VALVOLINE INC. The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 , 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
Valvoline Inc. ("Valvoline" or the "Company") is a worldwide marketer and supplier of engine and automotive maintenance products and services. Established in 1866, Valvoline's heritage spans over 150 years, during which it has developed powerful name recognition across multiple product and service channels. In addition to the iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, Valvoline provides a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Valvoline's premium branded product offerings enhance its high-quality reputation and provide customers with solutions that address a wide variety of needs. Inthe United States andCanada , Valvoline's products and services are sold through more than 1,400 franchised and company-owned quick-lube service center stores, to retailers with over 50,000 retail outlets, and to installer customers with over 15,000 locations. Valvoline also has a strong international presence with products sold in more than 140 countries. 29 --------------------------------------------------------------------------------
Valvoline has three reportable segments: Quick Lubes,
BUSINESS STRATEGY To deliver on Valvoline's key business and growth strategies in fiscal 2020, the Company is focused on: •Aggressively growing Quick Lubes through organic service center expansion and opportunistic acquisitions, while enhancing retail service capabilities through a consistent and preferred customer experience delivered by hands-on experts;
•Strengthening and maintaining the foundation in
•Accelerating International market share growth through continued development of and investment in key emerging and high value markets;
•Broadening capabilities to serve future transport vehicles by developing relationships with original equipment manufacturers and leveraging innovation in the development of future products and light services in direct and adjacent markets; and
•Accelerating the shift to a services-driven business by leveraging customer relationships and experiences to develop new capabilities globally.
FIRST FISCAL QUARTER 2020 OVERVIEW
The following were the significant events for the first fiscal quarter of 2020, each of which is discussed more fully in this Quarterly Report on Form 10-Q:
•Valvoline reported net income of$73 million and diluted earnings per share of$0.39 in the three months endedDecember 31, 2019 , increases of 38% and 39%, respectively, over the prior year quarter.
•Quick Lubes sales growth of 15% was driven by increased system-wide same store sales growth of 8.3% and the addition of 106 net new stores to the system compared to the prior year, while the costs associated with ramping up new stores, a temporary increase in labor costs and an increased allocation of shared corporate costs resulted in flat operating income year-over-year.
•Core North America sales and operating income growth of 7% and 48%, respectively, benefited from the favorable channel and product mix of higher branded retail volume and the operating expense reduction program launched last year, despite lower volume versus the prior year period. •International returned to sales and earnings growth of 4% and 11%, respectively, as a result of cost stability and volume growth attributable to the EMEA region, including a meaningful contribution from the recent Eastern European acquisition, as well as strong performance in keyAsia-Pacific markets and unconsolidated joint ventures.
•Valvoline returned value to its shareholders during the quarter by increasing
its quarterly dividend 7% from fiscal 2019 to
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 are not defined withinU.S. GAAP and do not purport to be alternatives to net income/loss or cash flows from operating activities as measures of 30 --------------------------------------------------------------------------------
operating performance or cash flows. The following are the non-GAAP measures management has included and how management defines them:
•EBITDA, which management defines as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;
•Adjusted EBITDA, which management defines as EBITDA adjusted for key items, as further described below, and net pension and other postretirement plan expense/income; and
•Free cash flow, which management defines as operating cash flows less capital expenditures and certain other adjustments as applicable.
These measures are not prepared in accordance withU.S. GAAP and management believes the use of non-GAAP measures assists investors in understanding the ongoing operating performance of Valvoline's business by presenting comparable financial results between periods. The non-GAAP information provided is used by Valvoline's management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA, Adjusted EBITDA and free cash flow. EBITDA, Adjusted EBITDA, and free cash flow provide a supplemental presentation of Valvoline's operating performance. For a reconciliation of non-GAAP measures, refer to the "Results of Operations" and "Financial Position, Liquidity and Capital Resources" sections below. Due to depreciable assets associated with the nature of the Company's operations and interest costs related to Valvoline's capital structure, management believes EBITDA is an important supplemental measure to evaluate the Company's operating results between periods on a comparable basis.
Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline's operating performance. Adjusted EBITDA excludes the impact of the following:
•Key items - Key items consist of income or expenses associated with certain
unusual, infrequent or non-operational income or expenses not directly
attributable to the underlying business, which management believes impacts the
comparability of operational results between periods. Key items may consist of
adjustments related to: the impairment of an equity investment; legacy
businesses, including the separation from Ashland and associated impacts of
related indemnities; significant acquisitions or divestitures;
restructuring-related matters; and other matters that are non-operational or
unusual in nature. Key items are considered by management to be outside the
comparable operational performance of the business and are also often related to
legacy matters or market-driven events that are not directly related to the
underlying business and do not have an immediate, corresponding impact on the
Company's ongoing performance. Details with respect to the composition of key
items recognized during the respective periods presented herein are set forth
below in the "EBITDA and Adjusted EBITDA" section of "Results of Operations"
that follows.
•Net pension and other postretirement plan expense/income - Net pension and
other postretirement plan expense/income includes several elements impacted by
changes in plan assets and obligations that are primarily driven by changes in
the debt and equity markets, as well as those that are predominantly legacy in
nature and related to prior service to the Company from employees (e.g.,
retirees, former employees, current employees with frozen benefits). These
elements include (i) interest cost, (ii) expected return on plan assets, (iii)
actuarial gains/losses, and (iv) amortization of prior service cost/credit.
Significant factors that can contribute to changes in these elements include
changes in discount rates used to remeasure pension and other postretirement
obligations on an annual basis or upon a qualifying remeasurement, differences
between actual and expected returns on plan assets, and other changes in
actuarial assumptions, such as the life expectancy of plan participants.
Accordingly, management considers that these elements are more reflective of
changes in current conditions in global financial markets (in particular,
interest rates) and are outside the operational performance of the business and
are also primarily legacy amounts that are not directly related to the
underlying business and do not have an
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immediate, corresponding impact on the compensation and benefits provided to
eligible employees for current service. Adjusted EBITDA will continue to include
pension and other postretirement service costs related to current employee
service as well as the costs of other benefits provided to employees for current
service.
Management uses free cash flow as an additional non-GAAP metric of cash flow
generation. By including capital expenditures and certain other adjustments, as
applicable, management is able to provide an indication of the ongoing cash
being generated that is ultimately available for both debt and equity holders as
well as other investment opportunities. Unlike cash flow from operating
activities, free cash flow includes the impact of capital expenditures,
providing a more complete picture of cash generation. Free cash flow has certain
limitations, including that it does not reflect adjustments for certain
non-discretionary cash flows, such as mandatory debt repayments. The amount of
mandatory versus discretionary expenditures can vary significantly between
periods.
Valvoline's results of operations are presented based on Valvoline's management
structure and internal accounting practices. The structure and practices are
specific to Valvoline; therefore, Valvoline's financial results, EBITDA,
Adjusted EBITDA and free cash flow are not necessarily comparable with similar
information for other comparable companies. EBITDA, Adjusted EBITDA and free
cash flow each have limitations as analytical tools and should not be considered
in isolation from, or as an alternative to, or more meaningful than, net income
and cash flows from operating activities as determined in accordance with U.S.
GAAP. Because of these limitations, net income and cash flows from operating
activities should primarily be relied upon as determined in accordance with U.S.
GAAP, and EBITDA, Adjusted EBITDA, and free cash flow should only be used as
supplements. In evaluating EBITDA, Adjusted EBITDA, and free cash flow, one
should be aware that in the future Valvoline may incur expenses/income similar
to those for which adjustments are made in calculating EBITDA, Adjusted EBITDA,
and free cash flow. Valvoline's presentation of EBITDA, Adjusted EBITDA, and
free cash flow should not be construed as a basis to infer that Valvoline's
future results will be unaffected by unusual or nonrecurring items.
Key Business Measures
Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-owned and franchised same-store sales; total lubricant volumes sold; lubricant volumes sold by unconsolidated joint ventures; and percentage of premium lubricants sold. Management believes these measures are useful to evaluating and understanding Valvoline's operating performance and should be considered as supplements to, not substitutes for, Valvoline's sales and operating income, as determined in accordance withU.S. GAAP. Same-store sales is defined as sales by Quick Lubes service center stores (company-owned, franchised or the combination of both for system-wide same-store sales), with new stores excluded from the metric until the completion of their first full fiscal year in operation because this period is generally required for new store sales levels to begin to normalize. Valvoline does not recognize store-level sales from franchised stores as Quick Lubes operating segment revenue. Quick Lubes revenue is limited to sales at company-owned stores, sales of lubricants and other products to independent franchisees and Express Care operators, and royalties and other fees from franchised stores. Although Valvoline does not record franchise store-level sales as revenue in its Condensed Consolidated Statements of Comprehensive Income, management believes system-wide and franchised same-store sales information is useful to assess the operating performance of an average Quick Lubes store. Management uses lubricant volumes sold in gallons by each of its reportable segments and unconsolidated joint ventures to assess performance. Lubricant volumes sold by unconsolidated joint ventures are used to measure the operating performance of the International operating segment. Valvoline does not record lubricant sales from unconsolidated joint venture as International reportable segment revenue. International revenue is limited to sales by Valvoline's consolidated affiliates. Although Valvoline does not record sales by unconsolidated joint ventures as revenue in its Condensed Consolidated Statements of Comprehensive Income, management believes lubricant volumes including and sold by unconsolidated joint ventures is useful to assess the operating performance of its investments in joint ventures. 32 -------------------------------------------------------------------------------- Premium lubricant percentage is also used by management to evaluate performance and is defined as premium lubricant gallons sold as a percentage ofU.S. branded lubricant volumes for theQuick Lubes and Core North America segments and as a percentage of total segment lubricant volume for the International segment. Premium lubricant products generally provide a higher contribution to segment profitability and the percentage of premium volumes is useful to evaluating and understanding Valvoline's operating performance.
RESULTS OF OPERATIONS
Consolidated review
The following table summarizes the results of the Company's operations:
Three months ended December 31
2019 2018
(In millions) % of Sales % of Sales
Sales $ 607 100.0% $ 557 100.0%
Gross profit $ 211 34.8% $ 183 32.9%
Net operating expenses $ 107 17.6% $ 96 17.2%
Operating income $ 104 17.1% $ 87 15.6%
Net income $ 73 12.0% $ 53 9.5%
Sales
Sales for the three months ended
Year over year change
(In millions) Three months ended December 31, 2019
Mix and price $ 30
Volume 18
Currency exchange (2)
Acquisitions 4
Change in sales $ 50
For the three months ended December 31, 2019 , lubricant gallons sold increased
3% to 43.4 million, which favorably impacted sales as the volume growth in Quick
Lubes and International more than offset the slight volume decline in Core North
America . Though volumes declined in Core North America , channel and product mix
improvements led to increased revenues and mix improvements in Quick Lubes drove
higher average ticket. The Eastern European acquisition completed in fiscal 2019
also favorably impacted sales, and these benefits were partially offset by
modest unfavorable currency exchange.
The changes to reportable segment sales and the drivers thereof are discussed in further detail in the "Reportable Segment Review" section below.
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--------------------------------------------------------------------------------Gross profit
Gross profit increased$28 million for the three months endedDecember 31, 2019 compared to the three months endedDecember 31, 2018 . The table below provides a reconciliation of the changes: Year over year change (In millions) Three months ended December 31, 2019 Volume and mix $ 20 Price and cost 8 Change in gross profit $ 28
The increase in gross profit was largely driven by improvements in volumes and product mix and to a lesser extent, benefits from the operating expense reduction program announced in fiscal 2019, favorable adjustments to promotion-related cost estimates, and a more stable raw material cost environment.
The increase in gross profit margin of 1.9% for the three months endedDecember 31, 2019 compared to the prior year period was primarily driven by favorable mix inQuick Lubes and Core North America .
The changes to reportable segment gross profit and the drivers thereof are discussed in further detail in the "Reportable Segment Review" section below.
Net operating expenses
The table below provides details of the components of net operating expenses:
Three months ended December 31
2019 2018
(In millions) % of Sales % of Sales
Selling, general and administrative expenses $ 117 19.3 % $ 105 18.8 %
Net legacy and separation-related income (1) (0.2) % - -
Equity and other income, net (9) (1.5) % (9) (1.6) %
Net operating expenses $ 107 17.6 % $ 96 17.2 %
Selling, general and administrative expenses increased $12 million in the three
months ended December 31, 2019 compared to the prior year period. These
increases were largely driven by increases in incentive and deferred
compensation expense, with the remainder largely comprised of investments in the
Quick Lubes and International businesses.
Net legacy and separation-related income increased
Equity and other income, net was flat in the three months endedDecember 31, 2019 compared to the prior year period. Increases in equity income during the quarter were offset by decreases due to incentives received during the prior year for operating in a free trade zone outside theU.S. 34 --------------------------------------------------------------------------------
Net pension and other postretirement plan income
Net pension and other postretirement plan income for the three months ended
Net interest and other financing expense
Net interest and other financing expense decreased by
Income tax expense
The following table summarizes income tax expense and the effective tax rate:
Three months ended December 31
(In millions) 2019 2018
Income tax expense $ 24 $ 19
Effective tax rate percentage 24.7 % 26.4 %
The increase in income tax expense over the prior year was principally driven by
higher pre-tax earnings, and the lower effective tax rate is attributed to the
current year benefit from favorable discrete items compared to unfavorable
discrete items in the prior year.
EBITDA and Adjusted EBITDA
The following table reconciles net income to EBITDA and Adjusted EBITDA:
Three months ended December 31
(In millions) 2019 2018
Net income $ 73 $ 53
Income tax expense 24 19
Net interest and other financing expenses 16 17
Depreciation and amortization 16 14
EBITDA 129 103
Net pension and other postretirement plan income (a) (9) (2)
Net legacy and separation-related income (1) -
Restructuring and related expenses 1 -
Adjusted EBITDA $ 120 $ 101
(a) Net pension and other postretirement plan income includes remeasurement
gains and losses, when applicable, and recurring non-service pension and other
postretirement net periodic income, which consists of interest cost, expected
return on plan assets and amortization of prior service credit. Refer to Note 9
in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I
in this Quarterly Report on Form 10-Q for further details.
The increase in adjusted EBITDA of
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--------------------------------------------------------------------------------Reportable segment review Valvoline's business is managed within the following three reportable segments:
•Quick Lubes - services the passenger car and light truck quick lube market through company-owned and independent franchised retail quick lube service center stores and independent Express Care stores that service vehicles with Valvoline products, as well as through investment in a joint venture inChina to pilot expansion of retail quick lube service center stores outside ofNorth America . •Core North America - sells engine and automotive maintenance products inthe United States andCanada to retailers, installers, and heavy-duty customers to service vehicles and equipment. •International - sells engine and automotive maintenance products in more than 140 countries outside ofthe United States andCanada for the maintenance of consumer and commercial vehicles and equipment. Valvoline's reportable segments are measured for profitability based on operating income; therefore, Valvoline does not generally allocate items to each reportable segment below operating income, such as net pension and other postretirement plan income, net interest and other financing expenses, or income tax expense. Operating income by segment includes the allocation of shared corporate costs, which are allocated consistently based on each segment's proportional contribution to various financial measures. Valvoline does not allocate certain significant corporate and non-operational matters, including, but not limited to, company-wide restructuring activities and costs or adjustments that relate to former businesses that Valvoline no longer operates. These matters are attributed to Unallocated and other. Results of Valvoline's reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies.
Quick Lubes
Quick Lubes sales are influenced by the number of service center stores and the
business performance of those stores. Although Valvoline does not record
franchise store-level sales as revenue in its Condensed Consolidated Statements
of Comprehensive Income, Quick Lubes revenue includes product sales, as well as
royalties and other fees from franchised stores. Management believes the number
of company-owned and franchised service center stores as provided in the
following tables is useful to assess the operating performance of the Quick
Lubes reportable segment.
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Company-owned
First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter
2020 2019 2019 2019 2019
Beginning of period 519 501 483 471 462
Opened 2 12 4 7 5
Acquired 7 6 13 5 -
Net conversions between company-owned and franchised (4) - 1 - 4
Closed - - - - -
End of period 524 519 501 483 471
Franchised (a)
First Fourth Third Second
Quarter Quarter Quarter Quarter First Quarter
2020 2019 2019 2019 2019
Beginning of period 866 851 844 830 780
Opened 13 15 11 15 24
Acquired - - - - 31
Net conversions between company-owned and franchised 4 - (1) - (4)
Closed - - (3) (1) (1)
End of period 883 866 851 844 830
Total stores 1,407 1,385 1,352 1,327 1,301
(a)Valvoline's franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
The year over year change resulted in 106 net new company-owned and franchised
stores as a result of 75 net openings and 31 acquired stores. Organic service
center store growth was primarily related to new company-owned service center
store openings and franchisee expansion in key markets.
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The following table summarizes the results of the Quick Lubes reportable
segment:
Three months ended December 31
(In millions) 2019 2018
Sales $ 218 $ 189
Operating income $ 38 $ 38
Depreciation and amortization $ 10 $ 8
Gross profit as a percent of sales (a) 37.3 % 38.4 %
Operating income as a percent of sales 17.4 % 20.1 %
Operating information
Lubricant sales gallons 7.3 6.5
Premium lubricants (percent of U.S. branded volumes) 66.5 % 63.7 %
Same-store sales growth (b) - Company-owned 6.2 % 9.9 %
Same-store sales growth (b) - Franchised (c) 9.8 % 9.8 %
Same-store sales growth (b) - Combined (c) 8.3 % 9.8 %
(a)Gross profit as a percent of sales is defined as sales, less cost of sales,
divided by sales.
(b)Valvoline determines same-store sales growth on a fiscal year basis, with new
stores excluded from the metric until the completion of their first full fiscal
year in operation.
(c)Valvoline's franchisees are distinct legal entities and Valvoline does not
consolidate the results of operations of its franchisees.
Quick Lubes sales increased $29 million , or 15%, for the current quarter
compared to the prior year quarter. Volume growth resulted from an increase in
transactions, primarily attributable to the Company's marketing investments in
customer acquisition and retention programs and the addition of 106 net new
stores. Premium mix improvements and increases in non-oil change services
combined to improve average ticket and increase sales, while pricing actions
implemented in the prior year period that did not recur in the current year
moderated sales growth.
Gross profit margin declined 1.1% from the prior year primarily related to a
temporary increase in labor costs and higher costs associated with the ramp-up
phase of newly-built company stores within their first years of operation,
partially offset by mix improvements.
Operating income was flat during the current quarter compared to the prior year
quarter. Volume and mix improvements were offset by unfavorable gross margin
impacts, in addition to higher selling, general and administrative expenses as a
result of an increase in the allocation of shared corporate costs and to a
lesser extent, growth investments.
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--------------------------------------------------------------------------------The following table summarizes the results of theCore North America reportable segment: Three months ended December 31 (In millions) 2019 2018 Sales $ 248$ 232 Operating income $ 46$ 31 Depreciation and amortization $ 4 $ 4 Gross profit as a percent of sales (a) 36.3 % 31.7 % Operating income as a percent of sales 18.5 % 13.4 % Operating information Lubricant sales gallons 21.4 21.7 Premium lubricants (percent of U.S. branded volumes) 56.0 % 49.8 %
(a) Gross profit as a percent of sales is defined as sales, less cost of sales, divided by sales.
Core North America sales increased by$16 million , or 7%, during the current quarter compared to the prior year quarter. The increase was driven largely by product and channel mix as branded volume in the retail channel improved off of a weak performance in the prior year and more than offset the impact of lower volumes in the installer channel. Lower installer channel volume was primarily due to the timing of distributor sales, as well as volume declines in lower-margin business. Gross profit margin increased 4.6% primarily from channel and product mix benefits and lower costs as a result of the operating expense reduction program that commenced last fiscal year, as well as favorable adjustments to trade and promotion cost estimates. Operating income increased$15 million for the three months endedDecember 31, 2019 compared to the prior year period primarily due to favorable mix and margin improvements. 39
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International
The following table summarizes the results of the International reportable
segment:
Three months ended December 31
(In millions) 2019 2018
Sales $ 141 $ 136
Operating income $ 20 $ 18
Depreciation and amortization $ 2 $ 2
Gross profit as a percent of sales (a) 28.7 % 27.2 %
Operating income as a percent of sales 14.2 % 13.2 %
Operating information
Lubricant sales gallons (b) 14.7 13.8Lubricant sales gallons, including unconsolidated joint ventures (c)
25.5 24.2
Premium lubricants (percent of lubricant volume) 25.8 % 28.5 %
(a) Gross profit as a percent of sales is defined as sales, less cost of sales,
divided by sales.
(b) Excludes volumes from unconsolidated subsidiaries.
(c) Valvoline unconsolidated joint ventures are distinct legal entities and
Valvoline does not consolidate the result of operations of its unconsolidated
joint ventures.
International sales increased $5 million , or 4%, during the current quarter
compared to the prior year quarter. The increase in sales was driven by volume
growth of 7%, which was primarily attributable to the EMEA region and included
the recent acquisition of an Eastern European lubricant production company, as
well as strong performance in certain Asia-Pacific markets, including China .
This increase was partially offset by modest unfavorable currency exchange
during the quarter.
Gross profit margin increased 1.5% primarily as a result of a more stable raw material cost environment during the quarter compared to the prior year period.
Operating income increased
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company closely manages its liquidity and capital resources. Valvoline's
liquidity requirements depend on key variables, including the level of
investment needed to support business strategies, the performance of the
business, capital expenditures, borrowing arrangements, and working capital
management. Capital expenditures, acquisitions, share repurchases, and dividend
payments are components of the Company's cash flow and capital management
strategy, which to a large extent, can be adjusted in response to economic and
other changes in the business environment. The Company has a disciplined
approach to capital allocation, which focuses on investing
40
--------------------------------------------------------------------------------in key priorities that support Valvoline's business and growth strategies and returning capital to shareholders, while funding ongoing operations.
As of
Cash flows
Valvoline's cash flows as reflected in the Condensed Consolidated Statements of Cash Flows are summarized as follows for the three months endedDecember 31 : (In millions) 2019 2018 Cash provided by (used in): Operating activities$ 59 $ 85 Investing activities (35) (56) Financing activities (23) (25)
Effect of currency exchange rate changes on cash, cash equivalents, and restricted cash
3 (1)
Increase in cash, cash equivalents, and restricted cash $ 4 $ 3
Operating activities The decrease in cash flows provided by operating activities for the three months endedDecember 31, 2019 compared to the prior year was primarily due to unfavorable changes in working capital, notably the mix of accounts receivable driven largely by the improved year-over-year performance in theCore North America retail channel and the timing of certain cash payments. In addition, cash flows from operating activities in the prior year were impacted by$28 million of sales of certain customer accounts receivable. These unfavorable impacts were partially offset by improved earnings in the current year.
Investing activities
The decrease in cash flows used in investing activities for the three months endedDecember 31, 2019 compared to the prior year was primarily due to lower cash consideration paid for acquisitions of$24 million , partially offset by an investment in a domestic joint venture during the current quarter.
Financing activities
The decrease in cash flows used in financing activities for the three months endedDecember 31, 2019 compared to the prior year period was primarily driven by the prior year completion of the purchase of the remaining ownership interest in a consolidated subsidiary and the reclassification of a build-to-suit arrangement to an operating lease and operating cash flows in accordance with the transition requirements of the new lease accounting guidance adopted in fiscal 2020.
Free cash flow and other liquidity information
The following table sets forth free cash flow and reconciles cash flows from
operating activities to free cash flow. As previously noted, free cash flow has
certain limitations, including that it does not reflect adjustments for certain
non-discretionary cash flows, such as mandatory debt repayments. Refer to the
"Use of Non-GAAP Measures" section included above in this Item 2 for additional
information.
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Three months ended December 31
(In millions) 2019 2018
Cash flows provided by operating activities $ 59 $ 85
Additions to property, plant and equipment (28) (27)
Free cash flow $ 31 $ 58
As of December 31, 2019 , working capital (current assets minus current
liabilities, excluding long-term debt due within one year) was $395 million
compared to $389 million as of September 30, 2019 . Liquid assets (cash, cash
equivalents, and accounts receivable) were 132% of current liabilities as of
December 31, 2019 and September 30, 2019 . The increase in working capital is
primarily due the timing of certain payments since year-end, partially offset by
lower receivables.
Debt
As of December 31 and September 30, 2019 , the Company had long-term debt
(including the current portion and debt issuance costs and discounts) of $1.3
billion of loans and revolving facilities. Approximately 57% of Valvoline's
outstanding borrowings as of December 31, 2019 had fixed rates, with the
remainder bearing variable interest rates. As of December 31, 2019 , Valvoline
was in compliance with all covenants of its debt obligations and had $596
million of remaining borrowing capacity under its revolving credit and trade
receivables facilities.
On
Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for additional details regarding the Company's debt instruments.
Dividend payments
During the three months endedDecember 31, 2019 , the Company paid$21 million of cash dividends for$0.113 per common share. OnJanuary 29, 2020 , the Board of Directors of Valvoline declared a quarterly cash dividend of$0.113 per share of Valvoline common stock, which is payable onMarch 16, 2020 to shareholders of record onFebruary 28, 2020 . Future declarations of quarterly dividends are subject to approval by the Board of Directors and may be adjusted as business needs or market conditions change.
Restructuring and related expenses
During the second fiscal quarter of 2019, Valvoline outlined a broad-based restructuring and cost-savings program that is expected to reduce costs, simplify processes and focus the organization's structure and resources on key growth initiatives. Part of this program includes employee separation actions, which were generally completed during 2019, with the associated termination benefits anticipated to be substantially paid by the end of 2020. Since program inception, Valvoline has recognized cumulative restructuring and related expenses of$15 million , with$1 million recognized during the three months endedDecember 31, 2019 . The Company does not expect to incur material remaining costs from these actions. Restructuring expenses include employee severance and termination benefits provided to employees pursuant to the restructuring program. Restructuring-related expenses consist of those costs beyond those normally included in restructuring and incremental to the Company's normal operating costs. These restructuring-related costs were expensed as incurred and are primarily related to third-party professional service fees incurred in connection with execution of the restructuring program. The costs recognized during the three months endedDecember 31, 2019 were restructuring expenses recorded in Selling, general and administrative expenses within the Condensed Consolidated Statement of Comprehensive Income. 42 --------------------------------------------------------------------------------
Results by segment do not include these restructuring and related expenses, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses were included in Unallocated and other.
Valvoline's restructuring actions remain on track and are expected to generate annualized pre-tax savings of approximately$40 million to$50 million with benefits realized during the first fiscal quarter of 2020 and full savings expected to be delivered by the end of fiscal 2020. The ongoing annual savings are anticipated to benefit operating expenses, including Cost of sales and Selling, general and administrative expenses within the Condensed Consolidated Statements of Comprehensive Income, with a portion expected to be reinvested in the business to provide flexibility to address the ongoing market dynamics inCore North America and to invest in growth opportunities. Refer to Note 6 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q for additional details regarding this restructuring program.
Off-balance sheet arrangements and contractual obligations
Other than the matters disclosed in this Quarterly Report on Form 10-Q and in the ordinary course of business since the end of fiscal 2019, there have been no material changes in the Company's contractual obligations.
Summary
As ofDecember 31, 2019 , cash and cash equivalents totaled$162 million and total debt was$1.3 billion . Valvoline's ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in the industry, and is subject to the business and other risk factors described in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of the Annual Report on Form 10-K for the year endedSeptember 30, 2019 . If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives. The Company's total remaining borrowing capacity was$596 million as ofDecember 31, 2019 . Management believes that the Company has sufficient liquidity based on its current cash position, cash generated from business operations, and existing financing to meet its required pension and other postretirement plan contributions, debt servicing obligations, tax-related and other contractual commitments, and operating requirements for the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion and analysis of recently issued accounting pronouncements and the impacts on Valvoline, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's critical accounting policies and estimates are discussed in detail in Item 7 of Part II in Valvoline's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Management reassessed the critical accounting policies as disclosed in the Annual Report on Form 10-K and determined there were no changes to critical accounting policies and estimates in the three months endedDecember 31, 2019 .
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