10-Q 1 vvv-20220331.htm 10-Q vvv-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
______________________
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 001-37884
VALVOLINE INC.
vvv-20220331_g1.jpg
(Exact name of registrant as specified in its charter)
Kentucky
30-0939371
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
(Address of principal executive offices) (Zip Code)

Telephone Number (859) 357-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareVVVNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes þ     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes      No þ
At April 30, 2022, there were 178,197,668 shares of the registrants common stock outstanding.




2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Comprehensive Income

Three months ended
March 31
Six months ended
 March 31
(In millions, except per share amounts - unaudited) 2022202120222021
Sales$886 $701 $1,744 $1,354 
Cost of sales636 454 1,250 879 
Gross profit250 247 494 475 
Selling, general and administrative expenses137 129 272 246 
Legacy and separation-related expenses6  9 1 
Equity and other income, net(10)(13)(25)(27)
Operating income117 131 238 255 
Net pension and other postretirement plan income(9)(14)(18)(27)
Net interest and other financing expenses18 55 35 75 
Income before income taxes108 90 221 207 
Income tax expense27 22 53 52 
Net income$81 $68 $168 $155 
NET EARNINGS PER SHARE
Basic$0.45 $0.37 $0.93 $0.84 
Diluted$0.45 $0.37 $0.93 $0.84 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic180 182 180 184 
Diluted181 183 181 184 
COMPREHENSIVE INCOME
Net income$81 $68 $168 $155 
Other comprehensive income (loss), net of tax
Currency translation adjustments (7) 11 
Amortization of pension and other postretirement plan prior service credits(1)(2)(1)(4)
Unrealized gain on cash flow hedges7 1 8 1 
Other comprehensive income (loss)6 (8)7 8 
Comprehensive income$87 $60 $175 $163 

See Notes to Condensed Consolidated Financial Statements.
3


Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets

(In millions, except per share amounts - unaudited)March 31
2022
September 30
 2021
Assets
Current assets
Cash and cash equivalents$118 $230 
Receivables, net563 496 
Inventories, net276 258 
Prepaid expenses and other current assets59 53 
Total current assets1,016 1,037 
Noncurrent assets
Property, plant and equipment, net843 817 
Operating lease assets313 307 
Goodwill and intangibles, net788 775 
Equity method investments53 47 
Deferred income taxes13 14 
Other noncurrent assets222 194 
Total noncurrent assets2,232 2,154 
Total assets$3,248 $3,191 
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt$47 $17 
Trade and other payables238 246 
Accrued expenses and other liabilities300 306 
Total current liabilities585 569 
Noncurrent liabilities
Long-term debt1,648 1,677 
Employee benefit obligations237 258 
Operating lease liabilities280 274 
Deferred income taxes42 26 
Other noncurrent liabilities256 252 
Total noncurrent liabilities2,463 2,487 
Commitments and contingencies
Stockholders’ equity
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
  
Common stock, par value $0.01 per share, 400 shares authorized; 179 and 180 shares issued and outstanding at March 31, 2022 and September 30, 2021, respectively
2 2 
Paid-in capital36 35 
Retained earnings147 90 
Accumulated other comprehensive income15 8 
Total stockholders’ equity200 135 
Total liabilities and stockholders’ equity
$3,248 $3,191 

See Notes to Condensed Consolidated Financial Statements.
4


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

Six months ended March 31, 2022
(In millions, except per share amounts - unaudited)Common stockPaid-in capitalRetained earningsAccumulated other comprehensive incomeTotals
SharesAmount
Balance at September 30, 2021180 $2 $35 $90 $8 $135 
Net income— — — 87 — 87 
Dividends paid, $0.125 per common share
— — — (23)— (23)
Stock-based compensation, net of issuances— — (2)— — (2)
Repurchases of common stock — — (31)— (31)
Other comprehensive income, net of tax— — — — 1 1 
Balance at December 31, 2021180 $2 $33 $123 $9 $167 
Net income— — — 81 — 81 
Dividends paid, $0.125 per common share
— — — (22)— (22)
Stock-based compensation, net of issuances— — 3 — — 3 
Repurchases of common stock(1)— — (35)— (35)
Other comprehensive income, net of tax— — — — 6 6 
Balance at March 31, 2022179 $2 $36 $147 $15 $200 
Six months ended March 31, 2021
(In millions, except per share amounts - unaudited)Common stockPaid-in capitalRetained deficitAccumulated other comprehensive income Totals
SharesAmount
Balance at September 30, 2020185 $2 $24 $(110)$8 $(76)
Net income— — — 87 — 87 
Dividends paid, $0.125 per common share
— — — (23)— (23)
Stock-based compensation, net of issuances— — 1 — — 1 
Repurchases of common stock(2)— — (58)— (58)
Cumulative effect of adoption of credit losses standard, net of tax— — — (2)— (2)
Other comprehensive income, net of tax— — — — 16 16 
Balance at December 31, 2020183 $2 $25 $(106)$24 $(55)
Net income— — — 68 — 68 
Dividends paid, $0.125 per common share
— — — (23)— (23)
Stock-based compensation, net of issuances— — 4 — — 4 
Repurchases of common stock(2)— — (42)— (42)
Other comprehensive loss, net of tax— — — — (8)(8)
Balance at March 31, 2021181 $2 $29 $(103)$16 $(56)

See Notes to Condensed Consolidated Financial Statements.
5



Valvoline Inc. and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

Six months ended
March 31
(In millions - unaudited)20222021
Cash flows from operating activities
Net income$168 $155 
Adjustments to reconcile net income to cash flows from operating activities
Loss on extinguishment of debt 36 
Depreciation and amortization50 44 
Deferred income taxes15  
Pension contributions(1)(4)
Stock-based compensation expense7 6 
Other, net(3)2 
Change in assets and liabilities
Receivables(74)(14)
Inventories(19)(13)
Payables and accrued liabilities 4 
Other assets and liabilities(47)(26)
Total cash provided by operating activities96 190 
Cash flows from investing activities
Additions to property, plant and equipment(67)(74)
Repayments of notes receivable5 12 
Acquisitions of businesses(23)(223)
Other investing activities, net1 9 
Total cash used in investing activities(84)(276)
Cash flows from financing activities
Proceeds from borrowings185 546 
Repayments on borrowings(186)(800)
Premium paid to extinguish debt (26)
Repurchases of common stock(66)(100)
Cash dividends paid(45)(46)
Other financing activities(12)(5)
Total cash used in financing activities(124)(431)
Effect of currency exchange rate changes on cash, cash equivalents and restricted cash1 4 
Decrease in cash, cash equivalents and restricted cash(111)(513)
Cash, cash equivalents and restricted cash - beginning of period231 761 
Cash, cash equivalents and restricted cash - end of period$120 $248 

See Notes to Condensed Consolidated Financial Statements.
6



7


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

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline Inc. (“Valvoline” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021. Certain prior period amounts disclosed herein have been reclassified to conform to the current presentation.

Use of estimates, risks and uncertainties

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for interim periods are not necessarily indicative of those to be expected for the entire year, particularly in light of the novel coronavirus ("COVID-19") global pandemic and its effects.

Valvoline is subject to continued risks and uncertainties as a result of the COVID-19 pandemic. The extent to which the evolving pandemic impacts the Company's financial condition cannot be reasonably quantified or estimated and will depend on a number of factors including the ultimate magnitude and duration of the pandemic. The Company has substantially maintained its operations throughout the pandemic and continues to place additional emphasis on the safety and wellness of its employees and customers.

Strategic separation

On October 12, 2021, Valvoline announced its intention to pursue a separation of its two reportable segments, Retail Services and Global Products. Valvoline is evaluating the alternatives to accomplish the separation of these two businesses, and consummation of the separation will be subject to final approval by Valvoline's Board of Directors (the “Board”). No timetable has currently been established for completion of the separation, which is expected to enable the two businesses to enhance focus on their distinct customer bases, strategies and operational needs.

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. The Financial Accounting Standards Board ("FASB") issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on Valvoline’s condensed consolidated financial statements, and therefore, is not described below.

Issued but not yet adopted

In March 2020, the 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. This guidance can be applied on a prospective basis through the end of December 2022 for qualifying modified arrangements. The Company has interest rate swap hedging arrangements and variable rate long-term debt for which existing payments are based on LIBOR tenors expected to cease in June 2023. As of March 31, 2022, 29% of Valvoline’s outstanding total long-term debt and $275 million of its interest rate swap agreements are under existing arrangements that mature following LIBOR cessation and do not contain fallback provisions to alternative reference rates. The Company expects to adopt this guidance to the extent there are qualifying contractual modifications prior to the end of
8


calendar 2022 and does not expect application of this guidance to have a material impact on its condensed consolidated financial statements.

NOTE 2 - FAIR VALUE MEASUREMENTS

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

As of March 31, 2022
(In millions)TotalLevel 1Level 2Level 3
NAV (a)
Cash and cash equivalents
Time deposits$20 $— $20 $— $— 
Prepaid expenses and other current assets
Currency derivatives (b)
4 — 4 — — 
Other noncurrent assets
Non-qualified trust funds8 —  — 8 
Interest rate swap agreements12 — 12 — — 
Total assets at fair value$44 $ $36 $— $8 
Accrued expenses and other liabilities
Currency derivatives (b)
$5 $— $5 $— $— 
Other noncurrent liabilities
Deferred compensation obligations24 — — — 24 
Total liabilities at fair value$29 $ $5 $— $24 
As of September 30, 2021
(In millions)TotalLevel 1Level 2Level 3
NAV (a)
Cash and cash equivalents
Money market funds$13 $13 $— $— $— 
Time deposits87 — 87 — — 
Prepaid expenses and other current assets
Currency derivatives (b)
3 — 3 — — 
Other noncurrent assets
Non-qualified trust funds11 — 4 — 7 
Interest rate swap agreements2 2 — 
Total assets at fair value$116 $13 $96 $— $7 
Accrued expenses and other liabilities
Currency derivatives (b)
$3 $— $3 $— $— 
Interest rate swap agreements1 — 1 — — 
Other noncurrent liabilities
Deferred compensation obligations24 — — — 24 
Total liabilities at fair value$28 $ $4 $— $24 
(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 $150 million and $137 million as of March 31, 2022 and September 30, 2021, respectively.
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There were no material gains or losses recognized in earnings during the three and six months ended March 31, 2022 or 2021 related to these assets and liabilities.

Long-term debt

Long-term debt is reported in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the disclosure above of financial assets and liabilities measured at fair value within the condensed consolidated financial statements on a recurring basis. The fair values of the Company's outstanding fixed rate senior notes shown below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy.

March 31, 2022September 30, 2021
(In millions)Fair value
Carrying value (a)
Unamortized
discounts and
issuance costs
Fair value
Carrying value (a)
Unamortized
discounts and
issuance costs
2030 Notes$549 $593 $(7)$622 $593 $(7)
2031 Notes464 529 (6)531 529 (6)
Total$1,013 $1,122 $(13)$1,153 $1,122 $(13)
(a)Carrying values shown are net of unamortized discounts and debt issuance costs.

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

NOTE 3 - ACQUISITIONS

The Company acquired 21 service center stores in single and multi-store transactions for an aggregate purchase price of $23 million during the six months ended March 31, 2022. 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 Services system to over 1,650 system-wide service center stores.

During the six months ended March 31, 2021, the Company acquired 100 service center stores in single and multi-store transactions, including 28 former franchise locations converted to company-owned service center stores and 12 franchise-operated service center stores, for an aggregate purchase price of $223 million.

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

(In millions)20222021
Inventories$ $2 
Other current assets 1 
Property, plant and equipment3 82 
Operating lease assets7 26 
Goodwill (a)
20 180 
Intangible assets (b)
Reacquired franchise rights (c)
 34 
Other 3 
Other current liabilities (7)
Operating lease liabilities(7)(24)
Other noncurrent liabilities (74)
Net assets acquired$23 $223 
(a)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.
(b)Intangible assets acquired during the six months ended March 31, 2021 have weighted average amortization periods of 11 years.
(c)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 11 years for the rights reacquired in fiscal 2021. 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.

NOTE 4 - GOODWILL

The following table summarizes changes in the carrying amount of goodwill by reportable segment and in total during the six months ended March 31, 2022:

(In millions)Retail ServicesGlobal ProductsTotal
Balance at September 30, 2021$513 $131 $644 
Acquisitions (a)
20  20 
Currency translation1  1 
Balance at March 31, 2022$534 $131 $665 
(a)Includes acquisitions within the Retail Services reportable segment of 21 service center stores. Refer to Note 3 for additional details.


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NOTE 5 - DEBT

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

(In millions)March 31
2022
September 30
 2021
2031 Notes$535 $535 
2030 Notes600 600 
Term Loan475 475 
Revolver (a)
  
Trade Receivables Facility (b)
59 59 
China Construction Facility (c)
39 39 
China Working Capital Facilities (d)
  
Debt issuance costs and discounts(13)(14)
Total debt1,695 1,694 
Current portion of long-term debt47 17 
Long-term debt$1,648 $1,677 
 
(a)As of March 31, 2022, the total borrowing capacity remaining under the $475 million revolving credit facility was $471 million due to a reduction of $4 million for letters of credit outstanding.
(b)The Trade Receivables Facility had $116 million of borrowing capacity remaining and the wholly-owned financing subsidiary owned $321 million of outstanding accounts receivable as of March 31, 2022.
(c)The remaining borrowing capacity under the China Construction Facility was approximately $4 million as of March 31, 2022.
(d)The China Working Capital Facilities include two revolving credit facilities with no outstanding borrowings and a combined capacity of approximately $36 million as of March 31, 2022. These facilities expire in the first quarter of fiscal 2023 and bear interest at the local prime rate.

As of March 31, 2022, Valvoline was in compliance with all covenants under its long-term borrowings.

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 endedSix months ended
March 31March 31
(In millions)2022202120222021
Income tax expense$27 $22 $53 $52 
Effective tax rate percentage25.0 %24.4 %24.0 %25.1 %

The increase in income tax expense for the three months ended March 31, 2022 was principally driven by higher pre-tax earnings, in addition to an increased effective tax rate due to unfavorable discrete activity. Income tax expense remained relatively flat with higher pre-tax earnings in the six months ended March 31, 2022, resulting in a lower effective tax rate that was driven by discrete benefits in the current year-to-date period.


12


NOTE 7 – EMPLOYEE BENEFIT PLANS

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

Pension benefitsOther postretirement benefits
(In millions)2022202120222021
Three months ended March 31
Service cost$1 $ $ $ 
Interest cost11 11 1  
Expected return on plan assets(20)(21)  
Amortization of prior service credits  (1)(4)
Net periodic benefit income$(8)$(10)$ $(4)
Six months ended March 31
Service cost$1 $1 $ $ 
Interest cost22 22 1  
Expected return on plan assets(40)(43)  
Amortization of prior service credit  (1)(6)
Net periodic benefit income$(17)$(20)$ $(6)

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 endedSix months ended
March 31March 31
(In millions, except per share amounts)2022202120222021
Numerator 
Net income $81 $68 $168 $155 
Denominator 
Weighted average common shares outstanding180  182 180 184 
Effect of potentially dilutive securities
1 1 1  
Weighted average diluted shares outstanding181 183 181 184 
  
Earnings per share 
Basic$0.45  $0.37 $0.93 $0.84 
Diluted$0.45  $0.37 $0.93 $0.84 
NOTE 10 - REPORTABLE SEGMENT INFORMATION

Valvoline manages its business through the following two reportable segments:

Retail Services - services the passenger car and light truck quick lube market in the United States and Canada with a broad array of preventive maintenance services and capabilities performed through Valvoline’s retail network of company-operated and independent franchised service center stores, in addition to independent Express Care stores that service vehicles with Valvoline products.

Global Products - sells engine and automotive preventive maintenance products in more than 140 countries and territories to mass market and automotive parts retailers, installers, and commercial customers, including original equipment manufacturers (“OEM”), to service light- and heavy-duty vehicles and equipment.

These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline defines as segment operating income adjusted for depreciation and amortization and certain key items impacting comparability.

Certain indirect expenses are recognized within each segment based on the estimated utilization of indirect resources. Costs to support corporate functions and certain non-operational and corporate activity that is not directly attributable to a particular segment are not included in the segment operating results regularly utilized by the chief operating decision maker. This activity is separately delineated within Corporate to reconcile to consolidated results.

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Segment financial results

The following presents sales and adjusted EBITDA for each reportable segment:

Three months endedSix months ended
March 31March 31
(in millions)2022202120222021
Sales
Retail Services$350 $285 $696 $539 
Global Products536 416 1,048 815 
Consolidated sales$886 $701 $1,744 $1,354 
Adjusted EBITDA
Retail Services$95 $95 $193 $165 
Global Products81 80 158 174 
Total operating segments176 175351339
Corporate
(18)(18)(37)(33)
Consolidated Adjusted EBITDA158 157 314 306 
Reconciliation to income before income taxes:
Net interest and other financing expenses(18)(55)(35)(75)
Depreciation and amortization(25)(23)(50)(44)
Key items: (a)
Net pension and other postretirement plan income9 14 18 27 
Legacy and separation-related expenses(6) (9)(1)
LIFO charge(3)(5)(9)(<