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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 June 30, 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, Suite 100
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 August 4, 2023, there were 138,662,731 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
June 30
Nine months ended
June 30
(In millions, except per share amounts - unaudited) 2023202220232022
Net revenues$376.2 $317.4 $1,053.5 $900.7 
Cost of sales225.5 189.6 657.3 553.4 
Gross profit150.7 127.8 396.2 347.3 
Selling, general and administrative expenses65.6 59.2 194.2 182.6 
Net legacy and separation-related expenses1.6 9.9 30.8 18.9 
Other income, net(3.0)(2.4)(5.8)(7.3)
Operating income86.5 61.1 177.0 153.1 
Net pension and other postretirement plan expense (income)3.7 (9.2)11.0 (27.7)
Net interest and other financing (income) expense(4.6)17.3 27.4 51.2 
Income before income taxes87.4 53.0 138.6 129.6 
Income tax expense22.9 13.2 14.2 32.6 
Income from continuing operations64.5 39.8 124.4 97.0 
(Loss) income from discontinued operations(2.9)58.4 1,246.4 169.6 
Net income$61.6 $98.2 $1,370.8 $266.6 
Net earnings per share
Basic earnings (loss) per share
Continuing operations0.40 0.22 0.74 0.54 
Discontinued operations(0.02)0.33 7.35 0.94 
Basic earnings per share$0.38 $0.55 $8.09 $1.48 
Diluted earnings (loss) per share
Continuing operations0.40 0.22 0.73 0.53 
Discontinued operations(0.02)0.33 7.31 0.94 
Diluted earnings per share$0.38 $0.55 $8.04 $1.47 
Weighted average common shares outstanding
Basic161.5 178.6 169.5 179.6 
Diluted162.5 179.8 170.6 180.9 
Comprehensive income
Net income$61.6 $98.2 $1,370.8 $266.6 
Other comprehensive income (loss), net of tax
Currency translation adjustments1.0 (19.4)45.5 (19.7)
Amortization of pension and other postretirement plan prior service credits(0.4)(0.5)(1.3)(1.3)
Unrealized (loss) gain on cash flow hedges(1.5)1.9 (5.9)10.3 
Other comprehensive (loss) income(0.9)(18.0)38.3 (10.7)
Comprehensive income$60.7 $80.2 $1,409.1 $255.9 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.
3


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except per share amounts - unaudited)June 30
2023
September 30
 2022
Assets
Current assets
Cash and cash equivalents$526.7 $23.4 
Receivables, net71.9 66.1 
Inventories, net34.1 29.4 
Prepaid expenses and other current assets30.3 38.0 
Short-term investments424.1  
Current assets held for sale 1,464.2 
Total current assets1,087.1 1,621.1 
Noncurrent assets
Property, plant and equipment, net761.6 668.6 
Operating lease assets264.3 248.1 
Goodwill and intangibles, net678.0 663.1 
Other noncurrent assets194.5 215.9 
Total noncurrent assets1,898.4 1,795.7 
Total assets$2,985.5 $3,416.8 
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt$23.7 $162.5 
Trade and other payables96.4 45.0 
Accrued expenses and other liabilities285.8 172.6 
Current liabilities held for sale 539.3 
Total current liabilities405.9 919.4 
Noncurrent liabilities
Long-term debt1,567.8 1,525.1 
Employee benefit obligations202.1 199.4 
Operating lease liabilities245.0 229.2 
Other noncurrent liabilities279.3 237.1 
Total noncurrent liabilities2,294.2 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; 138.7 and 176.1 shares issued and outstanding at June 30, 2023 and September 30, 2022, respectively
1.4 1.8 
Paid-in capital44.8 44.1 
Retained earnings222.2 282.0 
Accumulated other comprehensive income (loss)17.0 (21.3)
Stockholders' equity285.4 306.6 
Total liabilities and stockholders’ equity
$2,985.5 $3,416.8 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.


4



Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended
June 30
(In millions - unaudited)20232022
Cash flows from operating activities
Net income$1,370.8 $266.6 
Adjustments to reconcile net income to cash flows from operating activities:
Income from discontinued operations(1,246.4)(169.6)
Depreciation and amortization60.7 52.1 
Deferred income taxes(26.6)29.6 
Stock-based compensation expense8.8 11.7 
Other, net2.1 1.6 
Change in operating assets and liabilities
Receivables(3.5)(2.1)
Inventories(3.3)(1.8)
Payables and accrued liabilities76.4 8.7 
Other assets and liabilities10.9 (69.9)
Operating cash flows from continuing operations249.9 126.9 
Operating cash flows from discontinued operations(298.3)64.3 
Total cash (used in) provided by operating activities(48.4)191.2 
Cash flows from investing activities
Additions to property, plant and equipment(125.9)(89.5)
Acquisitions of businesses, net of cash acquired(27.8)(42.7)
Purchases of investments(440.4) 
Other investing activities, net(0.8)8.6 
Investing cash flows from continuing operations(594.9)(123.6)
Investing cash flows from discontinued operations2,621.0 (20.0)
Total cash provided by (used in) investing activities2,026.1 (143.6)
Cash flows from financing activities
Proceeds from borrowings, net of issuance costs920.9  
Repayments on borrowings(915.0)(0.6)
Repurchases of common stock(1,395.5)(103.5)
Cash dividends paid(21.8)(67.1)
Other financing activities(16.0)(13.6)
Financing cash flows from continuing operations(1,427.4)(184.8)
Financing cash flows from discontinued operations(108.1)6.8 
Total cash used in financing activities(1,535.5)(178.0)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash0.6 (1.4)
Increase (decrease) in cash, cash equivalents and restricted cash442.8 (131.8)
Cash, cash equivalents and restricted cash - beginning of period83.9 231.4 
Cash, cash equivalents and restricted cash - end of period$526.7 $99.6 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.
5


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
Nine months ended June 30, 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 
Net income— — — 61.6 — 61.6 
Stock-based compensation, net of issuances0.1 — 2.2 — — 2.2 
Repurchases of common stock(30.1)(0.3)— (1,149.6)— (1,149.9)
Other comprehensive loss, net of tax— — — — (0.9)(0.9)
Balance at June 30, 2023138.7 $1.4 $44.8 $222.2 $17.0 $285.4 
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Nine months ended June 30, 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 
Net income— — — 98.2 — 98.2 
Dividends paid, $0.125 per common share
— — 0.2 (22.4)— (22.2)
Stock-based compensation, net of issuances— — 4.3 — — 4.3 
Repurchase of common stock(1.2)— — (37.1)— (37.1)
Other comprehensive income, net of tax— — — — (18.0)(18.0)
Balance at June 30, 2022177.4$1.8 $41.3 $185.6 $(3.2)$225.5 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.
7



8


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.

Sale of Global Products business

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 immediately prior to the closing date of 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 35.0 million shares of its common stock for $1,302.6 million since January 1, 2023 and recognized excise taxes of $13.0 million in Retained earnings as incremental costs to complete the repurchases during the six months ended June 30, 2023.

9


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 from LIBOR 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 June 30, 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 $2.650 billion and recognized a pre-tax gain on the sale of $1.572 billion that was recognized in Income from discontinued operations within the Condensed Consolidated Statements of Comprehensive Income.

The following table summarizes Income from discontinued operations within the Condensed Consolidated Statements of Comprehensive Income:
Three months ended
June 30
Nine months ended
June 30
(In millions) 2023202220232022
Net revenues$ $696.2 $1,174.4 $1,953.4 
Cost of sales 548.5 924.2 1,532.5 
Gross profit 147.7 250.2 420.9 
Selling, general and administrative expenses 78.0 125.0 225.7 
Net legacy and separation-related expenses5.6 0.2 26.2 0.5 
Equity and other income, net (7.8)(14.2)(28.6)
Operating (loss) income from discontinued operations(5.6)77.3 113.2 223.3 
Net pension and other postretirement plan expense 0.1 0.1 0.1 
Net interest and other financing expenses(0.7)1.2 4.3 2.7 
Gain on sale of discontinued operations (a)
(0.8) (1,571.6) 
(Loss) income before income taxes - discontinued operations(4.1)76.0 1,680.4 220.5 
Income tax (benefit) expense (b)
(1.2)17.6 434.0 50.9 
(Loss) income from discontinued operations$(2.9)$58.4 $1,246.4 $169.6 
(a)The gain on sale realized in the nine months ended June 30, 2023 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.
10


(b)Includes the income tax effects of the gain on sale, which were $0.2 million of current expense in the three months ended June 30, 2023 and $420.4 million in the nine months ended June 30, 2023, comprised of current and deferred expense of $327.8 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
June 30
Nine months ended
June 30
(In millions)2023202220232022
Net revenues$ $56.6 $89.7 $153.5 

Valvoline also entered into a Transition Services Agreement with the Global Products, 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 nine months ended June 30, 2023.

As part of the Transaction, the Company recognized an estimated obligation of $17.5 million, predominantly within Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2023 related to certain pre-closing employee matters reimbursable to the Buyer.

11


NOTE 3 - FAIR VALUE MEASUREMENTS

Recurring fair value measurements

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

As of June 30, 2023
(In millions)TotalLevel 1Level 2Level 3
NAV (a)
Cash and cash equivalents
Money market funds$1.4 $1.4 $— $— $— 
Time deposits277.5 — 277.5 — — 
Prepaid expenses and other current assets
Currency derivatives (b)
0.3 — 0.3 — — 
Other noncurrent assets
Non-qualified trust funds2.8 —  — 2.8 
Interest rate swap agreements (c)
9.8 — 9.8 — — 
Deferred compensation investments19.4 19.4 — — — 
Total assets at fair value$311.2 $20.8 $287.6 $— $2.8 
Accrued expenses and other liabilities
Currency derivatives (b)
$0.1 $— $0.1 $— $— 
Other noncurrent liabilities
Deferred compensation obligations20.2 — — — 20.2 
Total liabilities at fair value$20.3 $ $0.1 $— $20.2 
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 $27.1 million and $150.5 million as of June 30, 2023 and September 30, 2022, respectively.
(c)An interest rate swap agreement with a notional amount of $75.0 million matured during the three months ended June 30, 2023. Valvoline remains party to three interest rate swap agreements with notional amounts that aggregate to $275.0 million as of June 30, 2023.

12


Deferred compensation investments

The Company established an investment fund in April 2023 that is primarily comprised of mutual funds traded in active markets and valued using quoted (unadjusted) prices, which are Level 1 inputs. Gains and losses related to these investments are immediately recognized in the Condensed Consolidated Statements of Comprehensive Income within Selling, general and administrative expenses and were not material during the three and nine months ended June 30, 2023.

Fair value disclosures

The Company’s held-to-maturity U.S. treasury securities and long-term debt are reported in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and are 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 following disclosures summarize the fair value of these assets and liabilities at each relevant balance sheet date.

U.S. treasury securities

During the three months ended June 30, 2023, the Company purchased U.S. treasury securities which are carried at amortized cost within the Condensed Consolidated Balance Sheet and classified as held-to-maturity based on the intent and ability to hold these investments to maturity. The fair value of these investments summarized below is determined utilizing quoted prices for identical securities from less active markets, which are considered Level 2 inputs within the fair value hierarchy.

June 30, 2023
(In millions)Amortized costGross unrealized lossesFair value
Cash and cash equivalents
U.S. treasuries (a)
$19.9 $— $19.9 
Short-term investments
U.S. treasuries (b)
$424.1 $(0.9)$423.2 
(a)U.S. treasury securities with original maturity dates of 90 days or less.
(b)U.S. treasury securities with original maturities greater than 90 days and less than 12 months.

Long-term debt

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.

June 30, 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$590.1 $594.3 $(5.7)$568.5 $593.7 $(6.3)
2031 Notes438.6 529.7 (5.3)400.5 529.2 (5.8)
Total$1,028.7 $1,124.0 $(11.0)$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.

13


NOTE 4 - BUSINESS COMBINATIONS

The Company acquired 23 service center stores in single and multi-store transactions for an aggregate purchase price of $27.8 million during the nine months ended June 30, 2023. These acquisitions expand Valvoline's retail presence in key North American markets, increase the number of company-operated service center stores, and contributed to growing the retail footprint to over 1,800 system-wide service center stores.

During the nine months ended June 30, 2022, the Company acquired 31 service center stores in single and multi-store transactions for an aggregate purchase price of $42.7 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 nine months ended June 30:

(In millions)20232022
Inventories$0.4 $0.3 
Property, plant and equipment (a)
5.9 7.6 
Operating lease assets6.1 8.9 
Goodwill (b)
21.1 34.3 
Intangible assets (c)
Reacquired franchise rights (d)
4.0 0.6 
Other0.2 0.3 
Other current liabilities (a)
(0.6)(0.6)
Operating lease liabilities(5.7)(8.3)
Other noncurrent liabilities (a)
(3.6)(0.4)
Total net assets acquired$27.8 $42.7 
(a)Includes finance lease assets in property, plant and equipment and finance lease liabilities in other current and noncurrent liabilities. During the nine months ended June 30, 2023, finance lease assets acquired were $3.8 million and finance lease liabilities of $0.2 million and $3.6 million in other current and noncurrent liabilities, respectively. During the nine months ended June 30, 2022, finance lease assets acquired were $0.4 million and finance lease liabilities of $0.4 million in other noncurrent liabilities.
(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 nine months ended June 30, 2023 and 2022 have weighted average amortization periods of 9 and 7 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 9 and 8 years for the rights reacquired in fiscal 2023 and 2022, respectively. 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 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.

14


NOTE 5 - DEBT

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

(In millions)June 30
2023
September 30
 2022
2031 Notes$535.0 $535.0 
2030 Notes600.0 600.0 
Term Loan469.1 460.0 
Revolver (a)
  
Trade Receivables Facility 105.0 
Debt issuance costs and discounts(12.6)(12.4)
Total debt1,591.5 1,687.6 
Current portion of long-term debt23.7 162.5 
Long-term debt$1,567.8 $1,525.1 
 
(a)As of June 30, 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 June 30, 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 $1.1 million of expense within Net interest and other financing expenses in the Condensed Consolidated Statements of Comprehensive Income during the nine months ended June 30, 2023 associated with the modification of the Credit Agreement, which included accelerated amortization of previously capitalized debt issuance costs.

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
15


financial covenants as of the end of each fiscal quarter and guarantees from certain of Valvoline’s existing and future subsidiaries.

2030 Senior Notes

The bond indenture for the 2030 Senior Notes contains an asset sale covenant that requires Valvoline to make an offer to holders to purchase the 2030 Senior Notes at par, plus any accrued and unpaid interest with any Excess Proceeds from an Asset Sale, each as defined in the indenture. Valvoline currently expects that the sale of Global Products will require the Company to offer to repurchase all of the 2030 Senior Notes during the second quarter of fiscal 2024, absent an amendment to the indenture or other transaction related to these Senior Notes.

Trade Receivables Facility

Commensurate with the sale of Global Products on March 1, 2023, Valvoline was removed as an originator and assigned all of its rights, title and interests under the Trade Receivables Facility to the divested business. Concurrently, the Company repaid its outstanding balance of $175.0 million and recognized a loss on extinguishment of the obligation of $1.0 million in Income from discontinued operations in the Condensed Consolidated Statements of Comprehensive Income during the nine months ended June 30, 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
June 30
Nine months ended
June 30
(In millions)2023202220232022
Income tax expense$22.9 $13.2 $14.2 $32.6 
Effective tax rate percentage26.2 %24.9 %10.2 %25.2 %

The increase in income tax expense for the three months ended June 30, 2023 was principally due to higher pre-tax earnings, while the increase in the effective tax rate for this period was primarily attributed to favorable discrete tax benefits that drove a lower prior year rate. The favorable income tax provision and effective tax rate in the nine months ended June 30, 2023 were primarily attributed to the 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 nine months ended June 30, 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 nine months ended June 30, 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 gross unrecognized tax benefits during the nine months ended June 30, 2023. If realized, these unrecognized tax benefits would favorably impact the discontinued operations effective income tax rate.

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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 June 30
Interest cost$20.6 $10.8 $0.4 $0.1 
Expected return on plan assets(16.8)(19.7)  
Amortization of prior service credits0.1 0.1 (0.6)(0.5)
Net periodic benefit costs (income)$3.9 $(8.8)$(0.2)$(0.4)
Nine months ended June 30
Interest cost$61.8 $32.4 $1.2 $0.5 
Expected return on plan assets(50.4)(59.1)  
Amortization of prior service credit0.1 0.1 (1.7)(1.6)
Net periodic benefit costs (income)$11.5 $(26.6)$(0.5)$(1.1)

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
June 30
Nine months ended
June 30
(In millions, except per share amounts)2023202220232022
Numerator
Income from continuing operations$64.5 $39.8 $124.4 $97.0 
(Loss) income from discontinued operations(2.9)58.4 1,246.4 169.6 
Net income$61.6 $98.2 $1,370.8 $266.6 
Denominator
Weighted average common shares outstanding161.5 178.6 169.5 179.6 
Effect of potentially dilutive securities (a)
1.0 1.2 1.1 1.3 
Weighted average diluted shares outstanding162.5 179.8 170.6 180.9 
 
Basic earnings (loss) per share
Continuing operations$0.40 $0.22 $0.74 $0.54 
Discontinued operations(0.02)0.33 7.35 0.94 
Basic earnings per share$0.38 $0.55 $8.09 $1.48 
Diluted earnings (loss) per share
Continuing operations$0.40 $0.22 $0.73 $0.53 
Discontinued operations(0.02)0.33 7.31 0.94 
Diluted earnings per share$0.38 $0.55 $8.04 $1.47 
(a)There were 0.1 million and 0.2 million outstanding stock appreciation rights not included in the computation of diluted earnings per share in the three months ended June 30, 2023 and 2022, respectively, and 0.2 million for both the nine months ended June 30, 2023 and 2022 because the effect would have been antidilutive.

NOTE 10 – STOCKHOLDERS' EQUITY

Modified “Dutch auction” tender offer

During May 2023, Valvoline commenced a modified “Dutch auction” tender offer, (the “Tender Offer”), to repurchase up to $1.0 billion in value of shares of its common stock. Upon completion of the Tender Offer during June 2023, the Company accepted 27.0 million shares at $38.00 per share, for an aggregate purchase price of $1.024 billion, excluding fees and related expenses. Included within the 27.0 million shares were 0.6 million shares that the Company elected to repurchase pursuant to its right to repurchase up to an additional 2% of its outstanding shares of common stock. Valvoline incurred $16.3 million in fees and expenses associated with the Tender Offer, which included $10.2 million for excise taxes on share repurchases in accordance with the IRA. These costs were recognized within Retained earnings during the three and nine months ended June 30, 2023 as costs to repurchase the Company’s common stock. Shares repurchased were retired and returned to the status of authorized, unissued shares.

The Tender Offer was made pursuant to the authorization from Valvoline’s Board of Directors (the “Board”) for the Company to repurchase up to $1.6 billion of its common stock announced on November 15, 2022 (the “2022 Share Repurchase Authorization”). Following the completion of the Tender Offer, $340.4 million remained available under the 2022 Share Repurchase Authorization, as of June 30, 2023.
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NOTE 11 - SUPPLEMENTAL FINANCIAL INFORMATION

Cash, cash equivalents and restricted cash

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

(In millions)June 30
2023
September 30
 2022
June 30
2022
Cash and cash equivalents - continuing operations$526.7 $23.4 $25.5 
Cash and cash equivalents - discontinued operations (a)
 59.0 72.6 
Restricted cash - discontinued operations (a)
 1.5 1.5 
Total cash, cash equivalents and restricted cash$526.7 $83.9 $99.6 
(a)In the periods prior to the close of the sale of Global Products, these balances were included in Current assets held for sale within the Condensed Consolidated Balance Sheets.

Accounts and other receivables

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

(In millions)June 30
2023
September 30
 2022
Current
Trade$59.4 $56.2 
Other15.3 14.5 
Receivables, gross74.7 70.7 
Allowance for credit losses(2.8)(4.6)
Receivables, net$71.9 $66.1 
Non-current (a)
Notes receivable$2.2 $2.1 
Other7.6 0.1 
Noncurrent notes receivable, gross9.8 2.2 
Allowance for losses(2.3)(2.2)
Noncurrent notes receivable, net$7.5 $ 
(a)Included in Other noncurrent assets within the Condensed Consolidated Balance Sheets.

Revenue recognition

The following disaggregates the Company’s net revenues by timing of revenue recognized:

Three months ended
June 30
Nine months ended
June 30
(In millions)2023202220232022
Net revenues transferred at a point in time$358.3 $301.7 $1,003.4 $857.2 
Franchised revenues transferred over time17.9 15.7 50.1 43.5 
Net revenues$376.2 $317.4 $1,053.5 $900.7 

The following table summarizes net revenues by category:

Three months ended
June 30
Nine months ended
June 30
(In millions)2023202220232022
Oil changes and related fees$280.7 $235.7 $782.8 $660.9 
Non-oil changes and related fees77.2 65.3 219.9 182.8 
Franchise fees and other (a)
18.3 16.4 50.8 57.0 
Total$376.2 $317.4 $1,053.5 $900.7 
(a)Includes $1.2 million of net revenues associated with suspended operations for the three months ended June 30, 2022, and $0.2 million and $11.4 million in the nine months ended June 30, 2023 and 2022, respectively.

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FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, benefits and synergies of the sale of Global Products; future opportunities for the remaining stand-alone retail business; and any other statements regarding Valvoline's future operations, financial or operating results, capital allocation, debt leverage ratio, anticipated business levels, dividend policy, anticipated growth, market opportunities, strategies, competition, and other expectations and targets for future periods. Valvoline has identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,” “forecasts,” “may,” “will,” “should,” and “intends,” and the negative of these words or other comparable terminology. These forward-looking statements are based on Valvoline’s current expectations, estimates, projections, and assumptions as of the date such statements are made and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q and Valvoline’s most recently filed Annual Report on Form 10-K. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, unless required by law.


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

The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as well as the condensed consolidated financial statements and the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q.

BUSINESS OVERVIEW AND PURPOSE

The quick, easy, and trusted name in preventive vehicle maintenance, Valvoline leads the industry with vehicle service innovations that simplify customer’s lives and take the worry out of car care. With average customer ratings that demonstrate high levels of service satisfaction, Valvoline has built a new model for transparency in vehicle maintenance. From the signature 15-minute stay-in-your-car oil change to cabin air filters to battery replacements to tire rotations, the Company’s model offers maintenance solutions for all types of vehicles. The Company operates and franchises over 1,800 service center locations through its Valvoline Instant Oil ChangeSM and Great Canadian Oil Change retail brands and helps independent operators grow their businesses through its nearly 300 Valvoline Express Care locations in North America.

Valvoline is focused on expanding its footprint and driving a best-in-class customer experience, while evolving its service offerings to capture growing opportunities in the market by growing non-oil change services, services for the future of mobility, and pursuing fleet service solutions to address medium and heavy-duty vehicles that require comprehensive maintenance needs.

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BUSINESS STRATEGY

Continuing Valvoline’s shift to services as a trusted leader in preventive automotive maintenance, the Company will continue growing through ongoing improvements in service to drive same-store sales and investments in network expansion, while continuing to develop capabilities for an evolving car parc. Valvoline’s strategic initiatives include:

Continuing to capture increased market share and drive non-oil change revenue growth in existing stores by building on Valvoline’s strong foundation in technology and data, which enables the Company to be an industry leader in automobile aftermarket services and makes vehicle care easy for customers;

Aggressively growing the retail footprint with company-operated store growth and an increased emphasis on franchisee unit growth;

Developing capabilities to capture new customers through services expansion focused on fleet manager needs and needs of the evolving car parc; and

Creating value for the Company's shareholders by positioning the continuing operations for long-term success following the completion of the sale of Global Products.

RECENT DEVELOPMENTS

Sale of Global Products business

On March 1, 2023, Valvoline completed the sale of its former Global Products business to Aramco for a cash purchase price of $2.650 billion, subject to certain customary adjustments as set forth in the Purchase Agreement. Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I in this Quarterly Report on Form 10-Q for further details regarding the Global Products business.

With the net proceeds of $2.383 billion from the Transaction, Valvoline is focused on accelerating the return of capital to shareholders through share repurchases, reductions of debt, and investments in attractive retail service growth opportunities. Commensurate with closing of the Transaction, Valvoline repaid the pre-existing Trade Receivables Facility, in addition to amounts that were outstanding at that time under the Revolver. In June 2023, the Company completed a Tender Offer and accepted for payment 27.0 million shares for an aggregate purchase price of $1.024 billion, excluding fees and expenses. The Tender Offer utilized a substantial portion of the 2022 Share Repurchase Authorization, leaving $340.4 million remaining as of June 30, 2023.

COVID-19 update

Valvoline has substantially maintained its operations, demonstrating growth and strong results, while managing through the effects of the COVID-19 global pandemic. Valvoline’s offices and locations have established protocols based on continuous monitoring of the circumstances and trend data surrounding the pandemic.

Management is unable to reasonably quantify the impact of COVID-19 on its current year results. The continually evolving COVID-19 pandemic remains uncertain and while the Company cannot predict the duration or scale of the pandemic, it will continue to monitor the ongoing impacts and its effects on business, results of operations, and liquidity. The Company will continue to implement and adjust its procedures and processes as needed. For more information, refer to Risk Factors included in Item 1A of Part I in Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

THIRD FISCAL QUARTER 2023 OVERVIEW

The following were the significant events for the third fiscal quarter of 2023, each of which is discussed more fully in this Quarterly Report on Form 10-Q:

Valvoline’s net revenues grew 19% over the prior year period driven by system-wide same-store sales ("SSS") growth of 12.5% and the addition of 114 net new stores to the system from the prior year.

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Net income from continuing operations grew 62% to $64.5 million and diluted earnings per share increased 82% to $0.40 in the three months ended June 30, 2023 compared to the prior year. The growth was attributable to interest income of $24.9 million earned on investing a substantial portion of the net proceeds from the sale of Global Products, in addition to lower legacy and separation-related expenses. These benefits were partially offset by higher pension and postretirement plan non-service expense.

Adjusted EBITDA increased 28% over the prior year due to strong top-line growth that was driven by higher average ticket price as well as increased transactions that benefited from the start of summer drive season. These benefits were partially offset by growth investments in selling, general and administrative expenses.

The Company returned $1.133 billion to its shareholders during the quarter through repurchases of 30.1 million shares of Valvoline common stock, of which $1.024 billion related to the modified “Dutch auction” tender offer for 27.0 million shares.

Use of Non-GAAP Measures

To aid in the understanding of Valvoline’s ongoing business performance, certain items within this document are presented on an adjusted, non-GAAP basis. These non-GAAP measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, the financial statements presented in accordance with U.S. GAAP. The financial results presented in accordance with U.S. GAAP and reconciliations of non-GAAP measures included within this Quarterly Report on Form 10-Q should be carefully evaluated.

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

EBITDA - net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;

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

Free cash flow - cash flows from operating activities less capital expenditures and certain other adjustments as applicable; and

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

Non-GAAP measures include adjustments from results based on U.S. GAAP that management believes enables comparison of certain financial trends and results between periods and provides a useful supplemental presentation of Valvoline's operating performance that allows for transparency with respect to key metrics used by management in operating the business and measuring performance. The manner used to compute non-GAAP information used by management may differ from the methods used by other companies and may not be comparable. For a reconciliation of the most comparable U.S. GAAP measures to the non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.

Management believes EBITDA measures provide a meaningful supplemental presentation of Valvoline’s operating performance between periods on a comparable basis due to the depreciable assets associated with the nature of the Company’s operations, as well as income tax and interest costs related to Valvoline’s tax and capital structures, respectively. Adjusted EBITDA measures enable comparison of financial trends and results between periods where certain items may not be reflective of the Company’s underlying and ongoing operations performance or vary independent of business performance.

Management uses free cash flow and discretionary free cash flow as additional non-GAAP metrics of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Free cash flow includes the impact of capital expenditures, providing a supplemental view of cash generation. Discretionary free cash flow includes maintenance capital expenditures, which are routine uses of cash that are necessary to maintain the Company's operations and
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provides a supplemental view of cash flow generation to maintain operations before discretionary investments in growth. Free cash flow and discretionary free cash flow have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments.

The non-GAAP measures used by management exclude key items. Key items are often related to legacy matters or market-driven events considered by management to not be reflective of the ongoing operating performance. Key items may consist of adjustments related to: legacy businesses, including the separation from Valvoline's former parent company, the former Global Products reportable segment, and associated impacts of related activity and indemnities; non-service pension and other postretirement plan activity; restructuring-related matters, including organizational restructuring plans, the separation of Valvoline’s businesses, significant acquisitions or divestitures, debt extinguishment and modification, and tax reform legislation; in addition to other matters that management considers non-operational, infrequent or unusual in nature.

Details with respect to the description and composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows.

Key Business Measures

Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-operated and franchised store counts and SSS and system-wide store sales. Management believes these measures are useful to evaluating and understanding Valvoline’s operating performance and should be considered as supplements to, not substitutes for, Valvoline's net revenues and operating income, as determined in
accordance with U.S. GAAP.

Net revenues are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store counts. SSS is defined as net revenues by U.S. stores (company-operated, franchised and the combination of these for system-wide SSS), with new stores, including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize.

Net revenues are limited to sales at company-operated stores, in addition to royalties and other fees from independent franchised and Express Care stores. Although Valvoline does not recognize store-level sales from franchised stores as net revenues in its Condensed Consolidated Statements of Comprehensive Income, management believes system-wide and franchised SSS comparisons, store counts, and total system-wide store sales are useful to assess market position relative to competitors and overall operating performance.

RESULTS OF OPERATIONS

The following summarizes the results of the Company’s continuing operations for the periods ended June 30:

Three months ended June 30Nine months ended June 30
2023202220232022
(In millions)Amount% of Net revenuesAmount% of Net revenuesAmount% of Net revenuesAmount% of Net revenues
Net revenues$376.2 100.0%$317.4 100.0%$1,053.5 100.0%$900.7 100.0%
Gross profit$150.7 40.1%$127.8 40.3%$396.2 37.6%$347.3 38.6%
Net operating expenses$64.2 17.1%$66.7 21.0%$219.2 20.8%$194.2 21.6%
Operating income$86.5 23.0%$61.1 19.3%$177.0 16.8%$153.1 17.0%
Income from continuing operations$64.5 17.1%$39.8 12.5%$124.4 11.8%$97.0 10.8%

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Three months ended
June 30
Nine months ended
June 30
2023202220222022
System-wide store sales - in millions (a)
$719.6 $610.4 $2,023.5 $1,718.3 
Year-over-year growth (a)
17.9 %16.0 %17.8 %21.4 %
Same-store sales growth (b)