Valvoline(VVV) - 2025 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited) This section presents Valvoline Inc.'s unaudited condensed consolidated financial statements, including statements of comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, fair value measurements, acquisitions, debt, income taxes, employee benefits, litigation, earnings per share, supplemental financial information, and subsequent events for the periods ended June 30, 2025 and 2024 Condensed Consolidated Statements of Comprehensive Income Three Months Ended June 30 (in millions) | Metric | 2025 | 2024 | Change (YoY) | | :-------------------------------- | :----- | :----- | :----------- | | Net revenues | $439.0 | $421.4 | +4.2% | | Gross profit | $177.6 | $167.5 | +6.0% | | Operating income | $94.7 | $93.4 | +1.4% | | Income from continuing operations | $57.0 | $48.2 | +18.3% | | Net income | $56.5 | $45.9 | +23.1% | | Basic earnings per share | $0.44 | $0.35 | +25.7% | | Diluted earnings per share | $0.44 | $0.35 | +25.7% | Nine Months Ended June 30 (in millions) | Metric | 2025 | 2024 | Change (YoY) | | :-------------------------------- | :----- | :----- | :----------- | | Net revenues | $1,256.5 | $1,183.5 | +6.2% | | Gross profit | $481.0 | $448.5 | +7.2% | | Operating income | $305.4 | $232.6 | +31.3% | | Income from continuing operations | $189.2 | $125.4 | +50.9% | | Net income | $185.7 | $119.2 | +55.8% | | Basic earnings per share | $1.45 | $0.91 | +59.3% | | Diluted earnings per share | $1.44 | $0.91 | +58.2% | Condensed Consolidated Balance Sheets As of June 30, 2025 vs. September 30, 2024 (in millions) | Metric | June 30, 2025 | September 30, 2024 | Change | | :-------------------------------- | :------------ | :----------------- | :----- | | Total current assets | $239.0 | $255.4 | -$16.4 | | Total noncurrent assets | $2,322.6 | $2,183.3 | +$139.3 | | Total assets | $2,561.6 | $2,438.7 | +$122.9 | | Total current liabilities | $327.5 | $353.9 | -$26.4 | | Total noncurrent liabilities | $1,920.5 | $1,899.2 | +$21.3 | | Stockholders' equity | $313.6 | $185.6 | +$128.0 | | Total liabilities and stockholders' equity | $2,561.6 | $2,438.7 | +$122.9 | Condensed Consolidated Statements of Cash Flows Nine Months Ended June 30 (in millions) | Cash Flow Activity | 2025 | 2024 | Change | | :-------------------------------- | :----- | :----- | :----- | | Total cash provided by operating activities | $175.3 | $163.8 | +$11.5 | | Total cash (used in) provided by investing activities | $(71.9) | $161.4 | -$233.3 | | Total cash used in financing activities | $(103.6) | $(672.4) | +$568.8 | | Decrease in cash, cash equivalents and restricted cash | $(0.4) | $(347.1) | +$346.7 | | Cash, cash equivalents and restricted cash - end of period | $68.3 | $66.0 | +$2.3 | Condensed Consolidated Statements of Stockholders' Equity Changes in Stockholders' Equity (Nine Months Ended June 30, 2025, in millions) | Item | Amount | | :-------------------------------- | :----- | | Balance at September 30, 2024 | $185.6 | | Net income | $185.7 | | Stock-based compensation, net of issuances | $4.3 | | Repurchases of common stock | $(60.3) | | Other comprehensive income (loss), net of tax | $(1.7) | | Balance at June 30, 2025 | $313.6 | Notes to Condensed Consolidated Financial Statements Note 1 - Basis of Presentation and Significant Accounting Policies This note outlines the basis for preparing the unaudited condensed consolidated financial statements in accordance with U.S. GAAP and SEC regulations, emphasizing the use of estimates and judgments. It also details the reclassification of the Global Products business as discontinued operations and discusses recent FASB guidance on segment disclosures, income tax disclosures, and expense categories, none of which are expected to materially impact operating results, financial condition, or cash flows upon adoption - Valvoline completed the sale of its Global Products reportable segment on March 1, 2023, with its operating results and cash flows reflected as discontinued operations[23] - New FASB guidance on reportable segment disclosures (effective FY2025) and income tax disclosures (effective FY2026) will enhance disclosures but are not expected to impact operating results, financial condition, or cash flows[25][26] - FASB guidance on enhanced expense category disclosures (effective FY2028) is being evaluated for presentation and disclosure impact, but not expected to affect overall results from operations[27][29] Note 2 - Fair Value Measurements This note details the fair value measurements of Valvoline's financial assets and liabilities, categorizing them within the fair value hierarchy (Level 1, Level 2, Level 3). It also provides the fair value of long-term debt, specifically the 2031 Notes, based on recent trading values Financial Assets and Liabilities at Fair Value (June 30, 2025, in millions) | Item | Total | Level 1 | Level 2 | Level 3 | NAV | | :-------------------------- | :---- | :------ | :------ | :------ | :---- | | Cash and cash equivalents: | | | | | | | Money market funds | $0.3 | $0.3 | $— | $— | $— | | Time deposits | $2.6 | $— | $2.6 | $— | $— | | Other noncurrent assets: | | | | | | | Non-qualified trust funds | $2.9 | $— | $— | $— | $2.9 | | Deferred compensation investments | $18.1 | $18.1 | $— | $— | $— | | Total assets at fair value | $23.9 | $18.4 | $2.6 | $— | $2.9 | | Deferred compensation obligations | $19.3 | $— | $— | $— | $19.3 | | Total liabilities at fair value | $19.3 | $— | $— | $— | $19.3 | Fair Value of 2031 Notes (in millions) | Date | Fair Value | Carrying Value | | :---------------- | :--------- | :------------- | | June 30, 2025 | $485.2 | $530.9 | | September 30, 2024 | $478.5 | $530.4 | Note 3 - Acquisitions and Dispositions This note details Valvoline's acquisition and disposition activities. During the nine months ended June 30, 2025, the Company acquired 26 service center stores for $32.3 million, expanding its retail presence. Concurrently, it disposed of 39 company-operated service centers to a new franchisee in early December 2024, recognizing a pre-tax gain of $74.3 million - Valvoline acquired 26 service center stores, including 6 former franchise locations, for an aggregate purchase price of $32.3 million during the nine months ended June 30, 2025, increasing company-operated stores to 983[34][35] - In early December 2024, Valvoline sold 39 company-operated service center stores to a new franchisee, recognizing a pre-tax gain on sale of $74.3 million during the nine months ended June 30, 2025[40] Changes in Goodwill (in millions) | Item | Amount | | :-------------------- | :----- | | Balance as of September 30, 2024 | $615.3 | | Acquisitions | $23.8 | | Dispositions | $(11.4) | | Currency translation | $(0.3) | | Balance at June 30, 2025 | $627.4 | Note 4 - Debt This note summarizes Valvoline's debt structure, including 2031 Notes, Term Loan A, and Revolver. As of June 30, 2025, total debt was $1,079.7 million, with approximately 49% at fixed interest rates. The Company was in compliance with all debt covenants and had $341.5 million remaining borrowing capacity under its revolving credit facility Total Debt (in millions) | Item | June 30, 2025 | September 30, 2024 | | :-------------------------- | :------------ | :----------------- | | 2031 Notes | $535.0 | $535.0 | | Term Loan A | $421.6 | $439.4 | | Revolver | $130.0 | $125.0 | | Debt issuance costs and discounts | $(6.9) | $(5.6) | | Total debt | $1,079.7 | $1,093.8 | | Current portion of long-term debt | $23.8 | $23.8 | | Long-term debt | $1,055.9 | $1,070.0 | - As of June 30, 2025, Valvoline was in compliance with all covenants under its long-term borrowings and had a remaining borrowing capacity of $341.5 million under its $475.0 million revolving credit facility[42][44] - The Company guarantees future payments related to certain assigned leases ($65.8 million maximum potential payments) and franchisee debt obligations ($12.1 million), but has not recorded a liability as the likelihood of default is not considered probable[43] Note 5 - Income Taxes This note details Valvoline's income tax expense and effective tax rates. For the three months ended June 30, 2025, income tax expense was $20.0 million with an effective tax rate of 26.0%, and for the nine months, it was $65.9 million with a rate of 25.8%. The increase in expense year-over-year was primarily due to higher pre-tax earnings, and the nine-month effective rate increase was due to decreased favorable discrete tax benefits Income Tax Expense and Effective Tax Rate (in millions) | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Income tax expense | $20.0 | $17.0 | $65.9 | $42.9 | | Effective tax rate percentage | 26.0% | 26.1% | 25.8% | 25.5% | - The increase in income tax expense was driven by higher pre-tax earnings, and the nine-month effective tax rate increase was due to decreases in favorable discrete tax benefits[45] Note 6 - Employee Benefit Plans This note summarizes the components of Net pension and other postretirement plan (income) expenses. For the three months ended June 30, 2025, the Company reported a net periodic benefit income of $(0.6) million for pension benefits and $(0.3) million for other postretirement benefits, primarily due to higher expected returns on plan assets and lower interest costs Net Periodic Benefit (Income) Costs (in millions) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Pension benefits | $(0.6) | $3.6 | $(1.8) | $11.1 | | Other postretirement benefits | $(0.3) | $(0.2) | $(0.9) | $(0.7) | Note 7 - Litigation, Claims and Contingencies Valvoline is involved in various lawsuits and claims in the ordinary course of business. The Company accrues liabilities for probable and estimable losses, which were not material for the periods presented. Management believes that pending claims or proceedings will not have a material adverse effect on its condensed consolidated financial statements - Valvoline establishes liabilities for probable and reasonably estimable losses from lawsuits, claims, and other legal proceedings, which were not material for the periods presented[47][48] - Management believes that pending claims or proceedings will not have a material adverse effect on its condensed consolidated financial statements[50] Note 8 - Earnings Per Share This note provides a summary of basic and diluted earnings per share for both continuing and discontinued operations. For the three months ended June 30, 2025, diluted EPS from continuing operations was $0.44, and for the nine months, it was $1.47 Earnings Per Share (in millions, except per share amounts) | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Income from continuing operations | $57.0 | $48.2 | $189.2 | $125.4 | | Loss from discontinued operations, net of tax | $(0.5) | $(2.3) | $(3.5) | $(6.2) | | Net income | $56.5 | $45.9 | $185.7 | $119.2 | | Basic earnings per share (Continuing operations) | $0.45 | $0.37 | $1.48 | $0.96 | | Diluted earnings per share (Continuing operations) | $0.44 | $0.37 | $1.47 | $0.96 | Note 9 - Supplemental Financial Information This note provides supplemental financial details, including a reconciliation of cash, cash equivalents, and restricted cash, a summary of accounts and other receivables, and a disaggregation of net revenues by timing and category. Net revenues for the three months ended June 30, 2025, were $439.0 million, primarily from oil changes and related fees Cash, Cash Equivalents and Restricted Cash (in millions) | Item | June 30, 2025 | September 30, 2024 | June 30, 2024 | | :-------------------------------- | :------------ | :----------------- | :------------ | | Cash and cash equivalents - continuing operations | $68.3 | $68.3 | $65.7 | | Restricted cash - continuing operations | $— | $0.4 | $0.3 | | Total cash, cash equivalents and restricted cash | $68.3 | $68.7 | $66.0 | Accounts and Other Receivables (in millions) | Item | June 30, 2025 | September 30, 2024 | | :-------------------------- | :------------ | :----------------- | | Current receivables, net | $89.8 | $86.4 | | Noncurrent notes receivable, net | $4.5 | $4.3 | Net Revenues by Category (in millions) | Category | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Oil changes and related fees | $319.3 | $307.9 | $912.0 | $868.6 | | Non-oil changes and related fees | $93.9 | $93.6 | $275.2 | $258.6 | | Franchise fees and other | $25.8 | $19.9 | $69.3 | $56.3 | | Total | $439.0 | $421.4 | $1,256.5 | $1,183.5 | Note 10 - Subsequent Events This note highlights two significant subsequent events: the signing of the One Big Beautiful Bill Act on July 4, 2025, which is expected to modestly reduce cash tax payments, and Valvoline's definitive agreement to acquire Breeze Autocare for $625 million in cash, pending regulatory approvals, which will expand its quick lube service network - The 'One Big Beautiful Bill Act,' signed July 4, 2025, maintains the 21% corporate tax rate and makes permanent beneficial tax provisions, expected to modestly reduce cash tax payments in fiscal 2025 and more significantly in future periods due to 100% bonus depreciation[55][101] - Valvoline signed a definitive agreement to acquire Breeze Autocare (Oil Changers brand) for $625 million in cash, pending regulatory approval from the FTC, which issued a Second Request on April 9, 2025[56][57][65][66] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's discussion and analysis of Valvoline's financial condition and results of operations, focusing on continuing operations. It covers the business overview, strategic initiatives, recent developments including refranchising and the Breeze Autocare acquisition, a third fiscal quarter overview, and detailed analysis of net revenues, gross profit, operating expenses, and cash flows, along with the use of non-GAAP measures Business Overview and Purpose - Valvoline Inc. is a leader in automotive preventive maintenance, operating and franchising over 2,100 service center locations (Valvoline Instant Oil Change and Great Canadian Oil Change) and supporting 250 Express Care locations[62] - The Company's strategic initiatives include driving full potential in its core business, aggressively growing its retail footprint (company-operated and franchisee stores), and targeting customer and service expansion (fleet business, non-oil change services, evolving car parc)[63][64] Recent Developments - Valvoline completed three refranchising transactions in Q4 FY2024 and Q1 FY2025, selling 67 company stores to franchise partners to drive growth and long-term value[63] - Valvoline announced the acquisition of Breeze Autocare (Oil Changers brand) for approximately $625 million in cash, pending FTC regulatory approval, which is expected to incur $15 million in additional SG&A expenses for transaction fees and legal support[65][66][67] Third Fiscal Quarter 2025 Overview - Net revenues grew 4% YoY, driven by 4.9% system-wide same-store sales (SSS) growth and 163 net store additions, moderated by a $27.4 million decrease from Refranchising Transactions[69] - Income from continuing operations increased 18% to $57.0 million, and diluted EPS rose 19% to $0.44, due to profit expansion, lower net interest, and favorable pension activity, despite Refranchising impacts and SG&A investments[69] - Adjusted EBITDA increased 5% YoY, driven by gross profit expansion from strong operational performance (favorable volume and mix), offsetting growth investments in SG&A and Refranchising impacts[69] Use of Non-GAAP Measures - Valvoline uses non-GAAP measures like EBITDA, Adjusted EBITDA, Free Cash Flow, and Free Cash Flow excluding growth capital expenditures to provide supplemental insights into operating performance and cash generation, excluding unusual or non-operational activities[70][73][74] Key Business Measures - Valvoline tracks system-wide, company-operated, and franchised store counts, along with system-wide same-store sales (SSS) and store sales, to evaluate operating performance and market position[76][78] Store Counts at End of Period | Store Type | Q3 2025 | Q3 2024 | | :-------------------- | :------ | :------ | | Company-operated | 983 | 937 | | Franchised | 1,141 | 1,024 | | Total system-wide stores | 2,124 | 1,961 | Same-Store Sales Growth (YoY) | Category | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Company-operated | 4.2% | 7.6% | 5.7% | 7.3% | | Franchised | 5.4% | 6.7% | 6.5% | 7.6% | | System-wide | 4.9% | 7.1% | 6.2% | 7.5% | Results of Operations - Consolidated Review Net revenues Net revenues increased by $17.6 million (4.2%) for the three months and $73.0 million (6.2%) for the nine months ended June 30, 2025, compared to the prior year periods. This growth was primarily driven by higher volume from network expansion and system-wide SSS increases (4.9% for three months, 6.2% for nine months), reflecting higher average ticket, premiumization, non-oil change service penetration, and increased transactions. These gains were partially offset by the impact of Refranchising Transactions - Net revenues increased by $17.6 million (4.2%) for the three months and $73.0 million (6.2%) for the nine months ended June 30, 2025, driven by higher volume from network expansion and system-wide SSS growth[83][85] - System-wide SSS growth was 4.9% for the three months and 6.2% for the nine months, attributed to higher average ticket from premiumization, net pricing benefits, non-oil change service penetration, and increased transactions[83][85] - Revenue growth was partially offset by lower net revenues due to the Refranchising Transactions[83][85] Gross profit Gross profit increased by $10.1 million (6.0%) for the three months and $32.5 million (7.2%) for the nine months ended June 30, 2025. This improvement was largely due to volume expansion, pricing, and better service mix, reflecting premiumization and non-oil change services. Gross profit margin also improved due to enhanced labor efficiency and product cost leverage, despite higher store operating expenses and the impact of Refranchising Transactions - Gross profit increased by $10.1 million (6.0%) for the three months and $32.5 million (7.2%) for the nine months ended June 30, 2025, driven by volume expansion, pricing, and improved service mix[87][90] - Gross profit margin improved due to better labor efficiency, leverage in product costs, and benefits from service mix, partially offset by higher store operating expenses and Refranchising impacts[89][92] Net operating expenses Net operating expenses increased for the three and nine months ended June 30, 2025. Selling, general and administrative (SG&A) expenses rose due to investments in technology, talent, and advertising, as well as costs related to investment and divestiture activities. Net legacy and separation-related expenses also increased. Other income, net, saw a significant year-to-date increase primarily due to a $74.3 million gain on sale from a Refranchising Transaction Net Operating Expenses (in millions) | Item | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Selling, general and administrative expenses | $85.5 | $77.2 | $254.6 | $224.0 | | Net legacy and separation-related expenses | $0.4 | $0.1 | $1.6 | $0.2 | | Other income, net | $(3.0) | $(3.2) | $(80.6) | $(8.3) | | Net operating expenses | $82.9 | $74.1 | $175.6 | $215.9 | - SG&A expenses increased by $8.3 million (three months) and $30.6 million (nine months) due to investments in technology, talent, advertising, and costs for investment/divestiture activities[93] - Other income, net, increased by $72.3 million year-to-date, largely driven by a $74.3 million gain on sale of operations from a Refranchising Transaction[95][96] Net pension and other postretirement plan activity Net pension and other postretirement plan activity showed a favorable impact of $4.3 million for the three months and $13.1 million for the nine months ended June 30, 2025. This favorability resulted from higher expected returns on plan assets and reduced interest costs due to declining discount rates - Net pension and other postretirement plan activity was favorable by $4.3 million (three months) and $13.1 million (nine months) due to higher expected returns on plan assets and lower interest costs from declining discount rates[97] Net interest and other financing expenses Net interest and other financing expenses decreased by $6.2 million for the three months and $0.9 million for the nine months ended June 30, 2025. The quarterly decrease was primarily due to prior year debt modification charges. The year-to-date reduction was driven by lower debt modification expenses and reduced interest expense from prior year debt repurchases, partially offset by lower benefits from maturing investments - Net interest and other financing expenses decreased by $6.2 million (three months) and $0.9 million (nine months) due to lower prior year debt modification charges and reduced interest expense from prior year debt repurchases[98][99] - The decrease was partially offset by $20.4 million of lower benefits from the prior year maturities of invested net proceeds from the sale of Global Products and remaining interest rate swaps[99] Income tax provision Income tax expense increased to $20.0 million (26.0% effective rate) for the three months and $65.9 million (25.8% effective rate) for the nine months ended June 30, 2025, primarily driven by higher pre-tax earnings. The nine-month effective tax rate increase was due to decreased favorable discrete tax benefits Income Tax Expense and Effective Tax Rate (in millions) | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Income tax expense | $20.0 | $17.0 | $65.9 | $42.9 | | Effective tax rate percentage | 26.0% | 26.1% | 25.8% | 25.5% | - Changes in income tax expense were principally driven by pre-tax earnings, with the nine-month effective tax rate increase attributable to decreases in favorable discrete tax benefits[100] Loss from discontinued operations, net of tax Loss from discontinued operations, net of tax, decreased by $1.8 million for the three months and $2.7 million for the nine months ended June 30, 2025, compared to the prior year periods. This reduction was primarily due to lower costs associated with the separation of processes and systems following the sale of the former Global Products reportable segment Loss from Discontinued Operations, Net of Tax (in millions) | Period | 2025 | 2024 | | :-------------------- | :----- | :----- | | Three months ended June 30 | $(0.5) | $(2.3) | | Nine months ended June 30 | $(3.5) | $(6.2) | - The decrease in loss from discontinued operations was primarily due to lower costs associated with the separation of processes and systems related to the sale of the former Global Products reportable segment[103] Continuing operations EBITDA and Adjusted EBITDA Adjusted EBITDA from continuing operations increased by $6.3 million for the three months and $18.2 million for the nine months ended June 30, 2025. This growth was primarily driven by gross profit expansion from strong operational performance, including improvements in volumes and mix, which more than offset the impacts from Refranchising Transactions and growth investments in SG&A expenses EBITDA and Adjusted EBITDA from Continuing Operations (in millions) | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Nine months ended June 30, 2025 | Nine months ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | EBITDA from continuing operations | $125.8 | $116.9 | $394.7 | $299.3 | | Adjusted EBITDA from continuing operations | $129.5 | $123.2 | $336.7 | $318.5 | - Adjusted EBITDA increased due to gross profit expansion from strong operational performance (volume and mix improvements), offsetting Refranchising impacts and growth investments in SG&A[105] Financial Position, Liquidity and Capital Resources Overview Valvoline manages its liquidity and capital resources through a disciplined approach, focusing on investing in business and growth strategies, returning capital to shareholders, and funding ongoing operations. Capital expenditures, acquisitions, and share repurchases are adjustable components of its cash flow and capital management strategy - Valvoline's capital allocation strategy prioritizes profitable growth, maintaining a target adjusted EBITDA net leverage ratio of 2.5 to 3.5 times, and returning excess capital to shareholders[116] Continuing operations cash flows For the nine months ended June 30, 2025, cash provided by operating activities increased to $180.0 million, while cash used in investing activities was $(71.9) million, and cash used in financing activities significantly decreased to $(103.6) million Continuing Operations Cash Flows (Nine months ended June 30, in millions) | Activity | 2025 | 2024 | | :-------------------------- | :----- | :----- | | Operating activities | $180.0 | $170.0 | | Investing activities | $(71.9) | $161.4 | | Financing activities | $(103.6) | $(672.4) | Operating activities Cash flows from operating activities increased by $10.0 million, driven by higher cash earnings and lower interest payments, partially offset by unfavorable changes in net working capital, particularly a decrease in payables and accrued liabilities due to milestone payments - Cash flows from operating activities increased by $10.0 million, driven by higher cash earnings and $16.4 million lower interest payments, partially offset by unfavorable changes in net working capital (e.g., $20 million in product supply milestone payments)[109] Investing activities Cash flows from investing activities decreased by $233.3 million, primarily due to a $344.0 million decline in proceeds from investments (maturities of Global Products sale proceeds) and higher capital expenditures ($7.3 million) and acquisition activity ($4.2 million). This was partially offset by increased net proceeds from the sale of operations ($124.7 million) from a Refranchising Transaction - Investing cash flows decreased by $233.3 million, mainly due to a $344.0 million decline in proceeds from investments (maturities of Global Products sale proceeds) and increased capital expenditures ($7.3 million) and acquisition activity ($4.2 million)[110] - This was partially offset by $124.7 million in increased net proceeds from the sale of operations, primarily from a Refranchising Transaction of 39 company-operated stores[110] Financing activities Cash flows used in financing activities decreased by $568.8 million, largely due to $430.0 million lower net repayments on borrowings (driven by prior year tender offer for 2030 Notes) and $151.8 million lower share repurchase activity. This was partially offset by $16.4 million in excise tax payments related to prior share repurchases - Cash flows used in financing activities decreased by $568.8 million, primarily due to $430.0 million lower net repayments on borrowings (prior year tender offer for 2030 Notes) and $151.8 million lower share repurchase activity[111] - This decrease was partially offset by $16.4 million in excise tax payments, largely from fiscal 2023 share repurchases subject to the Inflation Reduction Act[111] Continuing operations free cash flow Free cash flow from continuing operations increased to $19.7 million for the nine months ended June 30, 2025, up from $17.0 million in the prior year. This increase was driven by higher operating cash flows, partially offset by increased capital expenditures, particularly in maintenance capital expenditures due to growing store count Free Cash Flow (Nine months ended June 30, in millions) | Metric | 2025 | 2024 | | :-------------------------------- | :----- | :----- | | Cash flows provided by operating activities | $180.0 | $170.0 | | Less: Maintenance capital expenditures | $(35.1) | $(23.0) | | Free cash flow excluding growth capital expenditures | $144.9 | $147.0 | | Less: Growth capital expenditures | $(125.2) | $(130.0) | | Free cash flow | $19.7 | $17.0 | - The increase in free cash flow was due to higher operating cash flows, partially offset by increased capital expenditures, mainly maintenance capital expenditures for the growing store count[113] Debt As of June 30, 2025, approximately 49% of Valvoline's outstanding borrowings had fixed interest rates. The Company was in compliance with all debt covenants and maintained a borrowing capacity of $341.5 million under its Revolver - Approximately 49% of Valvoline's outstanding borrowings had fixed interest rates as of June 30, 2025[114] - Valvoline was in compliance with all debt covenants and had $341.5 million remaining borrowing capacity under its Revolver as of June 30, 2025[114] Share repurchases In July 2024, the Board approved a $400.0 million share repurchase authorization. During the nine months ended June 30, 2025, the Company repurchased 1.6 million shares for $59.8 million, with $325.0 million remaining. Share repurchase activity was paused in Q2 fiscal 2025 to accelerate debt repayment related to the upcoming Breeze Autocare acquisition - A $400.0 million share repurchase authorization was approved in July 2024, with $325.0 million remaining as of June 30, 2025[115] - During the nine months ended June 30, 2025, Valvoline repurchased 1.6 million shares for $59.8 million[115] - Share repurchase activity was paused in Q2 fiscal 2025 to accelerate debt repayment in connection with the Term Loan B for the Breeze Autocare acquisition[117] Summary As of June 30, 2025, Valvoline had $68.3 million in cash and cash equivalents, $1,079.7 million in total debt, and $341.5 million in remaining borrowing capacity. Management believes the Company has sufficient liquidity to meet its operational and financial obligations for the next twelve months - As of June 30, 2025, Valvoline had $68.3 million in cash and cash equivalents, $1,079.7 million in total debt, and $341.5 million in remaining borrowing capacity[118] - Management believes the Company has sufficient liquidity from current cash, operations, and existing financing to meet its obligations for the next twelve months[121] New Accounting Pronouncements This section refers to Note 1 for a discussion and analysis of recently issued accounting pronouncements and their potential impacts on Valvoline's financial statements - Refer to Note 1 for details on new accounting pronouncements and their impacts on Valvoline[122] Critical Accounting Policies and Estimates Management reassessed its critical accounting estimates and determined there were no changes during the nine months ended June 30, 2025, from those disclosed in the Annual Report on Form 10-K for fiscal year ended September 30, 2024 - No changes were identified in critical accounting estimates during the nine months ended June 30, 2025[123] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management reassessed the Company's quantitative and qualitative market risk disclosures and concluded there were no material changes to market risks during the nine months ended June 30, 2025, compared to those previously disclosed in its Annual Report on Form 10-K - No material changes to market risks were identified during the nine months ended June 30, 2025[124] ITEM 4. CONTROLS AND PROCEDURES This section details the evaluation of Valvoline's disclosure controls and procedures, which were deemed not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting related to the ERP system implementation. Despite this, management performed additional procedures to ensure fair presentation of financial statements. Remedial measures are actively being implemented to address the identified deficiencies Evaluation of Disclosure Controls and Procedures Valvoline's CEO and CFO concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting. However, management performed additional analyses and procedures to ensure the condensed consolidated financial statements are fairly presented - Valvoline's disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting[126] - Despite the material weakness, management performed additional procedures to ensure the condensed consolidated financial statements are fairly presented in all material respects, with no identified material misstatements[127][128] Changes in Internal Control Other than ongoing remediation efforts, there were no significant changes in Valvoline's internal control over financial reporting during the fiscal quarter ended June 30, 2025 - No significant changes in internal control over financial reporting occurred during the quarter, other than remediation efforts[129] Material Weakness in Internal Control over Financial Reporting A material weakness in internal control over financial reporting persisted as of June 30, 2025, stemming from the ERP system implementation and related ineffective information technology general controls (ITGCs) and business process controls. Specifically, deficiencies were noted in user access controls, change management controls, evidence of third-party IT service organization control effectiveness, and the design of certain business process controls - A material weakness in internal control over financial reporting continued to exist as of June 30, 2025, originating from the ERP system implementation and related ineffective ITGCs and business process controls[130][131] - Specific deficiencies include inadequate user access controls, insufficient change management controls, lack of evidence for third-party IT service organization control effectiveness, and design flaws in certain business process controls[131] Remedial Measures Management is actively implementing remedial measures to address the material weakness, including stabilizing the ERP, engaging outside consulting support, enhancing access and change management controls, implementing new ITGCs for HRIS, evaluating third-party service organization controls, and conducting end-to-end business process walkthroughs. These efforts are expected to be completed in fiscal 2025 - Remedial efforts include stabilizing the ERP, engaging outside consulting, enhancing access and change management controls, implementing new ITGCs for HRIS, evaluating third-party service organization controls, and conducting end-to-end business process walkthroughs[133][136] - These remedial efforts are in varying stages of implementation and are expected to be completed in fiscal 2025, with effectiveness confirmed upon consistent control execution and successful operational testing[134] ITEM 5. OTHER INFORMATION This section states that no director or officer adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2025 - No director or officer adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2025[135] PART II – OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section refers to Note 7 of the Condensed Consolidated Financial Statements for a description of Valvoline's legal proceedings - Refer to Note 7 for a description of Valvoline's legal proceedings[138] ITEM 1A. RISK FACTORS During the reporting period, there were no material changes to the Company's risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2024 - No material changes to the Company's risk factors were identified during the period covered by this report[139] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section indicates that there were no unregistered sales of equity securities or use of proceeds during the reporting period - There were no unregistered sales of equity securities and use of proceeds[140] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications (31.1, 31.2, 32) and XBRL-related documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104) - The report includes certifications (31.1, 31.2, 32) and various XBRL taxonomy extension documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[141] SIGNATURE - The report was signed by J. Kevin Willis, Chief Financial Officer, on behalf of Valvoline Inc. on August 6, 2025[143]