilities:

(In millions)Employee Termination Benefits
Balance at September 30, 2019$9  
Expenses recognized during the period1  
Payments (2) 
Balance at December 31, 2019$8  

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NOTE 7 - DEBT

The following table summarizes Valvoline’s total debt:

(In millions)December 31 2019September 30 2019
2025 Notes$400  $400  
2024 Notes375  375  
Term Loan575  575  
Other (a)
(8) (8) 
Total debt$1,342  $1,342  
Current portion of long-term debt22  15  
Long-term debt$1,320  $1,327  
 
(a) As of December 31, 2019 and September 30, 2019, other included debt issuance costs and discounts of $9 million and debt primarily acquired through acquisitions of $1 million.

Senior Notes

The Company’s outstanding fixed rate senior notes consist of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes”) and 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes” and together with the 2025 Notes, the “Senior Notes”).

Senior Credit Agreement

As of December 31 and September 30, 2019, the term loan facility (“Term Loan”) under the senior credit agreement (“Senior Credit Agreement”) had an outstanding principal balance of $575 million.

As of December 31 and September 30, 2019, there were no amounts outstanding under the $475 million revolving credit facility (“Revolver”) under the Senior Credit Agreement. There was no net borrowing activity under the Revolver during the three months ended December 31, 2019. As of December 31, 2019, the total borrowing capacity remaining under the Revolver was $466 million due to a reduction of $9 million for letters of credit outstanding.

As of December 31, 2019, Valvoline was in compliance with all covenants under the Senior Credit Agreement.

Trade Receivables Facility

As of December 31 and September 30, 2019, there were no amounts outstanding under the $175 million trade receivables securitization facility (the “Trade Receivables Facility”). During the three months ended December 31, 2019, Valvoline had no net borrowing activity under the Trade Receivables Facility.

Based on the availability of eligible receivables, the total borrowing capacity of the Trade Receivables Facility as of December 31, 2019 was $130 million. The financing subsidiary owned $220 million and $259 million of outstanding accounts receivable as of December 31 and September 30, 2019, respectively, which are included in Accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.

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NOTE 8 – INCOME TAXES

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

Three months ended December 31
(In millions)20192018
Income tax expense$24  $19  
Effective tax rate percentage24.7 %26.4 %

The increase in income tax expense over the prior year was principally driven by higher pre-tax earnings, and the lower effective tax rate is attributed to the current year benefit from favorable discrete items compared to unfavorable discrete items in the prior year.

NOTE 9 – EMPLOYEE BENEFIT PLANS

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

Other postretirement benefits
Pension benefits
(In millions)2019201820192018
Three months ended December 31
Service cost$1  $  $  $  
Interest cost16  20    1  
Expected return on plan assets(22) (20)     
Amortization of prior service credit    (3) (3) 
Net periodic benefit income$(5) $  $(3) $(2) 

NOTE 10 – LITIGATION, CLAIMS AND CONTINGENCIES

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

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

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

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NOTE 11 - EARNINGS PER SHARE

The following table summarizes basic and diluted earnings per share:

Three months ended
December 31
(In millions, except per share data)20192018
Numerator
Net income $73  $53  
Denominator
Weighted average common shares outstanding189  188  
Effect of potentially dilutive securities (a)
  1  
Weighted average diluted shares outstanding189  189  
 
Earnings per share
Basic$0.39