0001674910-23-000059.txt : 20230510 0001674910-23-000059.hdr.sgml : 20230510 20230510165003 ACCESSION NUMBER: 0001674910-23-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 69 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230510 DATE AS OF CHANGE: 20230510 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: 23907352 BUSINESS ADDRESS: STREET 1: 100 VALVOLINE WAY STREET 2: SUITE 100 CITY: LEXINGTON STATE: KY ZIP: 40509 BUSINESS PHONE: 859-357-2591 MAIL ADDRESS: STREET 1: 100 VALVOLINE WAY STREET 2: SUITE 100 CITY: LEXINGTON STATE: KY ZIP: 40509 10-Q 1 vvv-20230331.htm 10-Q vvv-20230331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
______________________
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023

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.
Valvoline New Logo.jpg
(Exact name of registrant as specified in its charter)
Kentucky30-0939371
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
(Address of principal executive offices) (Zip Code)

Telephone Number (859) 357-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each 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. 
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 May 5, 2023, there were 165,808,937 shares of the registrants common stock outstanding.




2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Three months ended
March 31
Six months ended
March 31
(In millions, except per share amounts - unaudited) 2023202220232022
Net revenues$344.5 $296.0 $677.3 $583.3 
Cost of sales217.8 188.7 431.8 363.8 
Gross profit126.7 107.3 245.5 219.5 
Selling, general and administrative expenses62.6 63.2 128.6 123.4 
Net legacy and separation-related expenses3.8 6.2 29.2 9.0 
Other income, net(0.9)(2.1)(2.8)(4.9)
Operating income61.2 40.0 90.5 92.0 
Net pension and other postretirement plan expense (income)3.6 (9.2)7.3 (18.5)
Net interest and other financing expenses13.3 16.9 32.0 33.9 
Income before income taxes44.3 32.3 51.2 76.6 
Income tax expense (benefit)11.4 9.3 (8.7)19.4 
Income from continuing operations32.9 23.0 59.9 57.2 
Income from discontinued operations1,194.4 58.4 1,249.3 111.2 
Net income$1,227.3 $81.4 $1,309.2 $168.4 
NET EARNINGS PER SHARE
Basic earnings per share
Continuing operations0.19 0.13 0.35 0.32 
Discontinued operations6.96 0.32 7.20 0.61 
Basic earnings per share$7.15 $0.45 $7.55 $0.93 
Diluted earnings per share
Continuing operations0.19 0.13 0.34 0.32 
Discontinued operations6.92 0.32 7.16 0.61 
Diluted earnings per share$7.11 $0.45 $7.50 $0.93 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic171.7 179.8 173.5 180.1 
Diluted172.7 181.0 174.5 181.5 
Comprehensive income
Net income$1,227.3 $81.4 $1,309.2 $168.4 
Other comprehensive income (loss), net of tax
Currency translation adjustments29.3 (0.6)44.5 (0.3)
Amortization of pension and other postretirement plan prior service credits(0.5)(0.4)(0.9)(0.8)
Unrealized (loss) gain on cash flow hedges(3.1)6.2 (4.4)8.4 
Other comprehensive income25.7 5.2 39.2 7.3 
Comprehensive income$1,253.0 $86.6 $1,348.4 $175.7 

See Notes to Condensed Consolidated Financial Statements.
3


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except per share amounts - unaudited)March 31
2023
September 30
 2022
Assets
Current assets
Cash and cash equivalents$2,334.5 $23.4 
Receivables, net61.1 66.1 
Inventories, net33.5 29.4 
Prepaid expenses and other current assets29.0 38.0 
Current assets held for sale 1,464.2 
Total current assets2,458.1 1,621.1 
Noncurrent assets
Property, plant and equipment, net722.5 668.6 
Operating lease assets258.7 248.1 
Goodwill and intangibles, net673.1 663.1 
Other noncurrent assets168.0 215.9 
Total noncurrent assets1,822.3 1,795.7 
Total assets$4,280.4 $3,416.8 
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt$23.8 $162.5 
Trade and other payables85.8 45.0 
Accrued expenses and other liabilities512.0 172.6 
Current liabilities held for sale 539.3 
Total current liabilities621.6 919.4 
Noncurrent liabilities
Long-term debt1,573.4 1,525.1 
Employee benefit obligations201.0 199.4 
Operating lease liabilities239.6 229.2 
Other noncurrent liabilities272.4 237.1 
Total noncurrent liabilities2,286.4 2,190.8 
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 40.0 shares authorized; no shares issued and outstanding
  
Common stock, par value $0.01 per share, 400.0 shares authorized; 168.7 and 176.1 shares issued and outstanding at March 31, 2023 and September 30, 2022, respectively
1.7 1.8 
Paid-in capital42.6 44.1 
Retained earnings1,310.2 282.0 
Accumulated other comprehensive income (loss)17.9 (21.3)
Stockholders' equity1,372.4 306.6 
Total liabilities and stockholders’ equity
$4,280.4 $3,416.8 
See Notes to Condensed Consolidated Financial Statements.



4


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six months ended
March 31
(In millions - unaudited)20232022
Cash flows from operating activities
Net income$1,309.2 $168.4 
Adjustments to reconcile to cash flows from operations
Income from discontinued operations(1,249.3)(111.2)
Depreciation and amortization39.1 34.5 
Deferred income taxes(26.6)13.5 
Stock-based compensation expense5.4 7.2 
Other, net2.3 1.7 
Change in operating assets and liabilities
Receivables4.8 (7.4)
Inventories(3.7) 
Payables and accrued liabilities68.5 (21.4)
Other assets and liabilities23.8 (38.5)
Operating cash flows from continuing operations173.5 46.8 
Operating cash flows from discontinued operations(63.4)49.0 
Total cash provided by operating activities110.1 95.8 
Cash flows from investing activities
Additions to property, plant and equipment(79.4)(57.7)
Acquisitions of businesses, net of cash acquired(18.9)(23.4)
Other investing activities, net2.0 6.1 
Investing cash flows from continuing operations(96.3)(75.0)
Investing cash flows from discontinued operations2,623.2 (9.2)
Total cash provided by (used in) investing activities2,526.9 (84.2)
Cash flows from financing activities
Proceeds from borrowings, net of issuance costs920.9  
Repayments on borrowings(909.0) 
Repurchases of common stock(257.4)(66.3)
Cash dividends paid(21.8)(45.0)
Other financing activities(12.1)(11.2)
Financing cash flows from continuing operations(279.4)(122.5)
Financing cash flows from discontinued operations(108.1)(1.0)
Total cash used in financing activities(387.5)(123.5)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash1.1 0.7 
Increase (decrease) in cash, cash equivalents and restricted cash2,250.6 (111.2)
Cash, cash equivalents and restricted cash - beginning of period83.9 231.4 
Cash, cash equivalents and restricted cash - end of period$2,334.5 $120.2 
See Notes to Condensed Consolidated Financial Statements.
5


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
Six months ended March 31, 2023
(In millions, except per share amounts - unaudited)Common stockPaid-in capitalRetained earningsAccumulated other comprehensive (loss) incomeTotals
SharesAmount
Balance at September 30, 2022176.1 $1.8 $44.1 $282.0 $(21.3)$306.6 
Net income— — — 81.9 — 81.9 
Dividends paid, $0.125 per common share
— — 0.1 (21.9)— (21.8)
Stock-based compensation, net of issuances0.3 — (3.4)— — (3.4)
Repurchases of common stock(2.9)(0.1)— (87.4)— (87.5)
Other comprehensive income, net of tax— — — — 13.5 13.5 
Balance at December 31, 2022173.5 $1.7 $40.8 $254.6 $(7.8)$289.3 
Net income— — — 1,227.3 — 1,227.3 
Stock-based compensation, net of issuances0.1 — 1.8 — — 1.8 
Repurchases of common stock(4.9)— — (171.7)— (171.7)
Other comprehensive income, net of tax— — — — 25.7 25.7 
Balance at March 31, 2023168.7 $1.7 $42.6 $1,310.2 $17.9 $1,372.4 
Six months ended March 31, 2022
(In millions, except per share amounts - unaudited)Common stockPaid-in capitalRetained earningsAccumulated other comprehensive income (loss)Totals
SharesAmount
Balance at September 30, 2021180.3 $1.8 $35.2 $90.0 $7.5 $134.5 
Net income— — — 87.0 — 87.0 
Dividends paid, $0.125 per common share
— — 0.1 (22.6)— (22.5)
Stock-based compensation, net of issuances0.2 — (2.4)— — (2.4)
Repurchases of common stock(0.9)— — (31.4)— (31.4)
Other comprehensive income, net of tax— — — — 2.1 2.1 
Balance at December 31, 2021179.6 $1.8 $32.9 $123.0 $9.6 $167.3 
Net income— — — 81.4 — 81.4 
Dividends paid, $0.125 per common share
— — 0.1 (22.6)— (22.5)
Stock-based compensation, net of issuances— — 3.8 — — 3.8 
Repurchases of common stock(1.0)— — (34.9)— (34.9)
Other comprehensive income, net of tax— — — — 5.2 5.2 
Balance at March 31, 2022178.6 $1.8 $36.8 $146.9 $14.8 $200.3 
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 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, 2022. Certain prior period amounts disclosed herein have been reclassified to conform to the current presentation.

Use of estimates, risks and uncertainties

The preparation of the condensed 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. 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.

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

Strategic separation

On March 1, 2023, Valvoline completed the previously announced sale of VGP Holdings LLC, which holds all of the issued and outstanding equity interests in the companies that, along with their respective subsidiaries, comprised the Company’s former Global Products reportable segment (“Global Products”) to Aramco Overseas Company B.V. (“Aramco” or the “Buyer”) (the “Transaction”). As a result, in all prior periods presented within these condensed consolidated financial statements, the assets and liabilities associated with the Global Products disposal group have been classified as held for sale within the Condensed Consolidated Balance Sheet and its operations have been classified as discontinued operations within the Condensed Consolidated Statements of Comprehensive Income and Cash Flows.

The operating results and cash flows of the Global Products business have been reported through February 28, 2023, the date prior to closing the Transaction. Refer to Note 2 for additional information regarding the Global Products business, including the assets and liabilities divested and income from discontinued operations. Unless otherwise noted, disclosures within these remaining Notes to Condensed Consolidated Financial Statements relate solely to the Company's continuing operations.

Inflation Reduction Act of 2022

The Inflation Reduction Act (the “IRA”) was enacted in the United States in August 2022, which includes, among other provisions, a 15% alternative minimum tax on corporate adjusted income in excess of certain thresholds for taxable years beginning after December 31, 2022. The Company does not expect this provision will have a material impact on its condensed consolidated financial statements.

The IRA also imposes an excise tax of one percent on share repurchases that occur after December 31, 2022. Corporations are permitted to credit certain new stock issuances against their stock repurchases during the same taxable period. Valvoline has repurchased 4.9 million shares of its common stock for $170.0 million since January 1, 2023 and recognized excise taxes of $1.7 million in Retained earnings as incremental costs to complete the repurchases during the three months ended March 31, 2023.

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Recent accounting pronouncements

The following accounting guidance relevant to Valvoline was either issued or adopted in the current year, or is expected to have a meaningful impact on Valvoline in future periods upon adoption.

Recently adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance related to reference rate reform that simplifies the accounting for contract modifications and hedging arrangements as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates. In December 2022, FASB issued guidance to extend the temporary transition period which now can be applied on a prospective basis through the end of December 2024 for qualifying modified arrangements.

Valvoline amended its Credit Agreement, effective upon the sale of Global Products on March 1, 2023. This amendment includes the transition to the Secured Overnight Financing Rate (“SOFR”) or an alternate base rate, among other modifications. Refer to Note 5 for additional details. Concurrent with the amendment of the Credit Agreement, Valvoline modified its interest rate swap agreements solely to change the reference rates from LIBOR to SOFR and applied the optional expedients available under the reference rate reform accounting guidance. This modification aligns with changes to its variable rate debt under the Credit Agreement amendment. Valvoline expects these hedges to continue to effectively hedge its exposure risk to interest rates.

As of March 31, 2023, Valvoline has no outstanding long-term debt or interest rate swap agreements with payments based on LIBOR.

NOTE 2 - DISCONTINUED OPERATIONS

Financial results

On July 31, 2022, the Company entered into a definitive agreement to sell Global Products to Aramco. On March 1, 2023, Valvoline completed the sale of Global Products for a cash purchase price of $2.65 billion and recognized a pre-tax gain on the sale of $1.6 billion that was recognized in Income from discontinued operations within the Condensed Consolidated Statements of Comprehensive Income. This gain is preliminary and subject to final settlements in accordance with the Purchase Agreement.

The following table summarizes Income from discontinued operations within the Condensed Consolidated Statements of Comprehensive Income:
Three months ended
March 31
Six months ended
March 31
(In millions) 2023202220232022
Net revenues$468.6 $638.2 $1,174.4 $1,257.2 
Cost of sales367.6 495.9 924.2 984.0 
Gross profit101.0 142.3 250.2 273.2 
Selling, general and administrative expenses52.7 73.6 125.0 147.7 
Net legacy and separation-related expense14.4 0.3 20.6 0.3 
Equity and other income, net(5.0)(8.6)(14.2)(20.8)
Operating income from discontinued operations38.9 77.0 118.8 146.0 
Net pension and other postretirement plan (income) expense  0.1  
Net interest and other financing expenses2.7 0.8 5.0 1.5 
Gain on sale of discontinued operations (a)
(1,570.8) (1,570.8) 
Income from discontinued operations before income taxes1,607.0 76.2 1,684.5 144.5 
Income tax expense (b)
412.6 17.8 435.2 33.3 
Income from discontinued operations$1,194.4 $58.4 $1,249.3 $111.2 
(a)The gain on sale also includes the release of Accumulated other comprehensive income of $30.7 million associated with the realization of cumulative translation losses attributed to the Global Products business.
9


(b)Income tax expense in the three and six months ended March 31, 2023 includes the tax effects of the gain on sale of $420.2 million comprised of current and deferred expense of $327.6 million and $92.6 million, respectively.

A summary of the held for sale assets and liabilities included in the Condensed Consolidated Balance Sheets follows:

(In millions)September 30
 2022
Current assets
Cash and cash equivalents$59.0 
Receivables, net524.3 
Inventories, net290.1 
Prepaid expenses and other current assets35.0 
Property, plant and equipment, net257.4 
Goodwill and intangibles, net139.8 
Other noncurrent assets158.6 
Current assets held for sale$1,464.2 
Current liabilities
Trade and other payables$264.9 
Accrued expenses and other liabilities166.9 
Long-term debt30.7 
Other current liabilities76.8 
Current liabilities held for sale$539.3 

Post-closing arrangements

The products used in Valvoline’s service delivery are sourced from Global Products. Valvoline has entered into a long-term supply agreement whereby Valvoline purchases substantially all lubricant and certain ancillary products for its stores from Global Products. Net revenues within the results of Global Products above include product sales to the Company's continuing operations prior to the closing of the Transaction, which were considered to be effectively settled and were not eliminated. The following table summarizes these transactions:

Three months ended
March 31
Six months ended
March 31
(In millions)2023202220232022
Net revenues$34.6 $48.5 $89.7 $96.9 

Valvoline also entered into a Transition Services Agreement with the Buyer, effective March 1, 2023, to provide and receive services including information technology, legal, finance, and human resources support for a period not expected to exceed 18 months. The income and costs associated with these services were not material during the three and six months ended March 31, 2023.

As part of the Transaction, the Company recognized an estimated obligation of $15.5 million, predominantly within Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2023 related to certain pre-closing employee matters reimbursable to the Buyer.

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NOTE 3 - FAIR VALUE MEASUREMENTS

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

As of March 31, 2023
(In millions)TotalLevel 1Level 2Level 3
NAV (a)
Cash and cash equivalents
Money market funds$1,542.8 $1,542.8 $— $— $— 
Time deposits303.7 — 303.7 — — 
Prepaid expenses and other current assets
Currency derivatives (b)
0.4 — 0.4 — — 
Interest rate swap agreements2.1 — 2.1 — — 
Other noncurrent assets
Non-qualified trust funds3.6 —  — 3.6 
Interest rate swap agreements9.8 — 9.8 — — 
Total assets at fair value$1,862.4 $1,542.8 $316.0 $— $3.6 
Accrued expenses and other liabilities
Currency derivatives (b)
$0.6 $— $0.6 $— $— 
Other noncurrent liabilities
Deferred compensation obligations19.3 — — — 19.3 
Total liabilities at fair value$19.9 $ $0.6 $— $19.3 
As of September 30, 2022
(In millions)TotalLevel 1Level 2Level 3
NAV (a)
Cash and cash equivalents
Money market funds$0.4 $0.4 $— $— $— 
Time deposits13.3 — 13.3 — — 
Prepaid expenses and other current assets
Currency derivatives (b)
6.0 — 6.0 — — 
Interest rate swap agreements5.2 — 5.2 — — 
Other noncurrent assets
Non-qualified trust funds6.4 —  — 6.4 
Interest rate swap agreements12.6 — 12.6 — — 
Total assets at fair value$43.9 $0.4 $37.1 $— $6.4 
Accrued expenses and other liabilities
Currency derivatives (b)
$5.2 $— $5.2 $— $— 
Other noncurrent liabilities
Deferred compensation obligations19.6 — — — 19.6 
Total liabilities at fair value$24.8 $ $5.2 $— $19.6 
(a)Funds measured at fair value using the net asset value ("NAV") per share practical expedient have not been classified in the fair value hierarchy.
(b)The Company had outstanding contracts with notional values of $20.6 million and $150.5 million as of March 31, 2023 and September 30, 2022, respectively.

Long-term debt

Long-term debt is reported in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the disclosure above of financial assets and liabilities measured at fair value within the condensed consolidated financial statements on a recurring basis. The fair values of the Company's outstanding fixed rate senior notes shown below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy.
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March 31, 2023September 30, 2022
(In millions)Fair value
Carrying value (a)
Unamortized
discounts and
issuance costs
Fair value
Carrying value (a)
Unamortized
discounts and
issuance costs
2030 Notes$586.8 $594.1 $(5.9)$568.5 $593.7 $(6.3)
2031 Notes454.1 529.5 (5.5)400.5 529.2 (5.8)
Total$1,040.9 $1,123.6 $(11.4)$969.0 $1,122.9 $(12.1)
(a)Carrying values shown are net of unamortized discounts and debt issuance costs.

Refer to Note 5 for details of these senior notes as well as Valvoline's other debt instruments that have variable interest rates with carrying amounts that approximate fair value.

NOTE 4 - BUSINESS COMBINATIONS

The Company acquired 13 service center stores in single and multi-store transactions for an aggregate purchase price of $18.9 million during the six months ended March 31, 2023. These acquisitions expand Valvoline's retail presence in key North American markets, increase the number of company-operated service center stores, and contribute to increasing its footprint to 1,781 system-wide service center stores.

During the six months ended March 31, 2022, the Company acquired 21 service center stores in single and multi-store transactions for an aggregate purchase price of $23.4 million.

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

(In millions)20232022
Inventories$0.3 $ 
Property, plant and equipment (a)
3.5 2.9 
Operating lease assets4.0 7.3 
Goodwill (b)
15.1 20.4 
Intangible assets (c)
Reacquired franchise rights (d)
2.3  
Other0.1 0.1 
Other current liabilities(0.4)(0.4)
Operating lease liabilities(3.7)(6.9)
Other noncurrent liabilities(2.3) 
Total net assets acquired$18.9 $23.4 
(a)Includes $2.4 million of finance lease assets in property, plant and equipment and finance lease liabilities of $0.1 million and $2.3 million in current and noncurrent liabilities, respectively, for leases acquired during the six months ended March 31, 2023. No finance lease assets or liabilities were acquired during the six months ended March 31, 2022.
(b)Goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions.
(c)Intangible assets acquired during the six months ended March 31, 2023 and 2022 have weighted average amortization periods of 9 and 5 years, respectively.
(d)Prior to the acquisition of former franchise service center stores, the Company licensed the right to operate franchised service centers, including the use of Valvoline's trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately 10 years for the rights reacquired in fiscal 2023. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market.

The fair values above are preliminary for up to one year from the date of acquisition as they may be subject to measurement period adjustments if new information is obtained about facts and circumstances that existed as of the
12


acquisition date. The Company does not currently expect any material changes to the preliminary purchase price allocations for acquisitions completed during the last twelve months.

NOTE 5 - DEBT

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

(In millions)March 31
2023
September 30
 2022
2031 Notes$535.0 $535.0 
2030 Notes600.0 600.0 
Term Loan475.0 460.0 
Revolver (a)
  
Trade Receivables Facility 105.0 
Debt issuance costs and discounts(12.8)(12.4)
Total debt1,597.2 1,687.6 
Current portion of long-term debt23.8 162.5 
Long-term debt$1,573.4 $1,525.1 
 
(a)As of March 31, 2023, the total borrowing capacity remaining under the $475.0 million revolving credit facility was $471.2 million due to a reduction of $3.8 million for letters of credit outstanding.

As of March 31, 2023, Valvoline was in compliance with all covenants under its long-term borrowings.

Senior Credit Agreement

Key terms and conditions

In December 2022, Valvoline amended the Senior Credit Agreement, which became effective March 1, 2023 commensurate with the sale of the Global Products business. The Senior Credit Agreement provides an aggregate principal amount of $950.0 million in senior secured credit facilities comprised of (i) a five-year $475.0 million term loan facility (the “Term Loan”) and (ii) a five-year $475.0 million revolving credit facility (the “Revolver”), including a $100.0 million letter of credit sublimit.

The principal amount of the Term Loan under the Senior Credit Agreement is required to be repaid in quarterly installments of approximately $5.9 million beginning with the first fiscal quarter after the sale of Global Products, with the remainder due at maturity and prepayment required in the amount of the net cash proceeds from certain events. Amounts outstanding under the Senior Credit Agreement may be prepaid at any time, and from time to time, in whole or part, without premium or penalty. At Valvoline’s option, amounts outstanding under the Senior Credit Agreement will bear interest at either SOFR or an alternative base rate, in each case plus the applicable interest rate margin. The interest rate will fluctuate between SOFR plus 1.375% per year and SOFR plus 2.250% per year (or between the alternative base rate plus 0.375% per year and the alternative base rate plus 1.250% per year), based upon Valvoline’s consolidated total net leverage ratio.

Proceeds from the Term Loan, in addition to a portion of the proceeds from the sale of the Global Products business, were used to pay in full the outstanding borrowings under the prior Credit Agreement, including the principal balance of the term loan facility of $445.6 million and outstanding borrowings under the revolving credit facility of $290.0 million, as well as accrued and unpaid interest and fees and expenses related to the amendment. The Company recognized $0.9 million of expense within Net interest and other financing expenses in the Condensed Consolidated Statements of Comprehensive Income during the three and six months ended March 31, 2023 associated with the modification of the Credit Agreement, which included accelerated amortization of previously capitalized debt issuance costs.
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Covenants and guarantees

The amended Senior Credit Agreement contains covenants and provisions that became effective March 1, 2023. These terms and conditions are generally consistent with the prior Credit Agreement, including the maintenance of financial covenants as of the end of each fiscal quarter and guarantees from certain of Valvoline’s existing and future subsidiaries.

Trade Receivables Facility

In connection with the sale of Global Products on March 1, 2023, the Company repaid the Trade Receivables Facility of $175.0 million and recognized a loss on extinguishment of $1.0 million in Income from discontinued operations in the Condensed Consolidated Income Statements for the three and six months ended March 31, 2023.

NOTE 6 – 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
March 31
Six months ended
March 31
(In millions)2023202220232022
Income tax expense (benefit)$11.4 $9.3 $(8.7)$19.4 
Effective tax rate percentage25.7 %28.8 %(17.0)%25.3 %

The increase in income tax expense for the three months ended March 31, 2023 was principally driven by higher pre-tax earnings, while the reduction in the effective tax rate for this period was primarily attributed to unfavorable impacts in the prior year from the suspended operations of a former Global Products business. The favorable income tax provision and effective tax rate in the six months ended March 31, 2023 were primarily attributed to release of valuation allowances due to the change in expectations regarding the utilization of certain legacy tax attributes as described further below.

Legacy tax attributes

In connection with amending the Tax Matters Agreement, management expects the Company is currently more likely than not to realize certain legacy tax attributes that were transferred from its former parent prior to Valvoline's initial public offering in late fiscal 2016. As a result, the Company recognized an income tax benefit of $26.5 million during the six months ended March 31, 2023 in connection with releasing its valuation allowance. Additionally, Valvoline recognized $24.4 million of expense within Net legacy and separation-related expenses in the Condensed Consolidated Statement of Comprehensive Income during the six months ended March 31, 2023 to reflect its increased estimated indemnity obligation due to its former parent company as a result of the terms of the amended Tax Matters Agreement.

Unrecognized tax benefits

In connection with the sale of Global Products, Valvoline established reserves of $24.4 million for unrecognized tax benefits during the three and six months ended March 31, 2023. If realized, these unrecognized tax benefits would favorably impact the discontinued operations effective income tax rate.
14


NOTE 7 – EMPLOYEE BENEFIT PLANS

The following table summarizes the components of pension and other postretirement plan expense (income):

Pension benefitsOther postretirement benefits
(In millions)2023202220232022
Three months ended March 31
Interest cost$20.6 $10.8 $0.4 $0.2 
Expected return on plan assets(16.8)(19.7)  
Amortization of prior service credits  (0.6)(0.5)
Net periodic benefit costs (income)$3.8 $(8.9)$(0.2)$(0.3)
Six months ended March 31
Interest cost$41.2 $21.6 $0.8 $0.4 
Expected return on plan assets(33.6)(39.4)  
Amortization of prior service credit  (1.1)(1.1)
Net periodic benefit costs (income)$7.6 $(17.8)$(0.3)$(0.7)

NOTE 8 – 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 when management believes a material loss is at least reasonably possible.

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

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

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NOTE 9 - EARNINGS PER SHARE

The following table summarizes basic and diluted earnings per share:

Three months ended
March 31
Six months ended
March 31
(In millions, except per share amounts)2023202220232022
Numerator
Income from continuing operations$32.9 $23.0 $59.9 $57.2 
Income from discontinued operations1,194.4 58.4 1,249.3 111.2 
Net income $1,227.3 $81.4 $1,309.2 $168.4 
Denominator
Weighted average common shares outstanding171.7 179.8 173.5 180.1 
Effect of potentially dilutive securities (a)
1.0