A C C E L E R A T I N G
I N T O T H E
F U T U R E
2 0 1 7 A N N U A L R E P O R T
Contents
From Our CEO........................................ 1
Our Future ............................................. 2
Financial Highlights ............................... 3
Hands-On Expertise Around the Globe ... 4
Core North America .............................. 6
Quick Lubes .......................................... 8
International ........................................ 10
We are building the world’s leading engine
and automotive maintenance business by
bringing Hands-On Expertise for the
benefit of our customers every day.
VALUES
It all starts with our people
Corporate Governance.......................... 12
Safety is always our priority
Shareholder Information ........ Inside Back
We are committed to winning … the right way
Non-GAAP Measures:
This Annual Report includes several non-GAAP measures,
including EBITDA, Adjusted EBITDA and free cash flow.
As further described in our 2017 ForFF m 10-K, these
measures are not defined in U.S. GAAP and do not
purport to be alternatives to net income or cash flows
from operating activities as measures of operating
performance or cash flows. However, management
believes the use of these non-GAAP measures on both
a consolidated and reportable segment basis assists
investors in understanding the ongoing operating
performance of Valvoline’s business by presenting
comparable financial results between periods. The
non-GAAP information provided may not be consistent
with the methodologies used by other companies and
should not be construed as an alternative to reported
results determined in accordance with U.S. GAAP. APP ll
non-GAAP information has been reconciled with reported
U.S. GAAP results in the “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” section of our 2017 Form 10-K, which has
been enclosed with this Annual Report and is available
online on our website at http://investors.valvoline.com/
sec-filings, and at the SEC’s website, http://www.sec.gov.
Forward-Looking Statements:
As further described in our 2017 ForFF m 10-K, which has
been included in this Annual Report and is available on
our website at http://investors.valvoline.com/sec-filings,
and on the SEC’s website, http://www.sec.gov, tv his
Annual Report includes forward-looking statements
within the meaning of Section 27A of the Securities Act
of 1933 as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. We have identified
some of these forward-looking statements with words
such as “anticipates,” “believes,” “expects,” “estimates,”
“is likely,”yy “predicts,” “projects,” “forecasts,” “may,”
“will,” “should,” and “intends” and the negative
of these words or other comparable terminology.
These statements are based on our expectations and
assumptions as of the date such statements are made.
You should not rely upon forward-looking statements as
predictions of future events. Except as required by law,
we undertake no obligation to update or revise these
forward-looking statements for any reason, even if new
information becomes available in the future.
We work hard, celebrate success and have fun
We strive for greatness
VOW
Our vow is to bring “Hands-On Expertise” for the benefit of our
customers every day, moving the business forward with speed
and excellence.
VISION
We are building the world’s leading engine and automotive maintenance
business. We will accelerate growth around the world by increasing our
focus and investment in:
The Valvoline™ brand, built on superior products and service
The industry’s best retail services model
Technology that enables speed, innovation and increased
efficiency in every aspect of our business
Strong value-adding relationships with our channel partners
Opposite page:
Our new state-of-the-art,
sustainably-built Valvoline
World Headquarters opened in
March 2017 in Lexington, Ky.
Dear Fellow Stakeholders:
We are off to a strong start.
This might be a surprising statement from a 151-year-old company, but
we are truly just getting started, having successfully completed our first
year as a newly independent, public company.
First, we delivered strong profitability and cash flow: record EBITDA of
$447 million from our core operating segments — Core North America,
Quick Lubes and International — and $196 million of free cash flow.
The strength and stability of our business model was especially evident
in 2017, as this was accomplished while facing significant raw material
inflation and covering the investments required in establishing a solid
public company infrastructure.
We grew the business in the key strategic areas: premium mix and branded volume growth in Core
North America, broad-based volume growth in International and exceptionally strong same-store
sales performance in Quick Lubes. We also continued to invest in growing Valvoline Instant Oil
ChangeSM through both acquisitions and development agreements with our franchisees, adding 59
stores to the network in 2017 and building a base for further expansion in the years ahead.
We took action to significantly reduce the risk, volatility and costs related to the pension
obligations that we assumed as part of our separation from Ashland, our former parent company.
Finally, we established a practice of returning capital to shareholders. We started a quarterly
dividend and began a share repurchase program that together returned $90 million in cash.
Today, Valvoline is accelerating into the future.
With a successful year one behind us, our focus shifts to accelerating our growth by delivering
greater and greater value for current and new customers. As you will see in the following pages,
Valvoline is driving innovation across the business — in our products, our services and new
technology solutions. Combined with the Hands-On Expertise of our team, we are off to a great
start in building the world’s leading engine and automotive maintenance business.
Sincerely,
Samuel J. Mitchell, Jr.
Chief Executive Officer
1
Our Future
Global Product Platforms
Product quality and innovation is at the core of the Valvoline
brand. As our global footprint grows, we are building broad
product platforms to meet the evolving needs of both
passenger car and heavy duty customers.
P R ODUCTS
S
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Services
Owning and operating
VIOC stores gives
us unique insights and
capabilities in delivering a
superior customer experience.
Valvoline is continuously improving
the installer and retail customer experience
– innovating unique packaging solutions, providing
customized marketing programs and call center services, and
investing in employee recruiting and training services.
Technology
Valvoline is staying one
step ahead by developing
cutting-edge technology that
delivers high-value solutions
to our customers, including: data
analytics, e-commerce, digital marketing,
mobile applications and engine diagnostics.
2
Financial Highlights1
Fiscal Years Ended September 30
Sales
Operating Income
Earnings before interest, taxes, depreciation and amortization (EBITDA)2
Adjusted EBITDA2
Net Income
Diluted earnings per share3
Weighted average common shares outstanding3
Cash flows from operating activities
Additions to property, plant and equipment
Free Cash Flow2, 4
Same-Store Sales (SSS) Growth5
Valvoline Instant Oil Change Store Count5
2017
$2,084
2016
2015
$1,929
$1,967
$532
$574
$517
$304
$1.49
204
$(130)
$68
$196
7.4%
1,127
$431
$468
$457
$273
$1.60
170
$311
$66
$245
7.5%
1,068
$323
$335
$421
$196
$1.15
170
$330
$45
$285
7.7%
942
1. In millions, except store counts and per share amounts.
2. See attached 2017 Form 10-K for a reconciliation of non-GAAP measures.
3. Refer to the attached Form 10-K for additional information regarding revisions to prior-period earnings per share (EPS) calculations.
4. Excludes a nearly $400 million voluntary pension contribution in 2017.
5. System-wide store locations, including company-owned and franchise stores.
Keys to Our Financial Performance
Drivers of Strong Profit
• Mix shift toward premium products, particularly in Core North America1
• 11 consecutive years of system-wide SSS growth in VIOC stores2
• Consistent volume and profit growth in international markets
(cid:135)(cid:172)(cid:51)(cid:85)(cid:82)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:68)(cid:90)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)
Growth in Adjusted EBITDA3
Fiscal Year Ended September 30
In millions
$342
$368
$421
$457
$517
2013
2014
2015
2016
2017
Adjusted EBITDA from Operating Segments4
(cid:51)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:50)(cid:51)(cid:40)(cid:37)(cid:3)(cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)5
1. Within U.S. branded lubricants.
2. System-wide SSS growth determined on a fiscal year basis with new stores included after first full fiscal year of operation.
3. Excludes key items; see attached 2017 Form 10-K for a reconciliation of Adjusted EBITDA to Net Income.
4. Adjusted EBITDA from Operating Segments is the contribution to Adjusted EBITDA from our three operating segments of Core North America, Quick Lubes and International.
5. Represents portion of Adjusted EBITDA from pension and OPEB income, which was $11 million, $9 million, $9 million, $17 million and $70 million in fiscal 2013, 2014,
2015, 2016 and 2017, respectively.
3
EUROPE
Fast-growing business in a mature market.
Significantly expanded distributor
markets and established meaningful
original equipment manufacturer
(OEM) selling relationships.
NORTH AMERICA
Share growth and innovation in the large mature
market where Valvoline was born.
Laid a foundation as an independent, publicly traded
company. Made investments in product packaging,
digital marketing and infrastructure to move us
forward. Grew VIOC business through key acquisitions
and franchisee development agreements. Moved into
a new state-of-the-art world headquarters.
MIDDLE EAST & AFRICA
Foundational investments tapping into
an emerging market.
Making investments across channel
partners, supply chain capabilities
and product portfolio.
Major Offices
Research and Development Centers
Lubricant Blending and Packaging
Major Third-Party Production
Consumer Retail Locations
(VIOC, Express Care, etc.)
$2 B
FY17 revenue
LATIN AMERICA
Rapid growth and solid market
share with high potential for
additional growth.
Enhanced working partnership with
Cummins across the region.
140+
countries where
Valvoline is sold
5,600
employees
worldwide
4
CHINA
CHINA
Rapid growth in one of the world’s largest
lubricant markets.
Worked with OEM partners to develop an
exclusive extended-drain product, driving
substantial, rapid growth. Continued
to rapidly build channels to serve
the DIFM market segment.
INDIA
Strong growth and solid share
position through our joint venture
in an emerging market.
Opened new shared services center
to support global operations.
Strengthened relationships with
regional OEMs.
AUSTRALIA
Strong business and high share
in a mature market.
Experienced rapid growth in
heavy-duty business.
VALVOLINE TODAY
Hands-On Expertise
around the globe
Valvoline Inc. (NYSE: VVV) is one of the most recognized and respected premium consumer brands in the global
automotive lubricant industry. With a heritage that spans more than 150 years, we combine our premium automotive- and
engine-maintenance products and services with innovative technology and data to help our installer and retail customers
be stronger and more successful.
We are known across multiple channels, marketing our products and services through our fast-growing best-in-class retail
model, to do-it-yourself (DIY) and do-it-for-me customers (DIFM), and through heavy-duty commercial and industrial
channels. We have significant, stable and resilient positions in the United States in all key lubricant sales channels and also a
growing worldwide presence, with our products sold in more than 140 countries.
In 2017, we completed our separation from our former parent and are now an independent company poised to accelerate
into the future.
5
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Core North America grew branded volume and premium
mix for fiscal 2017. The results were driven by marketing
investments, product mix management, DIY share gains
and ongoing work to create value for our retail and
installer customers.
The Valvoline brand has had strong equity since
its inception in 1866, and it continues to grow in
relevancy to consumers and customers. Effective
digital marketing is a key driver. Valvoline has become
the No. 1 motor oil brand on social media by total
followers, and our loyalty site TeamValvoline.com
attracts millions of visitors each year.
Innovation in products and packaging launched in
2017 — including our EasyGDI™ fuel system service,
Advanced Bay Box1 packaging and Easy Pour
bottle1 — will continue to drive growth.
Our new Digital Account Service Hub, or DASH, is an
online platform designed to help customers and channel
partners increase productivity and grow their business.
Built from customer and channel partner feedback,
it serves as a one-stop shop, available 24/7 on any
device, to find tools and information they need to
manage day-to-day operations with Valvoline. Feedback
from the current pilot will guide improvements before
its full launch, which is planned for the second quarter
of fiscal 2018.
How we’re accelerating into the future
In 2018, innovation, targeted marketing and enhanced
services will continue to drive Core North America’s
growth as we leverage the new packaging we launched in
2017 and look to add important new products in 2018.
We will also take the next steps in our digital initiatives,
bringing our installer customers onto our new portal and
e-commerce platform.
Premium Mix
(percent of U.S. Branded Volume)
Fiscal Year Ended September 30
30.0
33.7
36.6
41.4
45.8
FY2013
FY2014
FY2015
FY2016
FY2017
FY2017 Lubricant Volume By Channel
48%
47%
5%
Retailer
Installer
Other
Advanced Bay Box™
Innovation in packaging and products is a key source of
differentiation for the Valvoline brand, which we expect
to help drive future growth. The Advanced Bay Box was
launched in mid-fiscal 2017 to bring innovation to our
installer channel.
Creating a new standard in bag-in-box technology, it’s
designed to make oil changes easier, faster and more cost
effective. It maximizes product use and minimizes waste.
Plus, it has features optimized for transport, product
communication and box disposal.
Paired with an innovative new pitcher with an integrated
funnel and OEM adapter system and an efficient and
attractive racking system, the Advanced Bay Box has been
received well by our installer customers.
It’s further proof that Valvoline is on the cutting edge of
packaging innovation.
6
1. Patents pending.
NEW EASY POUR DESIGN
FASTER. CLEANER. PROVEN.™
FASTER. CLEANER. PROVEN.™
Branded, synthetic products are where most of Core
Branded, synthetic products are where most of Core
North America’s growth originated in 2017. This
North America’s growth originated in 2017. This
is precisely where we launched our DIY packaging
is precisely where we launched our DIY packaging
innovation: the Easy Pour bottle.
innovation: the Easy Pour bottle.
The breakthrough bottle provides a cleaner, faster
The breakthrough bottle provides a cleaner, faster
pour by using a precision spout, anti-glug technology
pour by using a precision spout, anti-glug technology
and a centralized handle. The bottle was designed
and a centralized handle. The bottle was designed
over three years with input from the DIYers it serves,
over three years with input from the DIYers it serves,
demonstrating that we listen to and add value for
demonstrating that we listen to and add value for
our customers.
our customers.
The bottle has received strong early support from
The bottle has received strong early support from
retail customers. We’re confident it will strengthen
retail customers. We’re confident it will strengthen
the Valvoline brand as we expand it to our full line
the Valvoline brand as we expand it to our full line
of motor oils during fiscal 2018.
of motor oils during fiscal 2018.
The Easy Pull Tab™
makes for a cleaner,
easier open. Pull it.
Pour it.
The redesigned
Precision Pour Spout™
delivers a precise pour
with a clean cutoff for
a mess-free experience.
The Anti-Glug Tube™
The Anti-Glug Tube™
allows air to flow back
allows air to flow back
into the bottle, creating
into the bottle, creating
a smooth stream.
a smooth stream.
As part of our digital
As part of our digital
transformation initiative, we
transformation initiative, we
rolled out the pilot of our Digital
rolled out the pilot of our Digital
Account Services Hub (DASH)
Account Services Hub (DASH)
that will help customers and
that will help customers and
partners increase productivity
partners increase productivity
and grow their business by
and grow their business by
easily managing their daily
easily managing their daily
operations with Valvoline.
operations with Valvoline.
Our Core North America business
segment sells lubricants and other
automotive- and engine-maintenance
products primarily through two
channels: Do-It-Yourself (DIY), which
reaches consumers through more than
30,000 retail outlets; and Do-It-for-
Me (DIFM), which services consumers
through more than 12,000 dealerships,
repair shops, quick lubes and other
outlets in the United States and Canada.
Team Valvoline is what we call
our community of DIY and
brand enthusiasts. During fiscal
2017, 3.8 million users visited
TeamValvoline.com more than
5.7 million times; that’s almost
16 years of time spent on the
Team Valvoline website.
In response to gasoline direct
injection (GDI) technology’s
rise, Valvoline launched
EasyGDI First Defense
to combat the systems’
prevalent, inevitable carbon
buildup. The 30-minute
service expands our reach
within quick lubes, service
centers and tire shops.
7
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Quick Lubes — which includes our best-in-class retail
model, Valvoline Instant Oil Change (VIOC) — is one of
our company’s biggest growth engines.
In 2017, we expanded VIOC, both organically and
through acquisitions. System-wide, VIOC same-
store sales grew 7.4 percent — an impressive 11th
consecutive year of SSS growth.
The industry-leading VIOC model is built to deliver a
quick, easy and trusted experience for every customer,
every day. It is based on these core principles:
• The reason we win is because of our people.
We have an unwavering commitment to acquiring,
developing and protecting superior talent.
• Taking a hands-on approach to operating our
stores, serving our customers and supporting our
franchisees. In 2017, VIOC was named one of the
top 100 franchises by Franchise Times.
• Our proprietary tools, including point-of-sale
technology, the SuperPro™ Management System
and marketing platforms.
How we’re accelerating into the future
The proven VIOC business model gives us the
confidence to expand the system more aggressively
into high-growth, underserved areas of the United
States through ground-up development and
opportunistic acquisitions that further enhance our
geographic footprint. As we continue to improve the
customer experience, we are confident in our ability to
deliver SSS growth well into the future.
VIOC Store Count (units)
1,200
1,000
800
600
400
200
-
638
650
663
726
743
261
2013
272
279
342
384
2014
2015
2016
2017
Company
Franchise
VIOC Sales Per Store1
Fiscal Year Ended September 30
(000s)
5 . 6 %
’ 1 7 C A G R :
’ 0 7 -
$738
$713
$649
$672
$947
$882
$824
$774
$613
$579
$550
2007 2008 2009 2010
2011 2012 2013
2014 2015 2016 2017
Part of our Q
is to accelera
growth. We have st
development capab
meet growth targets
Quick Lubes strategy
rate company-store
strengthened our
abilities to help
ts as we work
t quick-lube
America.
to build the largest q
system in North A
8
Fulfilling our promise of
“Service You Can See.
Experts You Can Trust.”
we launched an innovation
called Valvoline CarCam
that allows customers to
see what is happening
while their vehicle is
serviced and they remain in
their car.
A monitor shows live views
of technicians working
both under the hood and
below the vehicle, a timer
indicating how long service
has lasted, promotions
and more.
The system is being
rolled out to all VIOC
service centers. It further
differentiates us from
our competitors, giving
consumers another reason
to be confident that the
work is done right.
The Valvoline CarCam™ monitor is
in full view of customers the entire
time their vehicle is being serviced.
The customer service at VIOC
is so consistent because our
technicians receive 270 hours
of training. In fact, our award-
winning talent development
program was named No. 2
at the Association for Talent
Development’s 2017 BEST
Awards.
Our Quick Lubes segment targets the
passenger car and light truck quick-lube
market through two channels: Valvoline
Instant Oil Change, where customers
buy preventive maintenance services,
including full-service oil changes at our
more than 1,100 company-owned and
franchised service centers; and Express
Care, our platform for independent
operators who buy Valvoline products
and display our brand.
Our growing Support Center
— named a best-in-class
contact center at the 2017 CCW
Excellence Awards — began
piloting a centralized program in
which all calls to company-owned
VIOC stores are routed through
our call center, allowing service
center employees to focus on
customers in their stores.
Our VIOC business leverages
digital and mobile technology
to communicate directly
and immediately with our
consumers to drive loyalty.
9
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In 2017, our International business segment, which
sells in more than 140 countries outside the United
States and Canada, grew by further developing
channels in existing global markets and investing
resources in developing new markets.
Full-year International volume was up 9 percent
in fiscal 2017 — or 11 percent including our joint
ventures — delivering another year of strong volume
growth. We made great strides to position Valvoline as
a high-performance premium brand.
Globally, we reinforced our ties with our longtime
partner Cummins, contributing to our strong results
for fiscal 2017. Led by our European team, we
developed Premium Blue™ GEO LA ES extended drain
motor oil. It is the only product in the market that is
approved for a 6,000-hour oil drain interval on the
Cummins QSV91G engines used in power generation
applications.
How we’re accelerating into the future
In International, we are investing to develop new
direct markets and strengthen our distributor network
to further extend our reach to customers; we are
making investments in marketing to build brand
awareness across the globe; and we are investing to
develop new OEM and heavy duty technologies and
marketing capabilities to grow our share in this large
category of the market.
k t
f th
t
Valvoline Emerging Markets
Sales Volume1,2
(MM Gal)
80
60
40
20
CAGR of 10%
2009 2010 2011 2012 2013 2014 2015 2016 2017
FY2017 Sales Breakdown1
16%
22%
Europe
Australia / Pacific
MEA
17%
Rest of Asia
17%
3%
8%
17%
China
Latin America
India
67% Emerging
Markets2
Markets2
1. Includes unconsolidated joi
nt ventures.
n
2. Emerging Markets consist o
o
f all countries outside of the U.S., Canada,
Australia and Europe.
Working with Cumm
Working with Cummins
m
through our joint venture
through our joint ve
e
e
in China, we develo
in China, we developed
o
a long-life engine oil that
a long-life engine o
i
t
allows customers to double the standard
allows customers t
uble the standard
o
drain intervals to 100,000 kilometers in the
drain intervals to 1
00 kilometers in the
0
new Cummins ISG engine series. Sales for
new Cummins ISG
the ISG engine lubricant, commercialized
the ISG engine lubr
r
in 2016 in China, have grown in fiscal 2017
in 2016 in China, h
h
as fleet operators in the on-highway market
as fleet operators i
n
capitalized on the significantly lower total
capitalized on the s
s
cost of operation.
cost of operation.
10
10
Hands-On Expertise In Markets Worldwide
Valvoline applies its Hands-On Expertise worldwide,
bringing a full array of automotive lubricants, coolants
and chemicals that are built to the precise standards
of each of our different markets.
Our global partnership with
England’s Manchester City
Football Club soccer team brings
a powerful association with a
top-tier sports property, helping
drive brand awareness and
business growth worldwide.
Our International business segment sells
products for consumer and commercial
vehicles and equipment in more than
140 countries, including key markets
across Asia, India, Europe, Latin America
and Australia-Pacific. To help market
our products and services, we make use
of wholly-owned affiliates and strong
relationships with joint ventures and
independent distributors.
Robust field testing of Premium
Blue LA GEO ES in Belgium on
a Cummins QSV91G engine
resulted in another extended
drain approval — three times
that of other oils in the
marketplace.
Valvoline and Cummins
built two race trucks for the
grueling SCORE Baja 1000
endurance race in Mexico.
The race’s punishing terrain
was ultimately devastating
for the trucks — but the
oil and engines performed
flawlessly.
11
The Valvoline leadership team, from left: Anthony R. Puckett; Julie M. O’Daniel; Thomas A. Gerrald II; Sara K. Stensrud; Craig A. Moughler; Mary E. Meixelsperger; Samuel J. Mitchell, Jr.;
Heidi J. Matheys; Victor T. Rios and Frances E. Lockwood
Valvoline is governed by an eight-member
board of directors, six of whom are
independent directors under New York Stock
Exchange (NYSE) guidelines. The board
operates the following committees, all of
which consist entirely of outside directors:
Audit; Compensation; and Governance and
Nominating. Valvoline’s Chief Executive
Officer (CEO) and Chief Financial Officer have
each submitted certifications concerning the
accuracy of financial and other information
in Valvoline’s annual report on Form 10-K,
as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002. The certifications
are filed as exhibits to Valvoline’s 2017 annual
report on Form 10-K. In addition, the NYSE
requires that the CEO of listed companies
annually certify that he or she is not aware of
any violation by the company of NYSE corporate
governance listing standards. Valvoline’s CEO,
Samuel J. Mitchell, Jr., submitted Valvoline’s
certification on February 23, 2017.
Valvoline Executive Officers
Samuel J. Mitchell, Jr.
Chief Executive Officer and Director
Mary E. Meixelsperger
Chief Financial Officer
Thomas A. Gerrald II
Senior Vice President, Core North America
Frances E. Lockwood
Chief Technology Officer
Heidi J. Matheys
Chief Marketing Officer
Craig A. Moughler
Senior Vice President, International and
Product Supply
Julie M. O’Daniel
Senior Vice President, General Counsel and
Corporate Secretary
Anthony R. Puckett
President, Quick Lubes
Victor T. Rios
Chief Information Officer and
Chief Digital Officer
Board of Directors
Richard J. Freeland 2, 3
President and Chief Operating Officer of Cummins Inc.
Stephen F. Kirk (Chairman) 2, 3
Former Senior Vice President and Chief Operating
Officer of Lubrizol Corporation
Stephen E. Macadam 2, 3
President and Chief Executive Officer of EnPro
Industries, Inc.
Vada O. Manager 1, 2a, 3
President and Chief Executive Officer of Manager
Global Consulting Group; Senior Counselor of APCO
Worldwide
Samuel J. Mitchell, Jr.
Chief Executive Officer of Valvoline Inc.
Charles M. Sonsteby 1a, 2, 3
Former Vice Chairman of The Michaels Companies
Mary J. Twinem 1, 2, 3a
Former Executive Vice President and Chief Financial
Officer of Buffalo Wild Wings, Inc.
William A. Wulfsohn
Chairman and Chief Executive Officer of Ashland
Global Holdings Inc.
David J. Scheve
Chief Accounting Officer and Controller
Sara K. Stensrud
Chief People and Communications Officer
Committees
1. Audit
2. Governance and Nominating
3. Compensation
a. Committee Chair
12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
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.
Kentucky
(State or other jurisdiction of incorporation or organization)
30-0939371
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
Telephone Number (859) 357-7777
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Securities Registered Pursuant to Section 12(g) of the Act: None
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and
post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
No
No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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. (Check
one):
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
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
The aggregate market value of voting common stock held by non-affiliates at March 31, 2017 was approximately $850 million. At November 10,
2017, there were 202,527,634 shares of common stock outstanding.
Portions of the Registrant’s definitive proxy statement (“Proxy Statement”) for its 2018 Annual Meeting of Shareholders, which will be filed within
120 days of the Registrant’s fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedule
2
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Valvoline has identified some of these
forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,”
“forecasts,” “may,” “will,” “should” and “intends” and the negative of these words or other comparable terminology. In addition,
Valvoline may from time to time make forward-looking statements in its quarterly reports and other filings with the Securities and
Exchange Commission (“SEC”), news releases and other written and oral communications.
These forward-looking statements are based on Valvoline’s current expectations and assumptions regarding, as of the date such
statements are made, Valvoline’s future operating performance and financial condition, strategic and competitive advantages,
leadership and future opportunities, as well as the economy and other future events or circumstances. Valvoline’s expectations and
assumptions include, without limitation, internal forecasts and analyses of current and future market conditions and trends,
management plans and strategies, operating efficiencies and economic conditions (such as prices, supply and demand, cost of raw
materials, and the ability to recover raw-material cost increases through price increases), and risks and uncertainties associated with
the following: demand for Valvoline’s products and services; sales growth in emerging markets; the prices and margins of Valvoline’s
products and services; the strength of Valvoline’s reputation and brand; Valvoline’s ability to develop and successfully market new
products and implement its digital platforms; Valvoline's ability to attract and retain key employees; Valvoline's ability to operate in
highly competitive markets; Valvoline’s ability to retain its largest customers; the success of Valvoline's marketing activities to
promote and grow its business; potential product liability claims; new laws or regulations or changes in existing laws or regulations;
imposition of new taxes or additional liabilities; Valvoline's ability to execute its growth strategy; third-party risks associated with
Valvoline's joint ventures; dependence on franchised locations in Valvoline's Quick Lubes business; business disruptions from natural
disasters; Valvoline’s substantial indebtedness (including the possibility that such indebtedness and related restrictive covenants may
adversely affect Valvoline’s future cash flows, results of operations, financial condition and Valvoline’s ability to repay debt);
Valvoline's ability to access the capital markets or obtain bank credit; operating as a stand-alone public company; Valvoline’s
relationship with Ashland; payment-related risks associated with company-owned and franchised Quick Lubes locations; failure,
caused by Valvoline, of the stock distribution to Ashland's stockholders to qualify for tax-free treatment, which may result in
significant tax liabilities to Ashland for which Valvoline may be required to indemnify Ashland; and the impact of acquisitions and/or
divestitures Valvoline has made or may make (including the possibility that Valvoline may not realize the anticipated benefits from
such transactions or encounter difficulties with integration). These forward-looking statements are subject to a number of known and
unknown risks, uncertainties and assumptions. In light of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Annual Report on Form 10-K, and actual results could differ materially and adversely from those
anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although Valvoline believes that the expectations
reflected in these forward-looking statements are reasonable, Valvoline cannot guarantee future results, level of activity, performance
or achievements. In addition, neither Valvoline nor any other person assumes responsibility for the accuracy and completeness of any
of these forward-looking statements. In light of the significant uncertainties in these forward-looking statements, you should not
regard these statements as a representation or warranty by Valvoline or any other person that Valvoline will achieve its objectives and
plans in any specified time frame, or at all. These forward-looking statements are as of the date of this Annual Report on Form 10-K.
Except as required by law, Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even
if new information becomes available in the future.
Other important factors that could cause actual results to differ materially from those contained in these forward-looking statements
are discussed under “Use of estimates, risks and uncertainties” in Note 2 of the Notes to Consolidated Financial Statements in this
Annual Report on Form 10-K. For a discussion of other factors and risks that could affect Valvoline’s expectations and operations, see
“Item 1A. Risk Factors” in this Annual Report on Form 10-K.
All forward-looking statements attributable to Valvoline are expressly qualified in their entirety by these cautionary statements as well
as others made in this Annual Report on Form 10-K, and hereafter in Valvoline’s other SEC filings and public communications. You
should evaluate all forward-looking statements made by Valvoline in the context of these risks and uncertainties.
3
ITEM 1. BUSINESS
General
A PART I
Valvoline Inc., a Kentucky corporation, is a worldwide producer, marketer and supplier of engine and automotive maintenance
products and services. The terms “Valvoline,” the “Company,” “we,” “us,” “management” and “our” as used herein refer to Valvoline
Inc., its predecessors and its consolidated subsidiaries, except where the context indicates otherwise. On September 28, 2016,
Valvoline completed its initial public offering (“IPO”) of common stock and trades on the New York Stock Exchange (“NYSE”) under
the symbol, “VVV.”
Valvoline is one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known
for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during
which it has developed powerful name recognition across multiple product and service channels.
Valvoline Inc. was incorporated in May 2016 as a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors
and consolidated subsidiaries is referred to herein as “Ashland”). Prior to this time, Valvoline operated as an unincorporated
commercial unit of Ashland. Following a series of restructuring steps prior to the IPO of Valvoline common stock, the Valvoline
business was transferred from Ashland to Valvoline such that the Valvoline business included substantially all of the historical
Valvoline business, as well as certain other assets and liabilities transferred to Valvoline by Ashland. In connection with the IPO, 34.5
million shares of Valvoline common stock were sold to investors and Ashland retained 170 million shares, representing approximately
83% of the total outstanding shares of Valvoline common stock.
Company Developments
On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the “Distribution”) through a
pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017, marking
the completion of Valvoline's separation from Ashland. Effective upon the Distribution, Ashland no longer owned any shares of
Valvoline common stock, and Valvoline was no longer a controlled and consolidated subsidiary of Ashland.
During the fiscal year ended September 30, 2017, Valvoline acquired 43 company-owned stores within the Quick Lubes reportable
segment, including 28 stores related to the acquisition of business assets from Time-It Lube LLC and Time-It Lube of Texas, LP in the
second fiscal quarter of 2017.
Reportable Segments
Valvoline’s reporting structure is composed of three reportable segments: Core North America, Quick Lubes and International.
Additionally, to reconcile to consolidated results, certain corporate and other non-operational matters are included in Unallocated and
other. Refer to the below for a description of each reportable segment:
Core North America - The Core North America segment sells Valvoline™ and other branded and private label products in the United
States and Canada to both retailers for consumers to perform their own automotive maintenance, referred to as “Do-It-Yourself” or
“DIY” consumers, as well as to installer customers who use Valvoline products to service vehicles owned by “Do-It-For-Me” or
“DIFM” consumers. Valvoline DIY sales are primarily to retail auto parts stores, such as NAPA Auto Parts, AutoZone, O’Reilly Auto
Parts and Advance Auto Parts, as well as leading mass merchandisers and independent auto part stores. Valvoline also sells branded
products and services to installer customers such as car dealers, general repair shops and third-party quick lube locations, including
Goodyear, Monro, Express Oil Change, TBC Retail Group, directly as well as through a national network of approximately 140
distributors. The Valvoline team also sells branded products and solutions to heavy duty customers, such as on-highway fleets and
construction companies and has a strategic relationship with Cummins Inc. (“Cummins”), a leading heavy duty engine manufacturer,
for co-branding products in the heavy duty business.
Quick Lubes - The Quick Lubes segment services the passenger car and light truck quick lube market through two platforms:
Valvoline’s company-owned and franchised Valvoline Instant Oil ChangeSM (“VIOC”) stores, the second largest U.S. retail quick lube
service chain by number of stores; and Express Care™, a quick lube customer platform developed for independent operators who
purchase Valvoline motor oil and other products pursuant to contracts while displaying Valvoline branded signage. VIOC centers offer
customers a quick, easy and trusted way to maintain their vehicles, utilizing well-trained technicians who have access to a proprietary
service process that sets forth rigorous protocols for both the steps that must be followed in the service of vehicles and for interactions
4
with customers. As of September 30, 2017, the VIOC network consisted of 384 company-owned and 743 franchised locations and
operated in 46 states with eleven years of consecutive same-store sales growth for both company-owned and franchised stores
(determined on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in
operation). The Express Care™ platform supports smaller (typically single store) operators that do not fit Valvoline’s franchise model
and typically offer other non-quick lube services such as auto repairs and car washes. As of September 30, 2017, there were 316
Express Care™ locations.
International - Valvoline’s International segment sells Valvoline™ and other branded products through wholly-owned affiliates, joint
ventures, licensees and independent distributors in approximately 140 countries outside of the United States and Canada. Key
international markets include China; India; Europe, Middle East, and Africa (“EMEA”); Latin America; and Australia Pacific.
Valvoline has a growing presence in a number of markets, with primary growth targets being China, India and select countries within
Latin America. International sales include products for both light duty (passenger cars, light trucks and two wheelers) and heavy duty
(heavy trucks, agricultural, mining and construction equipment). Light duty products are sold internationally primarily through
distributors to installer customers. Heavy duty products are sold either directly to key customers or through distributors. Valvoline
goes to market in its International business segment in three ways: (1) through its own local sales, marketing, and back office support
teams; (2) through joint ventures; and (3) through independent distributors. Valvoline has 50/50 joint ventures with Cummins in India,
China and Argentina, and smaller joint ventures in select countries in South America and Asia.
Unallocated and other - Unallocated and other generally includes items that are non-operational in nature and not directly attributable
to any of the reportable segments, such as components of pension and other postretirement benefit plan expense/income (excluding
service costs, which are allocated to the reportable segments), certain significant company-wide restructuring activities and legacy
costs or adjustments that relate to divested businesses, including costs related to the separation from Ashland.
The information required by Item 1 with respect to Valvoline's reportable segments and financial information regarding its geographic
operations can be found in Note 20 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual
Report on Form 10-K.
Industry Overview
Valvoline participates primarily in the global finished lubricants market. In total, global lubricants demand is estimated to be
approximately 11 billion gallons. Demand for passenger car motor oil and motorcycle oil accounted for approximately 21% of global
lubricant demand, while the remaining 79% of demand was for commercial and industrial products. The United States has historically
accounted for the largest amount of lubricant demand, followed by China and India. The lubricants market is impacted by the
following key drivers and trends:
•
•
•
•
Global lubricants market demand is shifting towards higher performance finished lubricants, largely driven by
advancements in vehicle/equipment design and original equipment manufacturer (“OEM”) requirements for improved
efficiency, reduced carbon footprints and optimized fuel consumption.
There has been increasingly stringent regulation, particularly in North America and Europe, aimed at reducing toxic
emissions, which has led to a continuous drive for innovation given changing specifications for lubricants.
Between 2007 and 2012, the North American transport lubes market experienced average annual volume declines of 2.7%
per annum, due in part to an increase in oil change intervals, which have resulted from changing OEM recommendations
and advancements in engine technology. However, market conditions have shown some indications of improvement due
to an increase in the number of cars on the road and miles driven.
A surge in the number of cars on the road has led to rapid expansion of passenger vehicle lubricant sales in developing
regions.
Business and Growth Strategies
The strength of Valvoline’s business model is the ability to generate profitable sales across multiple channels to market, leveraging the
Valvoline brand through effective marketing, innovative product technology and the capabilities of the Valvoline team. Valvoline has
delivered strong profits and return on capital, with balanced results. Today, Valvoline is a high margin, high free cash flow generating
business, with significant growth opportunities. Valvoline’s key business and growth strategies include:
•
growing and strengthening Valvoline’s quick lube network through organic store expansion, opportunistic, high-quality
acquisitions in both core and new markets within the VIOC system and strong sales efforts to partner with new Express
Care operators, in addition to continued same-store sales growth and profitability within Valvoline’s existing VIOC
5
system stores as a result of attracting new customers and increasing customer satisfaction, customer loyalty and average
transaction size;
accelerating international growth across key markets where demand for premium lubricants is growing, such as China,
India and select countries in Latin America, by building strong distribution channels in under-served geographies,
replacing less successful distributors and improving brand awareness among installer customers in those regions; and
leveraging innovation, in terms of product development, packaging, marketing and the implementation of Valvoline’s new
digital infrastructure, to strengthen market share and profitability.
•
•
Valvoline’s Products
Valvoline’s portfolio is designed to deliver quality product solutions to meet the needs of its wide variety of customers with varying
needs. Valvoline has a history of leading innovation with revolutionary products such as All Climate™, DuraBlend™, and MaxLife™.
In addition to the iconic Valvoline-branded passenger car motor oils and other co-branded and private label automotive lubricant
products, Valvoline provides a wide array of lubricants used in heavy duty equipment, as well as automotive coolants and chemicals
designed to improve engine performance and lifespan. Premium branded product offerings enhance Valvoline’s high quality reputation
and provide customers with solutions that address a wide variety of needs. Valvoline's product offerings fall into the following
categories:
Product Line
% of 2017
Sales
Description
Passenger Car / Light Duty
Lubricants
Heavy Duty
Antifreeze
Antifreeze /
Coolants
Maintenance Chemicals
Chemicals
Coatings
89%
4%
4%
Comprehensive assortment meeting the needs of passenger car,
motorcycle and other light duty engines, including motor oil,
transmission fluid, greases and gear oil
Lubricating solutions for a wide range of heavy duty
applications ranging from on-road (Class 4 – Class 8 vehicles)
to off-road construction, mining, agricultural and power
generation equipment
Antifreeze/coolants for OEMs; full assortment of additive
technologies and chemistries to meet virtually all light-duty and
heavy duty engine applications and heat transfer requirements of
batteries and fuel cells used to power electric vehicles
Functional and maintenance chemicals ranging from brake
fluids and power steering fluids to chemicals specifically
designed to clean and maintain optimal performance of fuel,
cooling and drive train systems
Specialty coatings designed to target rust prevention, and sound
absorption for automotive and industrial applications
Filters
Filters
3%
Oil and air filters meeting the needs of light-duty vehicles
Other
Other Complementary
Products
-%
Windshield wiper blades, light bulbs, serpentine belts and drain
plugs
Included within lubricants above are revenues for related preventive maintenance services, including full-service oil changes, that
VIOC stores provide.
Competition
The industry is highly competitive and Valvoline faces competition in all product categories and subcategories. Competition is based
on several key criteria, including brand recognition, product performance and quality, product price, product availability and security
of supply, ability to develop products in cooperation with customers and customer service, as well as the ability to bring innovative
products or services to the marketplace.
6
In the Core North America reportable segment, Valvoline’s principal competitors for retail customers are global integrated oil brands,
such as Shell, which produces Pennzoil and Quaker State; BP, which produces Castrol; Exxon Mobil, which produces Mobil 1; as well
as mid-tier brands and private label producers. With respect to installer customers in the United States and Canada, Valvoline
competes with these same major integrated oil brands, many of which have significantly greater financial resources and more diverse
portfolios of products and services, leading to greater operating and financial flexibility.
The Quick Lubes segment competes with other major franchised brands that offer a turn-key operations management system, such as
Jiffy Lube (owned by Shell), Grease Monkey, Take 5 Oil Change, and Express Oil Change, as well as national branded companies that
offer a professional signage program with limited business model support, similar to Valvoline’s Express Care network, and regional
players such as Super-Lube, American Lube Fast and Express Oil Change that are not directly affiliated with a major brand. Valvoline
also competes to some degree with automotive dealerships and service stations, which provide quick lube and other preventative
maintenance services. Valvoline believes there are over 9,000 existing quick lube stores currently operating in the U.S. market. Jiffy
Lube is currently the Company's largest competitor by number of stores with just over 1,900 stores owned or operated by franchisees.
Major competitors of Valvoline’s International business vary by region. Valvoline generally faces strong competition from global
integrated oil brands, as these companies have a particularly strong presence in Europe and Asia. In certain markets, Valvoline also
competes with regional brands, including brands produced by national oil companies, such as Sinopec in China and Indian Oil in
India.
Competitive factors in all of these markets include price, product or service technology, brand awareness and loyalty, customer
service, and sales and marketing. Valvoline’s Core North America and International reportable segments also compete on the basis of
shelf space and product packaging.
Marketing and Advertising
Valvoline places a high priority on sales and marketing and focuses marketing efforts on areas expected to yield the highest rate of
return. Valvoline has dedicated marketing resources in each reportable segment, which are well qualified to reach target customers.
The majority of Valvoline’s large customers are supported by direct sales representatives with a number of key customers having
dedicated Valvoline teams. In addition, Valvoline has a number of distributors within the Core North America and International
reportable segments that represent the Company's products. In Core North America, Valvoline products are sold to consumers through
over 30,000 retail outlets, to installer customers with over 12,000 locations, and in Quick Lubes through 1,127 Valvoline-branded
franchised and company-owned stores. Valvoline serves the customer base through an extensive sales force and technical support
organization, allowing leverage of the technology portfolio and customer relationships globally, while meeting customer demands
locally.
Valvoline uses a variety of marketing techniques to build awareness of, and create demand for, Valvoline products and services.
Valvoline advertises through social and digital media, as well as traditional media outlets such as television, print and radio. Valvoline
selectively sponsors teams in high performance racing series, including a current sponsorship of Hendrick Motorsports, featuring
drivers Dale Earnhardt Jr., Chase Elliott, Jimmie Johnson and Kasey Kahne. In addition, Valvoline sponsors other teams and players in
other high performing sports, including the Manchester City Football Club and the Memphis Grizzlies, as well as Valvoline's joint
venture sponsorship of renowned Indian cricket player, Virat Kohli.
Valvoline has also embarked on a digital infrastructure initiative that will enable the use of technology across the entire enterprise.
Valvoline believes its digital marketing infrastructure will drive more effective engagement to deliver growth, customer retention and
acquisition as a strategic business partner.
Research and Development
Valvoline’s innovation is central to the successful performance of its business. Valvoline research and development is focused on
developing new and innovative products to meet the current and future needs of its customers. These products are developed through
Valvoline’s “Hands on Expertise” innovation approach, which begins with the mathematical modeling of critical product design
elements and extends through field testing. In addition, Valvoline technology centers, located in the Americas, Europe and Asia Pacific
regions, develop solutions for existing and emerging on and off-road equipment. Valvoline’s research and development team also
leverages its strong relationships with customers and suppliers to incorporate their feedback into the research and development
process. In addition to its own research and development initiatives, Valvoline also conducts limited testing for other entities, which
builds its expertise and partially offsets its research and development costs. Expenses for research and development are classified in
Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income included in Item 8 of Part II of
this Annual Report on Form 10-K, which were $13 million in each of fiscal 2017 and fiscal 2016 and $11 million in fiscal 2015.
Valvoline anticipates that the Company will continue to incur research and development expenditures in the future to ensure a
continuing flow of innovative, high-quality products and services and to help maintain and enhance Valvoline's competitive position.
7
Intellectual Property
Valvoline is continually seeking to develop new technology and enhance its existing technology. Valvoline has been issued 34 U.S.
and 59 international patents and has 17 U.S. and 51 international patent applications pending or published. Valvoline also holds over
2,450 trademarks in various countries around the world, which Valvoline believes are some of its most valuable assets, for which
Valvoline dedicates significant resources to protect. These trademarks include the Valvoline trademark and the famous “V” brand logo
trademark, which are registered in over 150 countries. In addition, Valvoline uses various trade names and service marks in its
business, including ValvolineTM, Valvoline Instant Oil ChangeSM, MaxLifeTM, All Climate™, DuraBlend™, SynPowerTM and Premium
BlueTM. Valvoline also has a variety of intellectual property licensing agreements primarily with its franchisees. Valvoline owns over
700 domain names that are used to promote Valvoline products and services and provide information about the Company.
Raw Material Supply and Prices
The key raw materials used in Valvoline’s business are base oils, additives, packaging materials (high density polyethylene bottles,
corrugated packaging and steel drums) and ethylene glycol. Valvoline continuously monitors global supply and cost trends of these
key raw materials and obtains these raw materials from a diversified network of large global suppliers and regional providers.
Valvoline’s sourcing strategy is to ensure supply through contracting a diversified supply base while leveraging market conditions to
take advantage of spot opportunities whenever such conditions are available. Valvoline leverages worldwide spend to obtain favorable
contract terms from the global suppliers and use the regional providers to ensure market competitiveness and reliability in its supply
chain. For materials that must be customized, Valvoline works with market leaders with global footprints and well developed business
continuity plans. Valvoline also utilizes the Company’s research and development resources to develop alternative product
formulations, which provide flexibility in the event of supply interruptions. Valvoline closely monitors the Company’s supply chain
and conducts annual supply risk assessments of its critical suppliers to reduce risk.
Valvoline has a large manufacturing and distribution footprint in the United States, with seven lubricant blending and packaging
plants, two distribution centers and several packaging and warehouse locations. Additional lubricant blending and packaging plants are
located in Australia and the Netherlands. Valvoline also has a blending and packaging facility in Canada. In addition, Valvoline also
uses numerous third-party toll manufacturers and warehouses.
Valvoline seeks to actively manage fluctuations in supply costs, product selling prices and the timing thereof to preserve unit margins.
The prices of many of Valvoline’s products fluctuate based on the price of base oil, which is a large percentage of Valvoline’s cost of
sales. Historically, base oil prices have been volatile, which sometimes causes sharp cost increases during periods of short supply.
Since 2011, base oil supply has increased dramatically while global demand has generally grown at a steady and moderate rate.
Although base oil, a derivative of crude, is highly correlated to the global oil market, excess supply of base oil in recent years has
contributed to reduced volatility in the base oil market. Base oil prices generally follow crude prices, but the lag period between
changes in the price of crude oil and changes in the price of base oil is influenced by whether there is an excess of or shortness in the
supply of base oil.
Valvoline has generally been successful in adjusting product selling prices to react to changes in base oil costs to preserve unit
margins. As part of the strategy to mitigate the impact of base oil volatility, Valvoline has negotiated base oil supply contracts with
terms that have reduced the impact of changes in the base oil market on Valvoline’s financial results. Valvoline has revised contracts in
several of the Company’s sales channels to accelerate the timing of adjustments to selling prices in response to changes in raw
material prices. Pricing adjustments to product sold to Valvoline’s larger national or regional installer customer accounts tend to be
made pursuant to contract and are often based on movements in published base oil indices. Pricing for product sold to Valvoline’s
franchisees is adjusted on a periodic basis pursuant to an agreed upon index (weighted combination of published base oil indices), the
composition and weighting of which may be updated from time to time by Valvoline and representatives of Valvoline’s franchisees.
Pricing adjustments for product sold to retail customers, private label products in the United States and product sold to smaller
installer customer accounts are generally market driven, based on negotiations in light of base oil costs and the pricing strategies of
Valvoline’s competitors.
Backlog
Although Valvoline may experience availability constraints from time to time for certain products, orders are generally filled within
30 days of receiving them. Therefore, Valvoline usually has a product backlog of less than 30 days at any one time, which the
Company does not consider material to its business.
Seasonality
Overall, there is little seasonality in Valvoline’s business. Valvoline's Quick Lubes business and to a lesser extent, its Core North
America business tend to experience slightly higher sales volume in the summer months due to summer vacations and increased
8
driving, as well as during the periods of time leading into holidays. Both businesses also tend to slow a little from October to February
due to inclement weather in parts of the United States and Canada. Valvoline’s International business experiences almost no
seasonality due to its geographic diversity and the high percentage of its business in the commercial and industrial lubricants market,
which is less influenced by weather.
Environmental and Regulatory Matters
Valvoline is subject to numerous foreign, federal, state and local Environmental Health and Safety (“EHS”) laws and regulations.
These laws and regulations govern matters such as safe working conditions; product stewardship; air emissions; discharges to the land
and surface waters; generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials;
and the registration and evaluation of chemicals. Valvoline maintains policies and procedures to control EHS risks and monitor
compliance with applicable EHS laws and regulations. These laws and regulations also require Valvoline to obtain and comply with
permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke the
Company's permits, registrations or other authorizations and can enforce compliance through fines and injunctions.
Valvoline expects to incur ongoing costs to comply with existing and future EHS requirements, including the cost of a dedicated EHS
group that is responsible for ensuring its business maintains compliance with applicable laws and regulations. This responsibility is
carried out through training; formulation of and widespread communication of EHS policies; formulation of procedures and working
practices; design and implementation of EHS management systems; internal compliance and management assessments; monitoring
legislative and regulatory developments that may affect Valvoline's operations; and incident response planning.
Valvoline is also subject to regulation by various U.S. federal regulatory agencies and by the applicable regulatory authorities in
countries in which Valvoline’s products are manufactured and sold. Such regulations principally relate to the ingredients,
classification, labeling, manufacturing, packaging, transportation, advertising and marketing of Valvoline’s products. In addition, the
Company is subject to the Foreign Corrupt Practices Act and other countries’ anti-corruption and anti-bribery regimes.
Valvoline could incur substantial costs if the Company were to violate or become liable under environmental laws or other applicable
regulations. Liabilities are accrued when Valvoline considers the matter to be probable of loss and the costs can reasonably be
estimated. Such costs and accruals are presently not material to Valvoline's results of operations, financial position, or cash
flows. There can be no assurances that existing or future environmental laws and other regulations applicable to the Company's
operations or products will not lead to a material adverse impact on Valvoline's results of operations, financial position or cash flows.
Employees
As of September 30, 2017, Valvoline had approximately 5,600 employees worldwide (excluding contract employees).
Available Information
More information about Valvoline is available on Valvoline’s website at http://www.valvoline.com. On this website, Valvoline makes
available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any
amendments to those reports, as well as any beneficial ownership reports of officers and directors filed on Forms 3, 4 and 5. All such
reports are available as soon as reasonably practicable after they are electronically filed with, or electronically furnished to, the SEC.
Valvoline also makes available, free of charge on its website, its Corporate Governance Guidelines, Board Committee Charters,
Director Independence Standards and the Global Standards of Business Conduct that applies to Valvoline’s directors, officers and
employees. These documents are also available in print to any shareholder who requests them. Information contained on Valvoline’s
website is not part of this Annual Report on Form 10-K and is not incorporated by reference in this document. The public may read
and copy any materials Valvoline files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
website (http://www.sec.gov) contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC.
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Executive Officers of Valvoline
The following is a list of Valvoline’s executive officers, their ages, positions and experience during the last five years.
SAMUEL J. MITCHELL, JR. (age 56) is Chief Executive Officer and Director of Valvoline. Mr. Mitchell was appointed as a director
and Chief Executive Officer in May 2016 and September 2016, respectively. He served as Senior Vice President of Ashland from 2011
to September 2016 and President of Valvoline from 2002 to September 2016.
MARY E. MEIXELSPERGER (age 57) is Chief Financial Officer of Valvoline since June 2016. Prior to joining Valvoline, Ms.
Meixelsperger was Senior Vice President and Chief Financial Officer of DSW Inc. from April 2014 to June 2016 and held the roles of
Chief Financial Officer, Controller and Treasurer at Shopko Stores from 2006 to 2014.
JULIE M. O’DANIEL (age 50) is Senior Vice President, General Counsel and Corporate Secretary of Valvoline since September
2016. She served as Lead Commercial Counsel of Valvoline from April 2014 to September 2016. Ms. O’Daniel previously served as
Litigation Counsel of Valvoline from July 2007 to April 2014.
THOMAS A. GERRALD II (age 53) is Senior Vice President, Core North America of Valvoline since September 2016. He served as
Senior Vice President, U.S. Installer Channel, of Valvoline from June 2012 to September 2016.
FRANCES E. LOCKWOOD (age 67) is Chief Technology Officer of Valvoline since September 2016. She served as Senior Vice
President, Technology, of Valvoline from May 1994 to September 2016.
HEIDI J. MATHEYS (age 45) is Chief Marketing Officer of Valvoline since September 2016. She served as Senior Vice President,
Do-It-Yourself Channels, of Valvoline from August 2013 to September 2016. Ms. Matheys previously served as Vice President, Global
Brands, of Valvoline from September 2012 to August 2013.
CRAIG A. MOUGHLER (age 60) is Senior Vice President, International & Product Supply of Valvoline since September 2016. He
served as Senior Vice President, International of Valvoline from October 2002 to September 2016.
ANTHONY R. PUCKETT (age 55) is President, Quick Lubes of Valvoline since September 2016. He served as President of Valvoline
Instant Oil Change from August 2007 to September 2016.
VICTOR T. RIOS (age 48) is Chief Information Officer and Chief Digital Officer since June 2016. Prior to joining Valvoline, Mr. Rios
was Chief Information Officer for the Consumer Medical Technologies division of Johnson & Johnson from November 2013 to
February 2016 and held the roles of Chief Information Officer of the Vision Care division and Vice President of IT, Global Solutions
Delivery at Johnson & Johnson from 2011 to 2013.
DAVID J. SCHEVE (age 42) is Chief Accounting Officer and Controller of Valvoline since October 2016. Mr. Scheve joined the
Company from Southern Graphic Systems, a supplier of design-to-print brand development products and services, where he started in
June 2007 as its Global Corporate Controller and was most recently its Chief Financial Officer and Vice President of Finance.
SARA K. STENSRUD (age 50) is Chief People and Communications Officer of Valvoline since August 2016. Prior to joining
Valvoline, Ms. Stensrud was Executive Vice President and Chief Human Resources Officer of Chico’s FAS, Inc. from 2010 to 2016.
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ITEM 1A. RISK FACTORS
The following “risk factors” could materially and adversely affect Valvoline’s business, operations, financial position or future
financial performance. This information should be considered when reading the rest of this Annual Report on Form 10-K, including
Management’s Discussion and Analysis and the consolidated financial statements and related notes. These factors could cause future
results to differ from those in forward-looking statements and from historical trends.
Risks Related to Valvoline’s Business
Damage to Valvoline’s brand and reputation could have an adverse effect on its business.
Maintaining Valvoline’s strong reputation with both consumers and customers is a key component of its business. Product or service
complaints or recalls, its inability to ship, sell or transport affected products and governmental investigations may harm its reputation
with consumers and customers, which may materially and adversely affect its business operations, decrease sales and increase costs.
Valvoline manufactures and markets a variety of products, such as automotive and industrial lubricants and antifreeze, and provides
automotive maintenance services. If allegations are made that some of Valvoline’s products have failed to perform up to consumers’ or
customers’ expectations or have caused damage or injury to individuals or property, or that Valvoline’s services were not provided in a
manner consistent with its vision and values, the public may develop a negative perception of its brands. In addition, if Valvoline’s
franchisees or Express Care operators do not successfully operate their quick lube service centers in a manner consistent with
Valvoline’s standards, its brand, image and reputation could be harmed, which in turn could negatively impact its business and
operating results. In addition, if any party with whom Valvoline has a sponsorship relationship were to generate adverse publicity,
Valvoline's brand image could be harmed. A negative public perception of Valvoline’s brands, whether justified or not, could impair its
reputation, involve it in litigation, damage its brand equity and have a material adverse effect on its business. In addition, damage to
the reputation of Valvoline’s competitors or others in its industry could negatively impact Valvoline’s reputation and business.
Valvoline has set aggressive growth goals for its business, including increasing sales, cash flow, market share, margins and
number of VIOC stores, in order to achieve its long-term strategic objectives. Execution of Valvoline’s growth strategies and
business plans to facilitate that growth involves a number of risks.
Valvoline has set aggressive growth goals for its business in order to meet its long-term strategic objectives and improve shareholder
value. Valvoline’s failure to meet one or more of these goals or objectives would negatively impact its business and is one of the most
important risks that Valvoline faces. Aspects of that risk include, among others, changes to the economic environment, changes to the
competitive landscape, including those related to automotive maintenance recommendations and consumer preferences, attraction and
retention of skilled employees, the potential failure of product innovation plans, failure to comply with existing or new regulatory
requirements, failure to maintain a competitive cost structure and other risks outlined in greater detail in this “Risk Factors” section.
Demand for Valvoline’s products and services could be adversely affected by consumer spending trends, declining economic
conditions, trends in Valvoline’s industry and a number of other factors, all of which are beyond its control.
Demand for Valvoline’s products and services may be affected by a number of factors it cannot control, including the number and age
of vehicles in current service, regulation and legislation, technological advances in the automotive industry and changes in engine
technology, including the adoption rate of electric or other alternative engine technologies, changing automotive original equipment
manufacturer (“OEM”) specifications and longer recommended intervals between oil changes. In addition, during periods of declining
economic conditions, consumers may defer vehicle maintenance. Similarly, increases in energy prices or other factors may cause miles
driven to decline, resulting in less wear and tear and lower demand for maintenance, which may lead to consumers deferring purchases
of Valvoline’s products and services. All of these factors, which impact metrics such as drain intervals and oil changes per day, could
result in a decline in the demand for Valvoline’s products and services and adversely affect its sales, cash flows and overall financial
condition.
The success of Valvoline’s growth initiatives depends on its ability to successfully develop and implement one or more integrated
digital platforms that will help it better understand consumers and more effectively engage them.
Valvoline is in the process of designing and implementing a number of digital platforms that will integrate its operations with
customer and consumer data. The successful development and implementation of these digital platforms will depend on Valvoline’s
ability to identify an appropriate strategy, dedicate adequate resources and select technologies that will provide it with adequate
flexibility to adapt to future developments in the marketplace and changes in consumer and customer behavior. Valvoline has incurred
and expects to incur significant upfront investments to develop these digital platforms. There is a risk that once implemented, these
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digital platforms will not deliver all or part of the expected benefits, including additional sales. As Valvoline develops and implements
its digital platforms, it may elect to modify, replace or abandon certain technology initiatives, which could result in asset write-downs.
Valvoline’s success depends upon its ability to attract and retain key employees and the identification and development of talent to
succeed senior management.
Valvoline’s success depends on its ability to attract and retain key personnel, and it relies heavily on its senior management team.
The inability to recruit and retain key personnel or the unexpected loss of key personnel may adversely affect Valvoline’s operations.
This risk of unwanted employee turnover is substantial in positions that require certain technical expertise. This risk is also
substantial in developing international markets Valvoline has targeted for growth and in North America, where attracting marketing
and technical expertise to geographies necessary to support its management is important to its success. In addition, because of
Valvoline’s reliance on its senior management team, its future success depends, in part, on its ability to identify and develop or
recruit talent to succeed its senior management and other key positions throughout the organization. If Valvoline fails to identify and
develop or recruit successors, it is at risk of being harmed by the departures of these key employees.
Valvoline faces significant competition from other companies, which places downward pressure on prices and margins and may
adversely affect Valvoline’s business and results of operations.
Valvoline operates in highly competitive markets, competing against a number of domestic and foreign companies. Competition is
based on several key criteria, including brand recognition, product performance and quality, product price, product availability and
security of supply, ability to develop products in cooperation with customers and customer service, as well as the ability to bring
innovative products or services to the marketplace. Certain key competitors, including Shell/Pennzoil, BP/Castrol and Exxon/Mobil,
are significantly larger than Valvoline and have greater financial resources and more diverse portfolios of products and services,
leading to greater operating and financial flexibility. As a result, these competitors may be better able to withstand adverse changes in
conditions within the relevant industry, the prices of raw materials and energy or general economic conditions. In addition,
competitors’ pricing decisions could compel Valvoline to decrease its prices, which could negatively affect Valvoline’s margins and
profitability. Additional competition in markets served by Valvoline could adversely affect margins and profitability and could lead to
a reduction in market share. Also, Valvoline competes in certain markets that are flat to declining, such as the U.S. passenger car
motor oil market. If Valvoline’s strategies for dealing with declining markets and leveraging market opportunities are not successful,
its results of operations could be negatively affected.
Because of the concentration of Valvoline’s sales to a small number of retailers, the loss of one or more, or a significant
reduction in, orders from, its top retail customers could adversely affect its financial results, as could the loss of one of its
distributor relationships.
Valvoline’s Core North America segment’s sales represented approximately 48% of Valvoline’s total sales in fiscal 2017. NAPA Auto
Parts, AutoZone, Advance Auto Parts, O’Reilly Auto Parts and another large national retailer together accounted for 47% of Core
North America’s fiscal 2017 sales and 44% of Core North America’s outstanding trade accounts receivable as of September 30, 2017.
NAPA Auto Parts accounted for greater than 16% of Core North America’s fiscal 2017 sales. Valvoline’s volume of sales to these
customers fluctuates and can be influenced by many factors, including product pricing, purchasing patterns and promotional
activities. The loss of, or significant reduction in orders from, one of Valvoline’s top five retail customers or any other significant
customer could have a material adverse effect on its business, financial condition, results of operations or cash flows, as could
customer disputes regarding shipments, fees, merchandise condition or related matters. Valvoline’s inability to collect accounts
receivable from one of its major customers, or a significant deterioration in the financial condition of one of these customers,
including a bankruptcy filing or a liquidation, could also have a material adverse effect on Valvoline’s financial condition, results of
operations or cash flows. Valvoline also relies on independent distributors to sell and deliver its products. Disagreements or the loss
of Valvoline’s relationship with a distributor could also have a material adverse effect on its financial condition, results of operations
or cash flows.
Valvoline’s marketing activities may not be successful.
Valvoline invests substantial resources in advertising, consumer promotions and other marketing activities in order to maintain and
strengthen its brand image and product awareness. The Valvoline name and brand image are integral to the growth of its business and
its expansion into new markets. Failure to adequately market and differentiate its products and services from competitive products
and services could adversely affect Valvoline’s business. There can be no assurances that Valvoline’s marketing strategies will be
effective or that its investments in advertising activities will result in a corresponding increase in sales of its products. If Valvoline’s
marketing initiatives are not successful, it will have incurred significant expenses without the benefit of higher sales of its products.
Valvoline’s business exposes it to potential product liability claims and recalls, false advertising claims and other claims, which
could adversely affect its financial condition and performance.
The development, manufacture and sale of automotive, commercial and industrial lubricants and automotive chemicals and the
provision of automotive maintenance services involve an inherent risk of exposure to product liability claims, false advertising
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claims, product recalls, workplace exposure, product seizures and related adverse publicity. A product liability claim, false
advertising claim or related judgment against the Company could also result in substantial and unexpected expenditures, affect
consumer or customer confidence in Valvoline’s products and services, and divert management’s time and attention from other
responsibilities. Although Valvoline maintains product and general liability insurance, there can be no assurance that the type or level
of coverage it has is adequate or that it will be able to continue to maintain its existing insurance or obtain comparable insurance at a
reasonable cost, if at all. A product recall or a partially or completely uninsured product liability, false advertising or other judgment
against Valvoline could have a material adverse effect on its reputation, results of operations and financial condition.
Failure to develop and market new products and production technologies could impact Valvoline’s competitive position and have
an adverse effect on its business and results of operations.
The lubricants industry is subject to periodic technological change and ongoing product improvements. In order to maintain margins
and remain competitive, Valvoline must successfully develop and introduce new products or improvements that appeal to its
customers and ultimately to global consumers. Changes in additive technologies, base oil production techniques and sources, and the
demand for improved performance by OEMs and consumers place particular pressure on Valvoline to continue to improve its product
offerings. Valvoline’s efforts to respond to changes in consumer demand in a timely and cost-efficient manner to drive growth could
be adversely affected by difficulties or delays in product development and service innovation, including the inability to identify
viable new products, successfully complete research and development, obtain regulatory approvals, obtain intellectual property
protection or gain market acceptance of new products or service techniques. Due to the lengthy development process, technological
challenges and intense competition, there can be no assurance that any of the products Valvoline is currently developing, or could
develop in the future, will achieve substantial commercial success. The time and expense invested in product development may not
result in commercial products or provide revenues. Valvoline could be required to write-off its investments related to a new product
that does not reach commercial viability. Moreover, Valvoline may experience operating losses after new products are introduced and
commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.
The impact of changing laws or regulations or the manner of interpretation or enforcement of existing laws or regulations could
adversely impact Valvoline’s financial performance and restrict its ability to operate its business or execute its strategies.
New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could
increase Valvoline’s cost of doing business and restrict its ability to operate its business or execute its strategies. This risk includes,
among other things, the possible taxation under U.S. law of certain income from foreign operations, the possible taxation under
foreign laws of certain income Valvoline reports in other jurisdictions, regulations related to the protection of private information of
its employees and customers, regulations issued by the U.S. Federal Trade Commission (and analogous non-U.S. agencies) affecting
Valvoline and its customers, compliance with the REACH regulation (and analogous non-EU initiatives). In addition, compliance
with laws and regulations is complicated by Valvoline’s substantial and growing global footprint, which will require significant and
additional resources to ensure compliance with applicable laws and regulations in the approximately 140 countries where Valvoline
conducts business.
Valvoline’s global operations expose it to trade and economic sanctions and other restrictions imposed by the United States, the
European Union and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and
other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations
and individuals for violations of economic sanctions laws, export control laws, the Foreign Corrupt Practices Act (the “FCPA”) and
other federal statutes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Under these
laws and regulations, as well as other anti-corruption laws, anti-money-laundering laws, export control laws, customs laws, sanctions
laws and other laws governing Valvoline’s operations, various government agencies may require export licenses, may seek to impose
modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or
entities and modifications to compliance programs, which may increase compliance costs, and may subject Valvoline to fines,
penalties and other sanctions. A violation of these laws or regulations could adversely impact Valvoline’s business, results of
operations and financial condition.
Although Valvoline has implemented policies and procedures in these areas, it cannot assure you that its policies and procedures are
sufficient or that directors, officers, employees, representatives, distributors, consultants and agents have not engaged and will not
engage in conduct for which Valvoline may be held responsible, nor can Valvoline assure you that its business partners have not
engaged and will not engage in conduct that could materially affect their ability to perform their contractual obligations to Valvoline
or even result in its being held liable for such conduct. Violations of the FCPA, OFAC restrictions or other export control, anti-
corruption, anti-money-laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and
Valvoline may be subject to other liabilities, which could have a material adverse effect on its business, financial condition, cash
flows and results of operations.
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Imposition of new taxes, disagreements with tax authorities or additional tax liabilities could adversely affect Valvoline’s
business, financial condition, reputation or results of operations.
Valvoline’s products are made, manufactured, distributed or sold in approximately 140 countries and territories. As such, Valvoline is
subject to a myriad of tax laws and regulations applicable in those countries and territories, as well as those of the United States and
its various state and local governments. Economic and political pressure to increase tax revenues in jurisdictions where Valvoline
operates or does business, or the adoption of new or reformed tax regulations, may make resolving tax disputes more difficult, and
the final resolution of tax audits and any related litigation may differ from historical provisions and accruals resulting in an adverse
impact on Valvoline’s business, financial condition, reputation or results of operations. In addition to tax reform being considered in
the United States, many other countries are actively considering changes to existing tax laws. Changes in how United States
multinational corporations are taxed on earnings, including changes to currently enacted tax rates, could adversely affect Valvoline’s
business, financial condition or results of operations. There exists the potential for comprehensive tax reform in the United States
that may significantly change the tax rules applicable to U.S. domiciled corporations. Valvoline cannot assess what the overall effect
of such potential legislation could be on its results of operations or cash flows.
Valvoline’s substantial global operations subject it to risks of doing business in foreign countries, which could adversely affect its
business, financial condition and results of operations.
Sales from Valvoline’s International business segment accounted for 26% of its sales for fiscal 2017. Valvoline expects sales from
international markets to continue to represent an even larger portion of its sales in the future. Also, a significant portion of Valvoline’s
manufacturing capacity is located outside of the United States. Accordingly, its business is subject to risks related to the differing
legal, political, cultural, social and regulatory requirements and economic conditions of many jurisdictions.
The global nature of Valvoline’s business presents difficulties in hiring and maintaining a workforce in certain countries. Fluctuations
in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services
provided in foreign countries. In addition, foreign countries may impose additional withholding taxes or otherwise tax Valvoline’s
foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls. The imposition of
tariffs is also a risk that could impair Valvoline’s financial performance. In addition, joint ventures, particularly Valvoline’s existing
joint ventures with Cummins in India and China, are an important part of its growth strategy internationally. If Valvoline’s
relationship with one of its joint venture partners were to deteriorate, it could negatively impact Valvoline’s ability to achieve its
growth goals internationally.
Certain legal and political risks are also inherent in the operation of a company with Valvoline’s global scope. For example, it may be
more difficult for Valvoline to enforce its agreements or collect receivables through foreign legal systems. There is a risk that foreign
governments may nationalize private enterprises in certain countries where Valvoline operates. Terrorist activities and the response to
such activities may threaten Valvoline’s operations. Social and cultural norms in certain countries may not support compliance with
Valvoline’s corporate policies including those that require compliance with substantive laws and regulations. Also, changes in
general economic and political conditions in countries where Valvoline operates are a risk to Valvoline’s financial performance and
future growth. For example, Valvoline exited its Venezuelan joint venture in 2015 due in part to the continued lack of
exchangeability between the Venezuelan bolivar and U.S. dollar and other Venezuelan regulations. In addition, in executing its global
growth strategies, Valvoline has entered into several important strategic relationships with joint venture partners, such as Cummins,
unaffiliated distributors, toll manufacturers and others. The need to identify financially and commercially strong partners to fill these
roles who will comply with the high manufacturing and legal compliance standards Valvoline requires is a risk to Valvoline’s
financial performance.
As Valvoline continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively
manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to
Valvoline’s multinational operations will not have an adverse effect on its business, financial condition or results of operations.
The competitive nature of Valvoline’s markets or other factors may delay or prevent it from passing increases in raw material
costs on to its customers. In addition, certain of Valvoline’s suppliers may be unable to deliver products or raw materials or may
withdraw from contractual arrangements. The occurrence of either event could adversely affect Valvoline’s results of operations.
Rising and volatile raw material prices, especially for base oil and lubricant additives, may negatively impact Valvoline’s costs,
results of operations and the valuation of its inventory. Valvoline is not always able to raise prices in response to increased costs of
raw materials, and its ability to pass on the costs of such price increases is dependent upon market conditions. Likewise, reductions
in the valuation of Valvoline’s inventory due to market volatility may not be recovered and could result in losses.
Valvoline purchases certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers
are unable to meet Valvoline’s orders in a timely manner or choose to terminate or otherwise avoid contractual arrangements,
Valvoline may not be able to make alternative supply arrangements. For base oils, Valvoline’s suppliers are primarily large oil
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producers, many of whom operate oil lubricant production and sales businesses as part of their enterprise. There are risks inherent in
obtaining important raw materials from actual or potential competitors, including the risk that applicable antitrust laws may be
inadequate to mitigate Valvoline’s exposure to these risks. Valvoline purchases substantially all of its lubricant additives from the
following four suppliers: Afton Chemical Corporation, Chevron Oronite Company LLC, the Infineum group of companies and
Lubrizol Corporation. Because the industry is characterized by a limited number of lubricant additives suppliers, there are a limited
number of alternative suppliers with whom Valvoline could transact in the event of a disruption to its existing supply relationships;
for example, due to disruptions to its suppliers' operations caused by natural disasters or severe weather conditions. The inability of
Valvoline’s suppliers to meet its supply demands could also have a material adverse effect on its business.
Also, domestic and global government regulations related to the manufacture or transport of certain raw materials may impede
Valvoline’s ability to obtain those raw materials on commercially reasonable terms. If Valvoline is unable to obtain and retain
qualified suppliers under commercially acceptable terms, its ability to manufacture and deliver products in a timely, competitive
and profitable manner or grow its business successfully could be adversely affected.
Valvoline may be unable to execute its growth strategy, and acquisitions, joint ventures, strategic alliances and investments could
result in operating difficulties, dilution and other harmful consequences that may adversely impact Valvoline’s business and
results of operations.
Acquisitions, particularly for Valvoline’s VIOC business, and building strategic alliances for distribution and manufacturing,
particularly in international markets, including through joint venture partnerships, product distribution and toll manufacturing
arrangements, are important elements of its overall growth strategy. Valvoline expects to continue to evaluate and enter into
discussions regarding a wide array of potential strategic transactions, and to continue to grow its VIOC business organically and
through acquisitions. An inability to execute these plans could have a material adverse impact on Valvoline’s financial condition
and results of operations. In addition, the process of integrating an acquired company, business, or product may create unforeseen
operating difficulties or expenditures. The areas where Valvoline faces risks include:
• the possible inability to fully execute plans to add stores to Valvoline's VIOC network, due to lack of desirable real
estate sites, regulatory or municipal hurdles, a lack of viable acquisition targets, or other factors;
• diversion of management’s time and attention from operating Valvoline’s business to acquisition integration
challenges;
• failure to successfully grow the acquired business or product lines;
• inability to implement adequate controls, procedures and policies at the acquired company;
• integration of the acquired company’s accounting, human resources and other administrative systems, and coordination of
product, engineering and sales and marketing functions;
• transition of operations, users and customers onto Valvoline’s existing platforms;
• reliance on the expertise of Valvoline’s strategic partners with respect to market development, sales, local regulatory
compliance and other operational matters;
• failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon
approval under competition and antitrust laws which could, among other things, delay or prevent Valvoline from
completing a transaction, or otherwise restrict its ability to realize the expected financial or strategic goals of an
acquisition;
• in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address
economic, currency, political and regulatory risks associated with specific countries;
• cultural challenges associated with integrating employees from the acquired company into Valvoline’s organization, and
retention of employees from the companies that Valvoline acquires;
• liability for, or reputational harm from, activities of the acquired company before the acquisition or from Valvoline’s
strategic partners; and
• litigation or other claims in connection with the acquired company, including claims from terminated employees,
customers, former security holders or other third parties.
Valvoline’s failure to address these risks or other problems encountered in connection with its past or future acquisitions, investments
or strategic alliances could cause Valvoline to fail to realize the anticipated benefits of such acquisitions, investments or strategic
alliances, incur unanticipated liabilities and harm Valvoline’s business generally.
Valvoline’s acquisitions, investments and strategic alliances could also result in dilutive issuances of its equity securities, the
incurrence of debt, contingent liabilities or amortization expenses, impairment of goodwill or purchased long-lived assets and
restructuring charges, any of which could harm its financial condition, results of operations and cash flows. Also, the anticipated
benefits of Valvoline’s acquisitions may not be realized. Valvoline’s balance sheet includes goodwill primarily related to acquisitions
and future acquisitions may result in Valvoline’s recognition of additional goodwill. The impairment of a significant portion of this
goodwill would negatively affect its financial results.
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Valvoline shares in ownership of joint ventures, which may limit its ability to manage third-party risks associated with these
projects.
For financial or strategic reasons, Valvoline conducts a portion of its business through joint ventures. In these joint ventures, Valvoline
shares influence over the operation of the joint venture and its assets. Therefore, joint ventures may involve risks such as the
possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have
economic or business interests or goals that are inconsistent with Valvoline's business interests or goals, or take actions that are
contrary to Valvoline's direction or to applicable laws and regulations. In addition, joint venture partners could take actions binding on
the joint venture without Valvoline's consent, or Valvoline may be unable to take action without the concurrence of its joint venture
partners. Consequently, actions by the joint venture, co-venturer or other third-party could expose Valvoline to claims for damages,
financial penalties and reputational harm, any of which could have an adverse effect on its business and operations. Although joint
ventures may generate positive cash flow, in some cases they may be unable or unwilling to distribute that cash to the joint venture
partners.
The business model for Valvoline’s VIOC business, including its dependence on franchised oil change centers, presents a number
of risks.
VIOC is made up of a nationwide network of both company-owned and franchised stores. Valvoline’s success relies in part on the
financial success and cooperation of its franchisees. However, Valvoline has limited influence over their operations. Valvoline’s
franchisees manage their businesses independently and are responsible for the day-to-day operations of approximately 66% of VIOC
stores as of September 30, 2017. Valvoline’s revenue and income growth from franchised stores are largely dependent on the ability
of its franchisees to grow their sales. Valvoline’s franchisees may have limited or no sales growth, and Valvoline’s revenues and
margins could be negatively affected as a result. In addition, if sales or business performance trends worsen for franchisees, their
financial results may deteriorate, which could result in, among other things, VIOC store closures, delayed or reduced payments to
Valvoline and reduced growth in the number of VIOC stores.
Valvoline’s success also depends on the willingness and ability of its independent franchisees to implement major initiatives, which
may require additional investment by them, and remain aligned with Valvoline on operating, promotional and capital-intensive
reinvestment plans. The ability of Valvoline’s franchisees to contribute to the achievement of Valvoline’s overall plans is dependent
in large part on the availability of funding to its franchisees at reasonable interest rates and may be negatively impacted by the
financial markets in general or the creditworthiness of individual franchisees.
Valvoline’s operating performance and reputation could also be negatively impacted if its independent franchisees experience
service failures or otherwise operate in a manner that projects a brand image inconsistent with Valvoline’s values, particularly if
Valvoline’s contractual and other rights and remedies are limited, costly to exercise or subject to litigation. If Valvoline’s franchisees
do not successfully operate VIOC stores in a manner consistent with Valvoline’s standards, Valvoline’s brand, image and reputation
could be harmed, which in turn could negatively impact its business and operating results.
The ownership mix of company-owned and franchised VIOC stores also affects Valvoline’s results and financial condition. The
decision to own stores or to operate under franchise or license agreements is driven by a large number of factors with a complex and
changing interrelationship. The size of Valvoline’s largest franchisees creates additional risk due to Valvoline’s dependence on their
particular growth, financial and operating performance and cooperation and alignment with Valvoline’s initiatives.
Valvoline is the primary supplier of products to all VIOC stores. The growth and performance of Valvoline’s lubricants and other
product lines depends in large part on the performance of its VIOC business, potentially amplifying the negative effect of the other
risks related to the VIOC business model. Poor performance by VIOC stores would negatively impact revenues and income for
other Valvoline reporting segments.
Adverse developments in the global economy or in regional economies and potential disruptions of financial markets could
negatively impact Valvoline’s customers and suppliers, and therefore have a negative impact on its results of operations.
A global or regional economic downturn may reduce customer demand or inhibit Valvoline’s ability to produce and sell products.
Valvoline’s business and operating results are sensitive to global and regional economic downturns, credit market tightness, declining
consumer and business confidence, fluctuating commodity prices, volatile exchange rates, changes in interest rates, sovereign debt
defaults and other challenges, including those related to international sanctions and acts of aggression or threatened aggression that
can affect the global economy. With 74% of Valvoline’s sales coming from North America in fiscal 2017, Valvoline is particularly
sensitive to the risk of an economic slowdown or downturn in that region. In the event of adverse developments or stagnation in the
economy or financial markets, Valvoline’s customers may experience deterioration of their businesses, reduced demand for their
products, cash flow shortages and difficulty obtaining financing. As a result, existing or potential customers might delay or cancel
plans to purchase products and may not be able to fulfill their obligations to Valvoline in a timely fashion. Further, suppliers may
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experience similar conditions, which could impact their ability to fulfill their obligations to Valvoline. A weakening or reversal of the
global economy or a substantial part of it could negatively impact Valvoline’s business, results of operations, financial condition and
ability to grow.
Valvoline uses information technology systems to conduct business, and these systems are at risk from cyber security threats.
Despite steps Valvoline takes to mitigate or eliminate them, cyber-security threats to its systems are increasing and becoming more
advanced and breaches could occur as a result of the activity of hackers, employee error or employee misconduct. A breach of
Valvoline’s information technology systems could lead to the loss and destruction of trade secrets, confidential information,
proprietary data, intellectual property, customer and supplier data and employee personal information, and could disrupt business
operations which could adversely affect Valvoline’s relationships with business partners and harm its brands, reputation and financial
results. Valvoline’s customer data may include names, addresses, phone numbers, email addresses and payment account information,
among other information. Depending on the nature of the customer data that is compromised, Valvoline may also have obligations to
notify users, law enforcement or payment companies about the incident and may need to provide some form of remedy, such as
refunds for the individuals affected by the incident.
Valvoline may fail to adequately protect its intellectual property rights or may be accused of infringing the intellectual property
rights of third parties.
Valvoline relies heavily upon its trademarks, domain names and logos to market its brands and to build and maintain brand loyalty
and recognition, as well as upon trade secrets. Valvoline also relies on a combination of laws and contractual restrictions with
employees, customers, suppliers, affiliates and others, to establish and protect its various intellectual property rights. For example,
Valvoline has generally registered and continues to register and renew, or secure by contract where appropriate, trademarks and
service marks as they are developed and used, and reserve, register and renew domain names as appropriate. Effective trademark
protection may not be available or may not be sought in every country in which Valvoline’s products are made available and
contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may
be available or be registered, even if available.
Valvoline generally seeks to apply for patents or for other similar statutory protections as and if it deems appropriate, based on then-
current facts and circumstances, and will continue to do so in the future. No assurances can be given that any patent application
Valvoline has filed or will file will result in a patent being issued, or that any existing or future patents will afford adequate or
meaningful protection against competitors or against similar technologies. In addition, no assurances can be given that third parties
will not create new products or methods that achieve similar results without infringing upon patents Valvoline owns.
Despite these measures, Valvoline’s intellectual property rights may still not be protected in a meaningful manner, challenges to
contractual rights could arise or third parties could copy or otherwise obtain and use Valvoline’s intellectual property without
authorization. The occurrence of any of these events could result in the erosion of Valvoline’s brands and limit its ability to market its
brands using its various trademarks, as well as impede its ability to effectively compete against competitors with similar products and
services, any of which could adversely affect its business, financial condition and results of operations.
From time to time, Valvoline has been subject to legal proceedings and claims, including claims of alleged infringement of
trademarks, copyrights, patents and other intellectual property rights held by third parties. In the future, third parties may sue
Valvoline for alleged infringement of their proprietary or intellectual property rights. Valvoline may not be aware of whether its
products do or will infringe existing or future patents or the intellectual property rights of others. In addition, litigation may be
necessary to enforce Valvoline’s intellectual property rights, protect its trade secrets or determine the validity and scope of
proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and
diversion of management and technical resources, any of which could adversely affect Valvoline’s business, financial condition and
results of operations.
Valvoline’s pension and other postretirement benefit plan obligations are currently underfunded, and Valvoline may have to
make significant cash payments to some or all of these plans, which would reduce the cash available for its businesses.
In connection with Valvoline’s separation from Ashland, Valvoline assumed certain of Ashland’s historical pension and other
postretirement benefit plans and related liabilities. The funded status of Valvoline's pension plans is dependent upon many factors,
including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension
obligations. Though Valvoline has taken a number of actions in fiscal 2017 to reduce the risk and volatility associated with the most
significant of these plans, the U.S. qualified plan, changing market conditions or laws and regulations could require material
increases in our expected cash contributions to our pension plans in future years. Specifically, unfavorable returns on plan assets or
unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding,
which would reduce the cash available for Valvoline’s businesses. In addition, a decrease in the discount rate used to determine
pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funded status
of Valvoline’s pension plans and future contributions. Similarly, an increase in discount rates could increase the periodic pension cost
in subsequent fiscal years. Valvoline’s policy to recognize changes in the fair value of the pension assets and liabilities annually and
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as otherwise required through mark to market accounting could result in volatility in Valvoline’s results of operations, which could be
material. In addition, Valvoline’s pension and other postretirement benefit plan obligations are currently underfunded, and Valvoline
may have to make significant cash payments to some or all of these plans, which would reduce the cash available for its businesses.
Under the Employee Retirement Income Security Act of 1974, as amended, the Pension Benefit Guaranty Corporation (“PBGC”) has
the authority to terminate an underfunded tax-qualified pension plan under limited circumstances. In the event Valvoline’s tax-
qualified pension plans are terminated by the PBGC, Valvoline could be liable to the PBGC for some portion of the underfunded
amount.
Business disruptions from natural, operational and other catastrophic risks could seriously harm Valvoline’s operations and
financial performance. In addition, a catastrophic event at one of Valvoline’s facilities or involving its products or employees
could lead to liabilities that could further impair its operations and financial performance.
Business disruptions, including those related to operating hazards inherent in the production of lubricants, natural disasters, severe
weather conditions, supply or logistics disruptions, increasing costs for energy, temporary plant and/or power outages, information
technology systems and network disruptions, cyber-security breaches, terrorist attacks, armed conflicts, war, pandemic diseases,
fires, floods or other catastrophic events, could seriously harm Valvoline’s operations, as well as the operations of Valvoline’s
customers and suppliers, and may adversely impact Valvoline’s financial performance. Although it is impossible to predict the
occurrence or consequences of any such events, they could result in reduced demand for Valvoline’s products, make it difficult or
impossible for Valvoline to manufacture its products or deliver products and services to its customers or to receive raw materials
from suppliers, may lead to increased costs of raw materials, or create delays and inefficiencies in the supply chain. In addition to
leading to a serious disruption of Valvoline’s businesses, a catastrophic event at one of Valvoline’s facilities or involving its products
or employees could lead to substantial legal liability to or claims by parties allegedly harmed by the event.
While Valvoline maintains business continuity plans that are intended to allow it to continue operations or mitigate the effects of
events that could disrupt its business, Valvoline cannot provide assurances that its plans would fully protect it from all such events.
In addition, insurance maintained by Valvoline to protect against property damage, loss of business and other related consequences
resulting from catastrophic events is subject to coverage limitations, depending on the nature of the risk insured. This insurance may
not be sufficient to cover all of Valvoline’s damages or damages to others in the event of a catastrophe. In addition, insurance related
to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.
Valvoline has incurred, and will continue to incur, costs as a result of environmental, health and safety (“EHS”), and hazardous
substances liabilities and related compliance requirements. These costs could adversely impact Valvoline’s cash flow, its results of
operations or financial condition.
Valvoline is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution,
protection of the environment and human health and safety, as well as the generation, storage, handling, treatment, disposal and
remediation of hazardous substances and waste materials. Valvoline has incurred, and will continue to incur, costs and capital
expenditures to comply with these laws and regulations.
EHS regulations change frequently, and such regulations and their enforcement have tended to become more stringent over time.
Accordingly, changes in EHS laws and regulations and the enforcement of such laws and regulations could interrupt Valvoline’s
operations, require modifications to its facilities or cause it to incur significant liabilities, costs or losses that could adversely affect its
profitability. Actual or alleged violations of EHS laws and regulations could result in restrictions or prohibitions on plant operations
as well as substantial damages, penalties, fines, civil or criminal sanctions and remediation costs.
Valvoline’s business involves the production, storage and transportation of hazardous substances. Under some environmental laws,
Valvoline may be strictly liable and/or jointly and severally liable for environmental damages caused by releases of hazardous
substances and waste materials into the environment. For instance, under relevant laws and regulations Valvoline may be deemed
liable for soil and/or groundwater contamination at sites it currently owns and/or operates even though the contamination was caused
by a third party such as a former owner or operator, and at sites it formerly owned and operated if the release of hazardous
substances or waste materials was caused by it or by a third party during the period it owned and/or operated the site. Valvoline also
may be deemed liable for soil and/or groundwater contamination at sites to which it sent hazardous wastes for treatment or disposal,
notwithstanding that the original treatment or disposal activity accorded with all applicable regulatory requirements.
Valvoline is responsible for, and has financial exposure to, liabilities from pending and threatened claims which could adversely
impact its results of operations and cash flow.
There are various claims, lawsuits and administrative proceedings pending or threatened against Valvoline. Such actions are with
respect to commercial matters, false advertising, product liability, toxic tort liability and other matters that seek remedies or damages,
some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable. Valvoline’s
results could be adversely affected by financial exposure to these liabilities. Further, as a potential successor to Ashland, Valvoline
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may be subject to a consent order dated January 5, 1998 with the U.S. Federal Trade Commission arising out of charges that ads for
Valvoline’s TM8 Engine Treatment product contained claims that were unsubstantiated. Under the consent order, which expires
January 5, 2018, Valvoline may not make unsubstantiated claims about the performance or attributes of any engine treatment in the
future or misrepresent results of tests or studies used to support Valvoline’s claims. Valvoline has agreed to indemnify Ashland for
any liability arising out of the consent order. Valvoline could also be subject to additional legal proceedings in the future that may
adversely affect its business, including administrative proceedings, class actions, employment and personal injury claims, disputes
with current or former suppliers, claims by current or former franchisees and intellectual property claims.
Insurance maintained by Valvoline to protect against claims for damages alleged by third parties is subject to coverage limitations,
depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Valvoline’s liabilities to others. In
addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at
commercially reasonable rates.
Valvoline’s substantial indebtedness may adversely affect its business, results of operations and financial condition.
Valvoline has substantial indebtedness and financial obligations. As of November 10, 2017, Valvoline had outstanding indebtedness
of approximately $1.1 billion. In addition, Valvoline has a senior secured revolving credit facility with a borrowing capacity of $436
million. While Valvoline does not currently have any borrowings outstanding under the senior secured revolving credit facility, it
may incur indebtedness under this arrangement in the future.
Valvoline may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or
acquisitions, or for other purposes. Valvoline's substantial indebtedness could adversely affect its business, results of operations and
financial condition by, among other things:
• requiring Valvoline to dedicate a substantial portion of its cash flow from operations to pay principal and interest on its
debt, which would reduce the availability of its cash flow to fund working capital, capital expenditures, acquisitions,
execution of its growth strategy and other general corporate purposes;
• limiting Valvoline’s ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt
service requirements, execution of its growth strategy and other purposes;
• making Valvoline more vulnerable to adverse changes in general economic, industry and regulatory conditions and in its
business by limiting its flexibility in planning for, and making it more difficult for it to react quickly to, changing
conditions;
• placing Valvoline at a competitive disadvantage compared with its competitors that have less debt and lower debt service
requirements;
• making Valvoline more vulnerable to increases in interest rates since some of its indebtedness is subject to variable rates of
interest; and
• making it more difficult for Valvoline to satisfy its financial obligations.
In addition, Valvoline may not be able to generate sufficient cash flow from its operations to repay its indebtedness when it becomes
due and to meet its other cash needs. If Valvoline is not able to pay its debts as they become due, it could be in default under the
terms of its indebtedness. Valvoline might also be required to pursue one or more alternative strategies to repay indebtedness, such as
selling assets, refinancing or restructuring its indebtedness or selling additional debt or equity securities. Valvoline may not be able to
refinance its debt or sell additional debt or equity securities or its assets on favorable terms, if at all, and if it must sell its assets, it
may negatively affect Valvoline’s ability to generate revenues.
If Valvoline is unable to access the capital markets or obtain bank credit, its financial position, growth plans, liquidity and results
of operations could be negatively impacted.
Valvoline is dependent on a stable, liquid, and well-functioning financial system to fund its operations and capital investments. In
particular, Valvoline may rely on the public and private debt and equity markets to fund portions of its capital investments and the
commercial paper market and bank credit facilities to fund seasonal needs for working capital. Valvoline’s access to these markets
depends on multiple factors including the condition of the capital markets, Valvoline’s operating performance and credit ratings. If
rating agencies lower Valvoline’s credit ratings, it could adversely impact Valvoline’s ability to access the debt markets, its cost of
funds and other terms for new debt issuances. Each of the credit rating agencies reviews its rating periodically, and there is no
guarantee Valvoline’s current credit rating will remain the same.
Valvoline is subject to payment-related risks for company-owned and franchised VIOC stores.
At company-owned and franchised VIOC stores, Valvoline accepts a variety of payment methods, including credit cards and debit
cards. Accordingly, Valvoline is, and will continue to be, subject to significant and evolving regulations and compliance
requirements, including obligations to implement enhanced authentication processes that could result in increased costs, reduce the
ease of use of certain payment methods and expand liability for Valvoline. For certain payment methods, including credit and debit
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cards, Valvoline pays interchange and other fees, which may increase over time. Valvoline relies on independent service providers for
payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide
these services to Valvoline, or if the cost of using these providers increases, Valvoline’s business could be harmed. Valvoline is also
subject to payment card association operating rules, including data security rules, certification requirements and rules governing
electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for Valvoline to comply. If
Valvoline fails to comply with these rules or requirements, or if its data security systems are breached or compromised, Valvoline
may be liable for losses incurred by card issuing banks or consumers, subject to fines and higher transaction fees, lose its ability to
accept credit and debit card payments from its customers or process electronic fund transfers or facilitate other types of payments and
its brand, business and results of operations could be significantly harmed.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes- Oxley could have a
material adverse effect on Valvoline’s business and stock price.
As a public company, Valvoline is subject to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which, beginning
with this Annual Report on Form 10-K, requires annual assessments by Valvoline’s management of the effectiveness of Valvoline’s
internal control over financial reporting and annual reports by Valvoline’s independent registered public accounting firm that address
the effectiveness of internal control over financial reporting. During the course of annual testing, Valvoline may identify deficiencies
or material weaknesses which it may not be able to remediate in time to meet its deadline for compliance with Section 404. Testing
and maintaining internal control can divert management’s attention from other matters that are important to the operation of
Valvoline’s business. Valvoline may not be able to conclude on an ongoing basis that it has effective internal control over financial
reporting in accordance with Section 404 or Valvoline’s independent registered public accounting firm may not be able or willing to
issue an unqualified report on the effectiveness of Valvoline’s internal control over financial reporting. If Valvoline concludes that its
internal control over financial reporting is not effective in any annual assessment, Valvoline cannot be certain as to the timing of
completion of its evaluation, testing and remedial actions or their effect on its operations. If either Valvoline is unable to conclude
that it has effective internal control over financial reporting or its independent auditors are unable to provide it with an unqualified
report as required by Section 404 in any annual assessment, then investors could lose confidence in Valvoline’s reported financial
information, which could have a negative effect on the trading price of Valvoline's stock.
Risks Related to Valvoline’s Separation from Ashland
The Distribution could result in significant tax liability to Ashland, and in certain circumstances, Valvoline could be required to
indemnify Ashland for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.
Ashland obtained a written opinion of counsel to the effect that the Distribution should qualify for non-recognition of gain and loss
under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”). The opinion of counsel does not address any
U.S. state or local or foreign tax consequences of the Distribution. The opinion assumes that the Distribution is completed
according to the terms of the Separation Agreement entered into between Ashland and Valvoline (“Separation Agreement”) and
relies on the facts as described in the Separation Agreement, the Tax Matters Agreement, other ancillary agreements, the
information statement distributed to Ashland’s shareholders in connection with the Distribution and a number of other documents.
In addition, the opinion is based on certain representations as to factual matters from, and certain covenants by, Ashland and
Valvoline. The opinion cannot be relied on if any of the assumptions, representations or covenants is incorrect, incomplete or
inaccurate or is violated in any material respect.
The opinion of counsel is not binding on the Internal Revenue Service (the “IRS”) or the courts, and thus there can be no assurance
that the IRS or a court will not take a contrary position. Ashland has not requested, and does not intend to request, a ruling from the
IRS regarding the U.S. federal income tax consequences of the Distribution.
If the Distribution were determined not to qualify for non-recognition of gain and loss, then Ashland would recognize a gain as if it
had sold its Valvoline common stock in a taxable transaction in an amount up to the fair market value of the common stock it
distributed in the Distribution. In addition, certain reorganization transactions undertaken in connection with the separation and the
Distribution could be determined to be taxable, which could result in additional taxable gain. Under certain circumstances set forth in
the Tax Matters Agreement, Valvoline could have a substantial indemnification obligation to Ashland with respect to the tax
associated with some or all of such gain, which could have a material adverse impact on Valvoline's financial condition.
Valvoline could have an indemnification obligation to Ashland if events or actions subsequent to the Distribution cause the
Distribution to be taxable.
If, due to breaches of covenants that Valvoline has agreed to in connection with the Separation Agreement or the Distribution, it were
determined that the Distribution did not qualify for non-recognition of gain and loss, Valvoline could be required to indemnify
Ashland for the resulting taxes (and reasonable expenses). In addition, Section 355(e) of the Code generally creates a presumption
that the Distribution would be taxable to Ashland, but not to its shareholders, if Valvoline or its shareholders were to engage in
transactions that result in a 50% or greater change (by vote or value) in the ownership of Valvoline’s stock during the four-year
period beginning on the date that begins two years before the date of the Distribution, unless it were established that such
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transactions and the Distribution were not part of a plan or series of related transactions. If the Distribution were taxable for U.S.
federal income tax purposes to Ashland due to a breach of Valvoline’s covenants or a 50% or greater change in the ownership of
Valvoline’s stock during the aforementioned four-year period, Ashland would recognize gain as if it had sold Valvoline common
stock in a taxable transaction in an amount up to the fair market value of the stock held by it immediately before the Distribution,
and Valvoline generally would be required to indemnify Ashland for the tax on such gain and related expenses, as well as any
additional gain in connection with certain reorganization transactions undertaken to effect the separation and the Distribution. Any
such obligation could have a material impact on Valvoline’s operations.
Valvoline has agreed to numerous restrictions to preserve the tax-free nature of the Distribution, which may reduce its strategic
and operating flexibility.
Valvoline has agreed in the Tax Matters Agreement to covenants and indemnification obligations designed to preserve the tax-free
nature of the Distribution. These covenants and indemnification obligations may limit Valvoline’s ability to pursue strategic
transactions or engage in new businesses or other transactions that might be beneficial and could discourage or delay a strategic
transaction that its shareholders may consider favorable.
Valvoline will have joint and several liability with Ashland for the consolidated U.S. federal income taxes of the Ashland
consolidated group for the taxable periods in which Valvoline was part of the Ashland consolidated group. In addition, Valvoline
has agreed to indemnify Ashland for certain pre-IPO U.S. taxes that arise on audit and are directly attributable to neither the
Valvoline business nor Ashland’s specialty ingredients and performance materials businesses (collectively, the “Chemicals
business”).
Valvoline and Ashland as well as their respective subsidiaries were part of U.S. federal consolidated group tax returns and certain
combined or similar group tax returns (together, “Combined Tax Returns”) through the date of the Distribution. Therefore, Valvoline
has joint and several liability with Ashland to the respective taxing authorities for the Combined Tax Returns for the periods up to
and including the date of the Distribution.
Pursuant to the Tax Matters Agreement, Valvoline is required to indemnify Ashland for: (a) certain U.S. federal, state or local taxes
of Ashland and/or its subsidiaries for any tax period ending on or prior to the Distribution that arise on audit or examination and are
(i) directly attributable to Valvoline or (ii) prior to the IPO that arise on audit or examination and are directly attributable to neither
the Valvoline business nor the Chemicals business; and (b) certain foreign taxes of Ashland and/or its subsidiaries for any tax period
ending on or prior to the Distribution that arise on audit or examination and are directly attributable to Valvoline.
The Tax Matters Agreement also requires Valvoline to indemnify Ashland for any taxes (and reasonable expenses) resulting from the
failure of the Distribution to qualify for non-recognition of gain and loss or certain reorganization transactions related to the
separation or the IPO and Distribution to qualify for their intended tax treatment (“Transaction Taxes”), where the taxes result from
(1) breaches of representations or covenants that Valvoline made or agreed to in connection with these transactions, (2) the
application of certain provisions of U.S. federal income tax law to the Distribution with respect to acquisitions of Valvoline common
stock or (3) any other actions that Valvoline knows or reasonably should expect would give rise to such taxes.
The Tax Matters Agreement also requires Valvoline to indemnify Ashland for a portion of certain other taxes arising from the
separation allocated to Valvoline generally based on Valvoline’s market capitalization relative to the market capitalization of
Ashland at the time of the Distribution.
Valvoline has only been a stand-alone public company since September 2016, and its financial results are not necessarily
representative of the results it would have achieved as a stand-alone public company prior to September 2016 and may not be
a reliable indicator of its future results.
The historical financial information Valvoline has included in this Annual Report on Form 10-K include certain expenses of Ashland
that were allocated to Valvoline as an unincorporated business unit of Ashland for corporate functions, which included treasury, legal,
accounting, insurance, information technology, payroll administration, human resources, stock incentive plans and other services.
Valvoline believes the assumptions underlying the consolidated financial statements, including the assumptions regarding allocated
expenses, reasonably reflect the utilization of services provided to or the benefit received during those periods. However, these
shared expenses may not represent what Valvoline’s financial position, results of operations or cash flows would have been had it
operated autonomously or independently from Ashland during those periods. Actual costs that would have been incurred if Valvoline
had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions in
various areas, such as information technology and infrastructure.
In addition, the historical financial information Valvoline has included in this Annual Report on Form 10-K does not reflect what its
financial position, results of operations or cash flows would have been had it been a stand-alone entity during the historical periods
presented, or what its financial position, results of operations or cash flows will be in the future as an independent entity.
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Valvoline’s ability to operate its business effectively may suffer if it is unable to cost-effectively establish its own administrative
and other support functions in order to operate as a stand-alone company after the expiration of its shared services and other
intercompany agreements with Ashland.
As a business segment of Ashland, Valvoline relied on administrative and other resources of Ashland, including information
technology, accounting, finance, human resources and legal, to operate Valvoline’s business. In connection with the IPO, Valvoline
entered into various service agreements to retain the ability for specified periods to use these Ashland resources. These services may
not be provided at the same level as when Valvoline was a business segment within Ashland, and Valvoline may not be able to obtain
the same benefits that it received prior to the IPO. These services may not be sufficient to meet Valvoline’s needs, and after
Valvoline’s agreements with Ashland expire (which will generally occur within 24 months following the closing of the IPO),
Valvoline may not be able to replace these services at all or obtain these services at prices and on terms as favorable as it currently
has with Ashland. Valvoline will need to continue to create its own administrative and other support systems or contract with third
parties to replace Ashland’s systems. In addition, Valvoline has received informal support from Ashland which may not be addressed
in the agreements it has entered into with Ashland, and the level of this informal support has not been available after the Distribution.
Ashland has agreed to indemnify Valvoline for certain liabilities. However, there can be no assurance that the indemnity will be
sufficient to insure Valvoline against the full amount of such liabilities, or that Ashland’s ability to satisfy its indemnification
obligation will not be impaired in the future.
Pursuant to the Separation Agreement and certain other agreements with Ashland, Ashland has agreed to indemnify Valvoline for
certain liabilities. However, third parties could also seek to hold Valvoline responsible for any of the liabilities that Ashland has
agreed to retain, and there can be no assurance that the indemnity from Ashland will be sufficient to protect Valvoline against the full
amount of such liabilities, or that Ashland will be able to fully satisfy its indemnification obligations in the future. Even if Valvoline
ultimately succeeded in recovering from Ashland any amounts for which Valvoline is held liable, Valvoline may be temporarily
required to bear these losses. Each of these risks could negatively affect Valvoline’s business, financial position, results of operations
and cash flows.
Valvoline’s inability to resolve favorably any disputes that arise between Valvoline and Ashland with respect to their past and
ongoing relationships may adversely affect its operating results.
Disputes may arise between Ashland and Valvoline in a number of areas relating to their past and ongoing relationships, including:
• labor, tax, employee benefit, indemnification and other matters arising from Valvoline’s separation from Ashland;
• employee retention and recruiting;
• business combinations involving Valvoline; and
• the nature, quality and pricing of services that Valvoline and Ashland have agreed to provide each other.
Valvoline may not be able to resolve potential conflicts, and even if it does, the resolution may not be favorable. The agreements
Valvoline entered into with Ashland may be amended upon agreement between the parties.
Valvoline may have received better terms from unaffiliated third parties than the terms it received in the agreements it entered
into with Ashland.
The agreements Valvoline entered into with Ashland in connection with the separation, including the Separation Agreement, the Tax
Matters Agreement, the Employee Matters Agreement, the Transition Services Agreement, the Reverse Transition Services
Agreement, a shared environmental liabilities agreement and certain commercial agreements, were prepared in the context of the
separation while Valvoline was still a wholly owned subsidiary of Ashland. Accordingly, during the period in which the terms of
those agreements were prepared, Valvoline did not have an independent board of directors or a management team that was
independent of Ashland. As a result, Valvoline may have received better terms from negotiations between unaffiliated third parties
than the terms of those agreements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
Valvoline’s corporate headquarters is located in Lexington, Kentucky. Valvoline owns or leases approximately 40 facilities throughout
North America, Europe, Australia, and Asia that comprise over 2 million square feet of blending, packaging, distribution, warehouse,
research and development and office space. In addition, Valvoline owns or leases the property associated with 384 quick lubes stores
under the VIOC brand throughout the United States. The properties leased by Valvoline have expiration dates ranging from less than
one year to more than 25 years (including certain renewal options).
The following table provides a summary of Valvoline’s principal owned and leased facilities:
Location
Lexington, Kentucky
West Chester, Ohio
Dordrecht, Netherlands
Leetsdale, Pennsylvania
Cincinnati, Ohio
Santa Fe Springs, California
Willow Springs, Illinois
Freedom (Rochester), Pennsylvania
Deer Park, Texas
St. Louis, Missouri
Mississauga, Canada
Sydney, Australia
Atlanta, Georgia
Approx. Area
(Sq. Ft.)
187,000
320,000
150,000
125,000
125,000
100,000
95,000
90,000
87,000
78,000
63,000
60,000
60,000
Corporate Headquarters and Research & Development
Principal Use
Warehouse and Distribution
Blending, Packaging & Warehouse
Warehouse & Distribution
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
Blending, Packaging & Warehouse
In addition, throughout North America, Valvoline contracts with third parties to provide blending and packaging and warehousing and
distribution services. Valvoline believes its physical properties are suitable and adequate for the Company’s business, and none of the
property owned by Valvoline is subject to any major known encumbrances. Additional information regarding certain lease obligations
may be found in Note 12 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
For a description of Valvoline's legal proceedings, refer to Note 15 of the Notes to Consolidated Financial Statements included in Item
8 of Part II of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Valvoline common stock is listed on the NYSE and trades under the symbol “VVV.” Valvoline’s common stock also has trading
privileges on NASDAQ. Prior to September 23, 2016, the pricing date of the initial public offering (“IPO”), there was no public
market for Valvoline’s common stock. As a result, Valvoline has not provided quarterly information with respect to the high and low
prices of its common stock for the first three quarters in the fiscal year ended September 30, 2016. The following table presents the
high and low per share prices for Valvoline common stock as reported on the NYSE for each quarter of fiscal 2017 and the fourth
quarter of fiscal 2016 following the Company's IPO.
Fiscal 2016
Fourth Quarter
Fiscal 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
$
$
$
24.51
23.68
24.98
24.84
23.87
$
$
$
$
$
23.00
18.30
21.00
21.91
20.99
As of November 10, 2017, there were approximately 11,130 holders of Valvoline common stock.
Dividend Policy
Valvoline paid quarterly cash dividends to the holders of its common stock for the year ended September 30, 2017; cash dividends
paid quarterly were $0.049 per share for a total of $0.20 for the year. There were no dividends paid for the year ended September 30,
2016. Refer to Note 18 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form
10-K for additional details regarding the dividend activity for the year ended September 30, 2017.
Valvoline expects to continue to pay quarterly cash dividends to the holders of its common stock; however, the declaration and
payment of dividends to holders of Valvoline common stock will be at the discretion of the Board in accordance with applicable law
after taking into account various factors, including Valvoline’s financial condition, operating results, current and anticipated cash
needs, cash flows, impact on Valvoline’s effective tax rate, indebtedness, legal requirements and other factors that the Board considers
relevant. In addition, the instruments governing Valvoline’s indebtedness may limit its ability to pay dividends. Therefore, no
assurance is given that Valvoline will pay any dividends to its stockholders, or as to the amount of any such dividends if the Board
determines to do so.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on a $100 investment in Valvoline common stock, the S&P Mid
Cap 400 Index and the S&P Mid Cap 400 Consumer Staples Index for the period from September 30, 2016 (following the IPO) to
September 30, 2017. This graph assumes an investment in the Valvoline common stock and each index were $100 on September 30,
2016 and that all dividends were reinvested.
24
120
100
80
60
09/30/16
Valvoline Inc. Comparison of 1-Year Cumulative Total Return Performance
12/31/16
03/31/17
06/30/17
09/30/17
VVV
S&P Mid Cap 400 Index
S&P Mid Cap 400 Consumer Staples Index
Comparison of cumulative total returns
Valvoline Inc.
9/30/2016
100
$
12/31/2016
92
$
3/31/2017
105
$
6/30/2017
102
$
9/30/2017
101
$
S&P Mid Cap 400 Index
S&P Mid Cap 400 Consumer Staples Index
$
$
100
100
$
$
107
102
$
$
112
105
$
$
114
101
$
$
118
100
Purchases of Company Common Stock
Purchases of Company Common Stock
h
h
il
On April 24, 2017, the Company's Board of Directors approved and authorized a Share Repurchase Program, under which Valvoline
d
may repurchase up to $150 million of the Company's common stock with the authorization through December 31, 2019. Under this
k i h h
program, shares may be repurchased on the open market, through Rule 10b5-1 trading plans, Rule 10b-18 repurchase programs and
program, shares may be repurchased on the open market, through Rule 10b5-1 trading plans, Rule 10b-18 repurchase programs and
accelerated share acquisition programs. As of September 30, 2017, $100 million remains available for repurchase under this
d h
authorization.
i
l
h i
h
h i
h i d
il bl
hi h
li
hi
d f
i i i
f h
illi
illi
hi
d
b
d
h
d
$
h
d
h
h
b
$
f
f
i
l
i
i
Share repurchase activity during the three months ended September 30, 2017 was as follows:
h h
d i
d d
f ll
i i
h
h
b
h
Issuer Purchases of Equity Securities (a)
Total Number
of Shares
Purchased
Average Price
Paid per Share,
including
commission
— $
— $
— $
—
—
—
—
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs (in
millions)(a)
— $
— $
— $
— $
100
100
100
100
Monthly Period
July 1, 2017 to July 31, 2017
August 1, 2017 to August 31, 2017
September 1, 2017 to September 30, 2017
Total
(a) Further information regarding the Company's share repurchases can be found in Note 18 of the Notes to Consolidated Financial Statements in Item 8 of Part II of
(a) Further information regarding the Company's share repurchases can be found in Note 18 of the Notes to Consolidated Financial Statements in Item 8 of Part II of
this Annual Report on Form 10-K.
hi
l
25
ITEM 6. SELECTED FINANCIAL DATA
Valvoline Inc. and Consolidated Subsidiaries
Five-Year Selected Financial Information (a)
(In millions)
Summary of operations
Sales
Gross profit
Operating income
Net income
Common stock information
Basic earnings per share (b)
Diluted earnings per share (b)
Dividends per common share
Cash flow information
Cash flows from operating activities
Less: Additions to property, plant and equipment
Plus: Discretionary contributions to pension plans
Free cash flow (c)
(In millions)
Balance sheet information
Total assets
Long-term debt and capital lease obligations (including
current portion)
Stockholders' (deficit) equity
Unaudited (In millions)
Other financial data
Lubricant sales volume (gallons)
Company-owned same-store sales growth (d)
Franchisee same-store sales growth (d)(e)
EBITDA (f)
Adjusted EBITDA (f)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
For the years ended September 30
2014
2015
2016
2013
2,084
778
532
304
1.49
1.49
0.20
$
$
$
$
$
$
$
(130) $
(68)
394
196
$
1,929
761
431
273
$
$
$
$
1,967
685
323
196
$
$
$
$
2,041
632
264
173
$
$
$
$
1.60
1.60
$
$
— $
1.15
1.15
$
$
— $
1.02
1.02
$
$
— $
1,996
658
381
246
1.45
1.45
—
311
(66)
—
245
$
$
330
(45)
—
285
$
$
170
(37)
—
133
$
$
273
(41)
—
232
2017
2016
As of September 30
2015
2014
1,915
$
1,825
$
1,075
$
(117) $
749
$
(330) $
978
4
617
$
$
$
2013
(unaudited)
1,062
$
1,083
4
725
$
$
3
684
2017
For the years ended September 30
2014
2015
2016
2013
179.7
174.5
167.4
162.6
158.4
7.0%
7.5%
574
517
$
$
6.2%
8.0%
468
457
$
$
7.5%
7.8%
335
421
$
$
4.5%
5.5%
301
368
$
$
1.9%
2.2%
416
342
(a) During the periods presented, Valvoline experienced certain changes in the composition of its assets and liabilities affecting the comparability of financial
information between years. These changes include, but are not limited to, the transfer of assets and liabilities from Ashland in 2016, separation from Ashland in
2017, an IPO in 2016, establishing a stand-alone capital structure in 2016, and the impact of immediately recognizing actuarial gains and losses for defined benefit
pension and other postretirement benefit plan remeasurements. During the five years ended September 30 presented above, Valvoline recognized a remeasurement
gain of $68 million in 2017, a gain of $18 million in 2016, a loss of $46 million in 2015, a loss of $61 million in 2014, and a gain of $74 million in 2013.
(b) The Company corrected an immaterial error in the net earnings per share (“EPS”) calculations for periods prior to and including September 30, 2016, and the
amounts included in the table above reflect the revised EPS calculations for the prior year periods. EPS was originally reported based on a weighted average
common shares outstanding of 204.5 million, which reflected both the 170 million shares issued to Ashland in the reorganization as well as the 34.5 million shares
issued in the IPO on September 28, 2016. EPS for the periods prior to and including September 30, 2016 have been revised based on an adjusted weighted average
common shares outstanding amount that includes the IPO shares only for the period they were outstanding. The impact of this change resulted in an increase in
previously reported EPS of $0.27, $0.19, $0.18, and $0.25 for the years ended September 30, 2016, 2015, 2014, and 2013, respectively. Refer to Note 17 of the
Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information.
In addition to cash flows from operating activities determined in accordance with U.S. GAAP, Valvoline uses free cash flow as a non-GAAP metric of cash flow
generation. By deducting capital expenditures from operating cash flows and adding discretionary contributions to pension plans, the Company is able to provide a
better 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 allocated costs, and includes the
pension and other postretirement plan remeasurement losses and gains. The amount of mandatory versus discretionary expenditures can vary significantly between
periods. Valvoline’s results of operations are presented based on its management structure and internal accounting practices. The structure and practices are
(c)
26
specific to Valvoline; therefore, its financial results and free cash flow are not necessarily comparable with similar information for other comparable companies.
Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, or more meaningful than, cash flows
provided by operating activities as determined in accordance with U.S. GAAP. In evaluating free cash flow, be aware that in the future Valvoline may incur
expenses similar to those for which adjustments are made in calculating free cash flow. Valvoline’s presentation of free cash flow should not be construed as a
basis to infer that its future results will be unaffected by unusual or nonrecurring items. Because of these limitations, one should rely primarily on cash flows
provided by operating activities as determined in accordance with U.S. GAAP and use free cash flow only as a supplement.
(d) 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.
(e) Valvoline franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
(f)
In addition to net income determined in accordance with U.S. GAAP, Valvoline evaluates operating performance using certain non-GAAP measures including
EBITDA, which Valvoline defines as net income, plus income tax expense (benefit), net interest and other financing expenses, and depreciation and amortization,
and Adjusted EBITDA, which Valvoline defines as EBITDA adjusted for losses (gains) on pension and other postretirement plans remeasurements, impairment of
equity investment, and other items, which can include costs related to the separation from Ashland, impact of significant acquisitions or divestitures, restructuring
costs, or other income/costs related to corporate or non-operational matters not directly attributable to the underlying business. Valvoline believes the use of non-
GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of its business by
presenting comparable financial results between periods. The non-GAAP information provided is used by management and may not be comparable to similar
measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA and Adjusted EBITDA. EBITDA and
Adjusted EBITDA provide a supplemental presentation of Valvoline’s operating performance on a consolidated and reportable segment basis. Adjusted EBITDA
generally includes adjustments for unusual, non-operational or restructuring-related activities.
The consolidated financial statements include actuarial gains and losses for defined benefit pension and other postretirement benefit plans recognized annually in
the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. Actuarial gains and losses occur when
actual experience differs from the estimates used to allocate the change in value of pension and other postretirement benefit plans to expense throughout the year
or when assumptions change, as they may each year. Significant factors that can contribute to the recognition of actuarial gains and losses 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. Management believes Adjusted
EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating performance, which includes the expected return on pension
plan assets and excludes both the actual return on pension plan assets and the impact of actuarial gains and losses. Though classified in operating income,
management believes these actuarial gains and losses are more reflective of changes in current conditions in global financial markets (and in particular interest
rates) that are not directly related to the operations of the underlying business and that do not have an immediate, corresponding impact on the compensation and
benefits provided to eligible employees and retirees.
EBITDA and Adjusted EBITDA 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 as determined in accordance with U.S. GAAP. Because of these limitations, one should rely primarily on net income as determined in
accordance with U.S. GAAP and use EBITDA and Adjusted EBITDA only as supplements. In evaluating EBITDA and Adjusted EBITDA, one should be aware
that in the future Valvoline may incur expenses similar to those for which adjustments are made in calculating EBITDA and Adjusted EBITDA. Valvoline’s
presentation of EBITDA and Adjusted EBITDA should not be construed as a basis to infer that future results will be unaffected by unusual or nonrecurring items.
The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented.
(In millions)
Net income
Income tax expense
Net interest and other financing expense
Depreciation and amortization
EBITDA
Separation costs
Adjustment associated with Ashland tax indemnity
Change in estimate - insurance reserves
(Gain) loss on pension and other postretirement plan
remeasurements
Net loss on acquisition and divestiture
Impairment of equity investment
Restructuring
Adjusted EBITDA
2017
For the years ended September 30
2014
2015
2016
2013
$
$
304
186
42
42
574
32
(16)
(5)
(68)
—
—
—
$
273
148
9
38
468
6
—
—
(18)
1
—
—
196
101
—
38
335
—
—
—
46
26
14
—
$
173
$
91
—
37
301
—
—
—
61
—
—
6
$
517
$
457
$
421
$
368
$
246
135
—
35
416
—
—
—
(74)
—
—
—
342
27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the accompanying Notes to
Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
BUSINESS OVERVIEW
Valvoline is a worldwide producer, marketer and supplier of engine and automotive maintenance products and services. In the United
States and Canada, Valvoline's products and services are sold to retailers with over 30,000 retail outlets, to installer customers with
over 12,000 locations, and through 1,127 Valvoline branded franchised and company-owned stores. Valvoline also has a strong
international presence with products sold in approximately 140 countries. Valvoline serves its customer base through an extensive
sales force and technical support organization, allowing Valvoline to leverage its technology portfolio and customer relationships
globally, while meeting customer demands locally. This combination of scale and strong local presence is critical to the Company’s
success.
Valvoline is one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known
for high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it
has developed powerful name recognition across multiple product and service channels. Valvoline also has a history of leading
innovation with revolutionary products such as All Climate™, DuraBlend™, and MaxLife™. 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.
Valvoline's fiscal year ends on September 30 of each year, and Valvoline has three reportable segments: Core North America, Quick
Lubes, and International, with certain corporate and non-operational items included in Unallocated and Other to reconcile to
consolidated results. Refer to Item 1 included in Part I of this Annual Report on Form 10-K for a description of Valvoline's reportable
segments.
2017 OVERVIEW
Separation from Ashland
On May 12, 2017, Ashland completed the distribution of 170 million shares of common stock of Valvoline to Ashland stockholders
(the “Distribution”) through a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record
date of May 5, 2017. Based on the shares of Ashland common stock outstanding as of May 5, 2017, each share of Ashland common
stock received 2.745338 shares of Valvoline common stock in the Distribution, marking the completion of Valvoline's separation from
Ashland. Effective upon the Distribution, Ashland no longer owned any shares of Valvoline common stock, and Valvoline was no
longer a controlled and consolidated subsidiary of Ashland.
Valvoline incurred certain costs related to the separation from Ashland, which are recorded within Separation costs in the Consolidated
Statements of Comprehensive Income included in Item 8 of Part II of this Annual Report on Form 10-K. During the years ended
September 30, 2017 and 2016, Valvoline recognized separation costs of $32 million and $6 million, respectively, which were primarily
related to nonrecurring expenses, including legal, consulting, accounting, and other professional fees, including a success fee related to
completing the Distribution, as well as employee costs and expenses to separate information technology platforms. Valvoline expects
to incur nominal costs related to the separation from Ashland in fiscal 2018.
Quick Lubes Acquisitions
During the year ended September 30, 2017, Valvoline acquired 43 company-owned stores within the Quick Lubes reportable segment,
including 28 stores related to the acquisition of the business assets from Time-It Lube LLC and Time-It Lube of Texas, LP (“Time-It
Lube”) in the second fiscal quarter of 2017. Refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8 of Part II of
this Annual Report on Form 10-K for additional information on the acquisitions completed during fiscal 2017.
28
Pension De-Risking Actions
During the fourth fiscal quarter of 2017, the Company took a number of actions to reduce the risk and volatility associated with the
U.S. qualified pension plan that was transferred from Ashland to Valvoline in fiscal 2016 prior to Valvoline's IPO.
• Valvoline made a discretionary contribution of $394 million to the U.S. qualified pension plan funded by the net proceeds
from the issuance of 4.375% senior unsecured notes due 2025 (the “2025 Notes”) with an aggregate principal amount of $400
million as described further in Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this
Annual Report on Form 10-K.
•
•
In addition, Valvoline purchased a non-participating annuity contract using plan assets for an insurer to pay and administer
future pension benefits for approximately 6,000 participants within the qualified U.S. pension plan. As a result, Valvoline
transferred $585 million of pension benefit obligations in exchange for a similar amount of plan assets.
Finally, given the impact these actions had on the funded status of the U.S. qualified pension plan, the Company also shifted
its target asset allocation toward more fixed income securities to better match asset duration to that of the pension plan
liabilities.
These actions have been leverage neutral to the Company and as a result of improved funded status, management does not expect
significant required cash contributions to the U.S. qualified pension plan for several years and expects administrative costs to be
reduced. These actions resulted in meaningful cash tax savings due to the Company's ability to reduce U.S. taxable income for these
contributions. These significant cash tax savings will continue in future periods as the Company utilizes the net operating loss
carryforward in 2017 to offset future U.S. taxable income generated from operations. At the end of fiscal 2017, total pension benefit
and other postretirement obligations were $2.4 billion compared to $3.2 billion at the end of fiscal 2016 and total funded status
improved to 85% in 2017 from 72% in 2016. For further information regarding these actions and the Company's pension and other
postretirement obligations, refer to Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this
Annual Report on Form 10-K.
BUSINESS STRATEGY
Valvoline’s key business and growth strategies include:
•
•
•
growing and strengthening Valvoline’s quick lube network through organic store expansion, opportunistic, high-quality
acquisitions in both core and new markets within the VIOC system and strong sales efforts to partner with new Express
Care operators, in addition to continued same-store sales growth and profitability within Valvoline’s existing VIOC
system stores by attracting new customers and increasing customer satisfaction, customer loyalty and average transaction
size;
accelerating international growth across key markets where demand for premium lubricants is growing, such as China,
India and select countries in Latin America, by building strong distribution channels in under-served geographies,
replacing less successful distributors and improving brand awareness among installer customers in those regions; and
leveraging innovation, both in terms of product development, packaging, marketing and the implementation of Valvoline’s
new digital infrastructure, to strengthen market share and profitability.
Use of Non-GAAP Measures
Valvoline has included within this document several non-GAAP measures, on both a consolidated and reportable segment basis, which
are not defined within U.S. GAAP and do not purport to be alternatives to net income or cash flows from operating activities as
measures of 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, plus income tax expense/benefit, net interest and other financing
expenses, and depreciation and amortization;
• EBITDA margin, which management defines as EBITDA divided by sales;
• Adjusted EBITDA, which management defines as EBITDA adjusted for losses/gains on pension and other postretirement
plan remeasurements, impairment of equity investment, and other items (which can include costs related to the separation
from Ashland, impact of significant acquisitions or divestitures, restructuring costs, or other non-operational income/costs not
directly attributable to the underlying business);
29
• Adjusted EBITDA margin, which management defines as Adjusted EBITDA divided by sales; 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 with U.S. GAAP, contain management’s best estimates of cost allocations and shared
resource costs. Management believes the use of non-GAAP measures on a consolidated and reportable segment basis 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 and Adjusted EBITDA.
EBITDA and Adjusted EBITDA provide a supplemental presentation of Valvoline’s operating performance on a consolidated and
reportable segment basis.
Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities. Valvoline’s
consolidated financial statements include actuarial gains and losses for defined benefit pension and other postretirement benefit plans
recognized annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during
a fiscal year. Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of
pension and other postretirement benefit plans to expense throughout the year or when assumptions change, as they may each year.
Significant factors that can contribute to the recognition of actuarial gains and losses 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.
Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating
performance, which includes the expected return on pension plan assets and excludes both the actual return on pension plan assets and
the impact of actuarial gains and losses. Though classified in operating income, management believes these actuarial gains and losses
are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly
related to the underlying business and that do not have an immediate, corresponding impact on the compensation and benefits
provided to eligible employees and retirees. For further information on the actuarial assumptions and plan assets referenced above, see
“Critical Accounting Policies-Employee benefit obligations” within this Item 7 and Note 12 of the Notes to Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Management uses free cash flow as an additional non-GAAP metric of cash flow generation. By deducting capital expenditures and
adding discretionary contributions to pension plans, management is able to provide a better 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
allocated costs and 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, you should rely primarily on net income and cash flows from operating activities as determined in accordance with U.S.
GAAP and use EBITDA, Adjusted EBITDA, and free cash flow only as supplements. In evaluating EBITDA, Adjusted EBITDA, and
free cash flow, you should be aware that in the future Valvoline may incur expenses 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.
30
The following table reconciles EBITDA and Adjusted EBITDA to net income for the three annual periods presented.
(In millions)
Net income
Income tax expense
Net interest and other financing expense
Depreciation and amortization
EBITDA
Separation costs
Adjustment associated with Ashland tax indemnity
Change in estimate - insurance reserves
(Gain) loss on pension and other postretirement plan remeasurements
Net loss on acquisition and divestiture
Impairment of equity investment
Adjusted EBITDA (a)
$
For the years ended September 30
2017
2016
2015
$
304
186
42
42
574
32
(16)
(5)
(68)
—
—
$
273
148
9
38
468
6
—
—
(18)
1
—
196
101
—
38
335
—
—
—
46
26
14
$
517
$
457
$
421
(a)
Includes recurring net periodic pension and other postretirement cost/income, which consists of service cost, interest cost, expected return on plan assets and
amortization of prior service credit. Fiscal 2017 included income of $68 million, fiscal 2016 included income of $7 million, and the impact in fiscal 2015 was less
than $1 million. Net periodic pension and other postretirement income is disclosed in further detail in Note 14 of the Notes to Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report on Form 10-K.
EBITDA and Adjusted EBITDA
The increase in Adjusted EBITDA of $60 million in 2017 was primarily due to an increase in pension and other postretirement non-
service income of $53 million in 2017, solid performance by the reportable segments led by Quick Lubes, and offset by investments in
the Company's stand-alone public company infrastructure. The increase in Adjusted EBITDA of $36 million from 2015 to 2016 is
primarily attributed to strong performance of the reportable segments, notably the mix and volume gains in Core North America and
Quick Lubes as well as improved raw materials cost, partially offset by International primarily due to the negative impact of foreign
currency exchange.
RESULTS OF OPERATIONS
Consolidated Review
A comparative analysis of the Consolidated Statements of Comprehensive Income by caption is provided as follows for the years
ended September 30, 2017, 2016 and 2015.
(In millions)
Sales
2017
2016
2015
2017
Change
2016
Change
$
2,084
$
1,929
$
1,967
$
155
$
(38)
31
The following table provides a reconciliation of the change in sales between fiscal years 2017 and 2016 and between fiscal years 2016
and 2015.
(In millions)
Pricing
Volume
Product mix
Currency exchange
Divestiture and acquisition, net
Change in sales
2017 compared to 2016
2017
Change
2016
Change
$
$
37
57
29
2
30
155
$
$
(94)
68
29
(31)
(10)
(38)
Sales increased $155 million, or 8%, to $2,084 million in 2017. The primary drivers of this increase were higher volume levels and
higher product pricing, which increased sales by $57 million, or 3% and $37 million, or 2%, respectively. Favorable changes in
product mix with increases in the percentage of sales for premium lubricants in Core North America and Quick Lubes and favorable
foreign currency exchange increased sales by $29 million, or 2%, and $2 million, respectively. During 2017, lubricant gallons sold
increased 3% to 179.7 million. Acquisitions within the Quick Lubes reportable segment increased sales by $30 million, or 2% during
2017.
2016 compared to 2015
Sales decreased $38 million, or 2%, to $1,929 million in 2016. Lower product pricing and unfavorable foreign currency exchange
decreased sales by $94 million, or 5%, and $31 million, or 2%, respectively. Unfavorable foreign currency exchange was due to the
U.S. dollar strengthening compared to various foreign currencies, primarily the Australian dollar, Euro and the Chinese Yuan. Higher
volume levels and changes in product mix increased sales by approximately $68 million, or 3%, and approximately $29 million,
respectively. During 2016, lubricant gallons sold increased 4% to 174.5 million. The net $10 million decrease due to divestitures and
acquisitions is due to the divestiture of car care products within the Core North America reportable segment during fiscal 2015 which
decreased sales by $45 million in 2016, net of increased sales of $35 million during 2016 from acquisitions within the Quick Lubes
reportable segment.
(In millions)
Cost of sales
2017
2016
2015
2017
Change
2016
Change
$ 1,306
$ 1,168
$ 1,282
$
138
$
(114)
Gross profit as a percent of sales
37.3%
39.5%
34.8%
The following table provides a reconciliation of the changes in cost of sales between fiscal years 2017 and 2016 and between fiscal
years 2016 and 2015.
(In millions)
Product cost
Volume and product mix
Divestiture and acquisition, net
Pension benefit plans income (including remeasurements)
Currency exchange
Change in cost of sales
2017
Change
2016
Change
$
$
54
50
24
9
1
$
138
$
(114)
65
(14)
(28)
(23)
(114)
32
2017 compared to 2016
Cost of sales increased $138 million during 2017 compared to 2016. Higher raw material costs increased cost of sales by $54 million
primarily due to base oil prices increases in 2017. Changes in volume and product mix combined to increase cost of sales by $50
million. Additional sales generated by acquisitions of Quick Lubes locations increased cost of sales by $24 million. In addition, during
2017, cost of sales increased compared to 2016 due to a $9 million decrease in income related to the Company's pension benefit plans.
Due to the freeze of U.S. pension benefits effective September 30, 2016, the only significant pension costs that are included in Cost of
sales beginning in fiscal 2017 include the ongoing service costs and remeasurement adjustments related to certain international
pension benefits. As a result, service costs in Cost of sales decreased $3 million year over year, and non-service income and
remeasurement gains in Cost of sales decreased by $12 million. As a result of these matters, gross profit as a percent of sales declined
driven largely by higher raw materials costs during 2017 as compared to 2016.
2016 compared to 2015
Cost of sales decreased $114 million during 2016 compared to 2015. Lower raw material costs decreased cost of sales by $114 million
primarily due to declining base oil prices in 2016. Favorable foreign currency exchange decreased cost of sales by $23 million, while
changes in volume and product mix combined to increase cost of sales by $65 million. The divestiture of car care products during
fiscal 2015 decreased cost of sales by $38 million in 2016 and was partially offset by increased cost of sales of $24 million from the
acquisition of OCH International Inc. (“Oil Can Henry’s”) during 2016. During 2016, cost of sales decreased compared to 2015 due to
increased income of $28 million primarily related to pension and other postretirement benefit plan remeasurements. Gross profit as a
percent of sales increased due to lower cost of sales driven largely by lower raw material costs during 2016 as compared to 2015.
(In millions)
2017
2016
2015
2017
Change
2016
Change
Selling, general and administrative expense
$
375
$
365
$
348
$
10
$
17
Pension and other postretirement plan non-service income and
remeasurement adjustments, net
Separation costs
Total operating expense
As a percent of sales
2017 compared to 2016
(136)
32
271
$
$
(22)
6
349
$
22
—
370
$
(114)
26
(78) $
(44)
6
(21)
13.0%
18.1%
18.8%
Total operating expense decreased $78 million, or 22%, during 2017 as compared to 2016. Key drivers of this decrease were:
•
•
a decrease of $114 million related to pension and other postretirement plan non-service income and remeasurement
adjustments. Specifically, during 2017, remeasurement gains of $66 million were recognized along with pension and other
postretirement plan non-service income of $70 million. This compared to remeasurement gains of $11 million and non-
service income of $11 million in 2016;
a $16 million benefit for a reduction in amounts due to Ashland under the Tax Matters Agreement as a result of Ashland's
utilization of Valvoline tax attributes in the Ashland group income tax returns; and
•
a $5 million benefit related to a change in estimate for insurance reserves.
These decreases were partially offset by increased separation costs of $26 million and approximately $3 million in costs from
acquisitions. Additionally, overall spend compared to the prior year increased primarily as a result of establishing Valvoline as a stand-
alone public company. The spend for people and professional assistance necessary to operate independently more than offset a
decrease in allocated corporate costs from the Company's former parent.
2016 compared to 2015
Operating expense decreased $21 million, or 6%, during 2016 as compared to 2015. Key drivers of this decrease were:
•
a decrease of $44 million related to the pension and other postretirement costs. Specifically, during 2016, remeasurement
gains of $11 million were recognized along with pension and other postretirement plan non-service income of $11 million.
This compared to remeasurement losses of $28 million and non-service income of $6 million in 2015;
33
•
•
a decrease in spending of $6 million due to the divestiture of car care products; and
a decrease of $5 million due to favorable currency exchange impacts.
These decreases were partially offset by the following significant increases:
•
•
•
•
•
•
•
separation costs of $6 million;
increased labor-related costs of $6 million related to the Company's investments in its infrastructure and teams;
increased spend of $4 million related to operating costs associated with the acquisition of Oil Can Henry’s;
increased consultant and technology cost of $4 million attributable to the Company's digital initiatives;
increased advertising and sales promotion expenses of $4 million;
increased research and development costs of $2 million; and
increased bad debt related expense of $2 million.
(In millions)
Equity and other income
Equity income (loss)
Other income
2017 compared to 2016
2017
2016
2015
2017
Change
2016
Change
$
$
12
13
25
$
$
12
7
19
$
$
(2) $
10
8
$
— $
6
6
$
14
(3)
11
Equity and other income increased by $6 million during 2017 compared to 2016. Equity income was flat compared to 2016, while
other income increased by $6 million primarily due to an increase in income generated by research and development testing and
royalties from the Company's investments in joint ventures, which had increased volumes and revenues.
2016 compared to 2015
Equity income (loss) increased by $14 million during 2016 compared to 2015, primarily due to the $14 million impairment of a joint
venture equity investment within Venezuela in 2015. For additional information, refer to Note 4 of the Notes to Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K. Other income decreased by $3 million primarily due to a
decrease in income due to divestitures and unfavorable currency impacts.
(In millions)
Net interest and other financing expense
2017
2016
2015
2017
Change
2016
Change
$
42
$
9
$
— $
33
$
9
2017 compared to 2016
Net interest and other financing expense increased by $33 million during 2017 compared to 2016. This increase was largely driven by
the timing of Valvoline's debt structure that was put into place in the fourth fiscal quarter of 2016, which included the term loan
borrowing and issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million (“2024
Notes”), that drove higher year over year interest costs. In addition, there was an increase in interest associated with higher
outstanding debt in 2017 primarily related to $75 million in new borrowings on the accounts receivable securitization facility entered
into in the first fiscal quarter of 2017 and the 2025 Notes issuance in the aggregate principal amount of $400 million senior unsecured
notes in the fourth fiscal quarter of 2017.
2016 compared to 2015
Net interest and other financing expense increased by $9 million during 2016 compared to 2015 due to Valvoline's debt structure that
was put into place in the fourth fiscal quarter of 2016, including the issuance of the 2024 Notes and term loan borrowing. There was
no outstanding debt in 2015.
34
(In millions)
Net loss on acquisition and divestiture
2017
2016
2015
2017
Change
2016
Change
$
— $
1
$
26
$
(1) $
(25)
The loss on acquisition and divestiture in 2016 represents costs to complete the acquisition of Oil Can Henry's while the 2015 amount
represents the loss on the disposition of car care products. This loss was a result of the book value exceeding the sales price of the
assets sold. There was no loss on acquisition and divestiture for 2017.
(In millions)
Income tax expense
Effective tax rate
2017
2016
2015
2017
Change
2016
Change
$
186
$
148
$
101
$
38
$
47
38.0%
35.2%
34.0%
The effective tax rates in each year are generally in line with the U.S. statutory rate. The increase in the 2017 and 2016 effective tax
rates is partially due to the increase in income from pension and other postretirement benefits that generated significant income
amounts in higher tax rate jurisdictions. Additionally, in fiscal 2017, the effective tax rate was impacted by income tax expense
resulting from the Tax Matters Agreement activity with Ashland, certain non-deductible separation costs, and the partial loss of certain
tax deductions as a result of the $394 million voluntary contribution to the U.S. qualified pension plan, partially offset by a benefit
from a state valuation allowance release. During fiscal years 2017, 2016 and 2015, the effective tax rate was impacted favorably by
the lower tax rate on foreign earnings and net favorable permanent items. These favorable items are offset by the unfavorable impact
of state taxes, and these adjustments net to an immaterial overall impact to the effective tax rate for each year.
Reportable Segment Review
Valvoline’s business is managed within three reportable segments: Core North America, Quick Lubes and International. 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. Valvoline allocates all
costs to its reportable segments except for 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. The
service cost component of pension and other postretirement benefit costs is allocated to each reportable segment on a ratable basis,
while the remaining non-service and remeasurement components of pension and other postretirement benefits costs are recorded to
Unallocated and other. Valvoline refines its expense allocation methodologies to the reportable segments from time to time as internal
accounting practices are improved, more refined information becomes available and the industry or market changes. Revisions to
Valvoline’s methodologies that are insignificant are applied on a prospective basis.
The EBITDA and Adjusted EBITDA amounts presented within this section are provided as a means to enhance the understanding of
financial measurements that Valvoline has internally determined to be relevant measures of comparison for each reportable segment.
Each of these non-GAAP measures is defined as follows: EBITDA (operating income plus depreciation and amortization), Adjusted
EBITDA (EBITDA adjusted for key items, which may include adjustments for significant acquisitions or divestitures, as applicable),
and Adjusted EBITDA margin (Adjusted EBITDA divided by sales). Valvoline does not generally allocate items to each reportable
segment below operating income, such as interest expense and income taxes. As a result, reportable segment EBITDA and Adjusted
EBITDA are reconciled directly to operating income since it is the most directly comparable Consolidated Statements of
Comprehensive Income caption.
35
The following table shows sales, operating income and statistical operating information by reportable segment for the years ended
September 30, 2017, 2016 and 2015.
(In millions)
Sales
Core North America
Quick Lubes
International
Operating income (loss)
Core North America
Quick Lubes
International
Total operating segments
Unallocated and other
Depreciation and amortization
Core North America
Quick Lubes
International
Operating information
Core North America
Lubricant sales gallons
Premium lubricants (percent of U.S. branded volumes)
Gross profit as a percent of sales
(a)
Quick Lubes
Lubricant sales gallons
Premium lubricants (percent of U.S. branded volumes)
Gross profit as a percent of sales (a)
International
Lubricant sales gallons (b)
Lubricant sales gallons, including unconsolidated joint ventures
Premium lubricants (percent of lubricant volumes)
Gross profit as a percent of sales
(a)
(a) Gross profit is defined as sales, less cost of sales.
(b) Excludes volumes from unconsolidated joint ventures.
Core North America
2017 compared to 2016
$
$
$
$
$
$
For the years ended September 30
2017
2016
2015
1,004
$
541
539
$
979
457
493
2,084
$
1,929
$
1,061
394
512
1,967
199
130
76
405
127
532
15
22
5
42
$
$
$
$
99.4
45.8%
39.5%
22.5
59.9%
40.3%
57.8
94.7
27.6%
29.8%
212
117
74
403
28
431
16
17
5
38
$
$
$
$
101.2
41.4%
41.2%
20.2
57.1%
41.6%
53.1
85.3
29.0%
31.4%
200
95
65
360
(37)
323
17
16
5
38
99.9
36.6%
36.6%
17.4
54.5%
39.8%
50.1
80.1
30.9%
30.2%
Core North America sales increased $25 million, or 3%, to $1,004 million in 2017. Higher product pricing and favorable changes in
product mix increased sales by $21 million, or 2%, and $20 million, or 2%, respectively. Lower volume levels decreased sales by $16
million, or 2%.
36
Gross profit decreased $6 million during 2017 compared to 2016. Higher raw material costs, partially offset by higher product pricing
and decreased gross profit by $14 million, while changes in volume and product mix combined for a net increase in gross profit by $8
million. Gross profit as a percent of sales (or gross profit margin) during the year decreased 1.7 percentage points to 39.5% driven
largely by higher raw materials costs during 2017 as compared to 2016.
Selling, general and administrative expense increased $7 million during the current period, primarily as a result of $2 million of
increased employee costs, and an $8 million increase of shared expenses partially due to stand-alone public company costs, net of a $3
million decrease in bad debts.
Operating income totaled $199 million in the current period as compared to $212 million in the prior year period. EBITDA decreased
$14 million to $214 million in 2017. EBITDA margin decreased 2.0 percentage points to 21.3% in 2017.
2016 compared to 2015
Core North America sales decreased $82 million, or 8%, to $979 million in 2016. Lower product pricing and the disposition of car
care products decreased sales by $68 million, or 6%, and $45 million, or 4%, respectively. Changes in product mix and higher volume
levels increased sales by $27 million, or 3%, and $7 million, respectively. Unfavorable foreign currency exchange decreased sales by
$3 million primarily due to the U.S. dollar strengthening compared to the Canadian dollar.
Gross profit increased $15 million during 2016 compared to 2015. Lower product costs, partially offset by lower product pricing,
increased gross profit by $12 million, while changes in volume and product mix combined to increase gross profit by $11 million. The
divestiture of car care products and unfavorable foreign currency exchange decreased gross profit by $7 million and $1 million,
respectively. Gross profit as a percent of sales (or gross profit margin) during the current period increased 4.6 percentage points to
41.2%.
Selling, general and administrative expense (which, for reportable segment purposes, includes corporate expense allocation costs)
increased $3 million during the current period, primarily as a result of $4 million of increased consulting and legal costs, $2 million of
increased bad debt expense, $2 million of increased research and development expenses and $1 million of salaries expense. These
increases were partially offset by cost savings from the divestiture of car care products of $6 million. Equity and other income
remained consistent compared to the prior year.
Operating income totaled $212 million in the current period as compared to $200 million in the prior year period. EBITDA increased
$11 million to $228 million in 2016. EBITDA margin increased 2.8 percentage points to 23.3% in 2016.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline
has internally determined to be relevant measures of comparison for the results of Core North America. There were no unusual or key
items that affected comparability for Adjusted EBITDA for all periods presented herein.
(In millions)
Operating income
Depreciation and amortization
EBITDA
Quick Lubes
2017 compared to 2016
For the years ended September 30
2017
2016
2015
$
$
199
15
214
$
$
212
16
228
$
$
200
17
217
Quick Lubes sales increased $84 million, or 18%, to $541 million during 2017. Volume increased sales by $29 million as lubricant
sales gallons increased to 22.5 million gallons during 2017. Acquisitions increased sales by $30 million and favorable product pricing
increased sales by approximately $17 million. Favorable changes in product mix increased sales $8 million.
Gross profit increased $28 million during 2017 compared to 2016. Increases in volumes and higher premium product mix combined to
increase gross profit by approximately $15 million. Favorable product pricing, partially offset by increased raw material costs,
increased gross profit by $7 million, while acquisitions increased gross profit by $6 million. Gross profit margin during the current
year decreased 1.3 percentage points to 40.3% driven largely by higher raw materials costs.
37
Selling, general and administrative expense increased $15 million during 2017. The increase was primarily a result of a $4 million
increase in advertising and sales promotion costs, a $3 million increase in operating costs as a result of acquisitions, and an $8 million
increase in shared expenses partially due to stand-alone public company costs. Equity and other income was essentially flat in 2017
compared to 2016.
Operating income totaled $130 million in 2017 as compared to $117 million in 2016. EBITDA increased $18 million to $152 million
in 2016. EBITDA margin decreased 1.2 percentage points to 28.1% in 2017.
2016 compared to 2015
Quick Lubes sales increased $63 million, or 16%, to $457 million during 2016. Volume increased sales by $34 million as lubricant
sales gallons increased to 20.2 million gallons during 2016. Acquisitions increased sales by $35 million, while unfavorable product
pricing decreased sales by $8 million. Changes in product mix increased sales $2 million.
Gross profit increased $33 million during 2016 compared to 2015. Increases in volumes and changes in product mix combined to
increase gross profit by $13 million. Lower raw material costs, partially offset by unfavorable product pricing, increased gross profit
by $9 million, while the acquisition of Oil Can Henry’s increased gross profit by $11 million. Gross profit margin during the current
year increased 1.8 percentage points to 41.6%.
Selling, general and administrative expense increased $11 million during 2016. The increase was primarily a result of a $4 million
increase in operating costs as a result of the acquisition of Oil Can Henry’s, $4 million of increased allocated resource costs from
Ashland, a $1 million increase in advertising and sales promotion costs and a $1 million increase in salaries and incentive
compensation costs. Equity and other income was essentially flat in 2016 compared to 2015.
Operating income totaled $117 million in 2016 as compared to $95 million in 2015. EBITDA increased $23 million to $134 million in
2016. EBITDA margin increased 1.1 percentage points in to 29.3% in 2016.
38
Additional Sales and Growth Information
Quick Lubes sales are influenced by the number of company-owned stores and the business performance of those stores. Through
Quick Lubes, Valvoline sells products to and receive royalty fees from VIOC franchisees. As a result, Quick Lubes sales are
influenced by the number of units owned by franchisees and the business performance of franchisees. The following table provides
supplemental information regarding company-owned stores and franchisees that Valvoline believes is relevant to an understanding of
the Quick Lubes business.
Beginning of period
Opened
Acquired
Conversions between company-owned and franchise
Closed
End of period
Beginning of period
Opened
Acquired
Conversions between company-owned and franchise
Closed
End of period
Total VIOC Stores
Company-owned
For the years ended September 30
2017
2016
2015
342
3
29
14
(4)
384
279
3
52
9
(1)
342
Franchise*
For the years ended September 30
2017
2016
2015
726
38
—
(14)
(7)
743
663
33
42
(9)
(3)
726
1,127
1,068
272
1
3
3
—
279
650
28
—
(3)
(12)
663
942
The year over year change from 2017 to 2016 is primarily driven by the acquisition of business assets from Time-It Lube in the second
quarter of 2017, which added 28 company-owned locations and other smaller acquisitions during 2017, including conversions from
franchises that added 15 company-owned locations.
Same-Store Sales Growth** - Company-owned
Same-Store Sales Growth** - Franchisee*
Same-Store Sales Growth** - Combined*
For the years ended September 30
2017
2016
2015
7.0%
7.5%
7.4%
6.2%
8.0%
7.5%
7.5%
7.8%
7.7%
* Valvoline’s franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
** 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.
39
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline
has internally determined to be relevant measures of comparison for the results of Quick Lubes. There were no unusual or key items
that affected comparability for Adjusted EBITDA for all periods presented herein.
(In millions)
Operating income
Depreciation and amortization
EBITDA
International
2017 compared to 2016
For the years ended September 30
2017
2016
2015
$
$
130
22
152
$
$
117
17
134
$
$
95
16
111
International sales increased $46 million, or 9%, to $539 million in 2017. Higher volume levels and changes in product mix combined
to increase sales by a net $45 million, or 9%. Favorable foreign currency exchange increased sales by $2 million, while unfavorable
product pricing decreased sales by $1 million due to pricing increases being put into place in the latter part of 2017.
Gross profit increased $6 million in 2017 compared to 2016. Increases in volumes and unfavorable changes in product mix combined
to increase gross profit by $14 million. Favorable foreign currency exchange increased gross profit by $1 million, while higher
product costs resulted in a $9 million decrease in gross profit. Gross profit margin during 2017 decreased 1.6 percentage points to
29.8% largely driven by higher raw materials costs, coupled with the timing of price increases and unfavorable changes in product
mix.
Selling, general and administrative expense increased $7 million during the year, primarily as a result of $2 million of employee costs,
$2 million of legal reserves and expenses related to the settlement of historical tax matters, $1 million related to foreign currency
exchange and a $2 million increase in shared expenses partially due to stand-alone public company costs. Equity and other income
increased $3 million compared to 2016 primarily as a result of increased royalty income from joint ventures during 2017.
Operating income totaled $76 million in 2017 as compared to $74 million in the prior year. EBITDA increased $2 million in 2017 to
$81 million. EBITDA margin decreased 1.0 percentage points to 15.0% in the current year.
2016 compared to 2015
International sales decreased $19 million, or 4%, to $493 million in 2016. Unfavorable foreign currency exchange, primarily with the
Yuan and Australian dollar, decreased sales by $28 million, or 5%. Higher volume levels increased sales by $27 million, or 5%. Lower
product pricing decreased sales by $18 million.
Gross profit was essentially unchanged in 2016 compared to 2015. Unfavorable foreign currency exchange decreased gross profit by
$7 million, while increases in volumes and changes in product mix combined to increase gross profit by $7 million. Lower product
pricing was partially offset by lower product costs resulting in minimal gross profit impact. Gross profit margin during 2016 increased
1.2 percentage points to 31.4%.
Selling, general and administrative expense increased $2 million during the current period, primarily as a result of $1 million of
salaries expense, $1 million of advertising and sales promotion costs, and $1 million of cost savings from resource costs allocated
from Valvoline’s parent company. Equity and other income (loss) increased $11 million compared to 2015 primarily as a result of the
$14 million impairment of the Venezuelan equity method investment in 2015. For additional information, refer to Note 4 of the Notes
to Consolidated Financial Statements.
Operating income totaled $74 million in 2016 as compared to $65 million in the prior year. EBITDA increased $9 million in 2016 to
$79 million. Adjusted EBITDA decreased $5 million and Adjusted EBITDA margin decreased 0.4 percentage points to 16.0% in the
current year.
40
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA and Adjusted EBITDA presentation is provided as a means to enhance the understanding of financial
measurements that Valvoline has internally determined to be relevant measures of comparison for the results of International. Adjusted
EBITDA results have been prepared to illustrate the ongoing effects of Valvoline’s operations, which exclude certain key items. The
$14 million adjustment during the year ended September 30, 2015 is related to the impairment of an equity method investment within
Venezuela.
(In millions)
Operating income
Depreciation and amortization
EBITDA
Impairment of equity investment
Adjusted EBITDA
Unallocated and Other
For the years ended September 30
2017
2016
2015
$
$
76
5
81
—
81
$
$
74
5
79
—
79
$
$
65
5
70
14
84
Unallocated and other generally includes items such as components of pension and other postretirement benefit plan expenses
(excluding service costs, which are allocated to the reportable segments), certain corporate and other non-operational matters, such as
company-wide restructuring activities and legacy costs, including those associated with the separation from Ashland.
The following table summarizes the key components of the Unallocated and other segment’s operating income (expense) for the fiscal
years ended September 30, 2017, 2016, and 2015.
(In millions)
Gain (loss) on pension and other postretirement plan remeasurements
Non-service pension and other postretirement net periodic income (a)
Separation costs
Adjustment associated with Ashland tax indemnity
Change in estimate - insurance reserves
Other
Total income (expense)
For the years ended September 30
2017
2016
2015
$
$
68
70
(32)
16
5
—
127
$
$
18
17
(6)
—
—
(1)
28
$
$
(46)
9
—
—
—
—
(37)
(a) Amounts exclude service costs of $2 million during 2017, $10 million during 2016 and $9 million during 2015, which are allocated to Valvoline’s reportable
segments.
Fiscal years ended September 30, 2017, 2016, and 2015
Unallocated and other recorded income of $127 million for 2017 and income of $28 million for 2016 compared to expense of $37
million for 2015. Unallocated and other includes pension and other postretirement non-service cost certain other corporate or non-
operational costs that have not been allocated to the reportable segments.
In connection with Valvoline’s separation from Ashland, the Company assumed pension and other postretirement benefit obligations
and plan assets, of which a substantial portion relates to the U.S. pension and other postretirement plans. Before the transfer, these
plans were accounted for by Valvoline as multiemployer plans. In 2015, Valvoline received an allocation of the cost for these benefits
based on Valvoline employees’ relative participation in the plans. However, as the responsibility for several of Ashland’s pension and
other postretirement plans transferred to Valvoline during 2016, the full amount of any costs or gains related to the transferred plans
has been reflected within the Valvoline consolidated financial statements for the month of September 2016 and the year ended
September 30, 2017. These pension and other postretirement plan costs include interest cost, expected return on assets and
amortization of prior service credit, which resulted in income of $70 million during 2017, $17 million during 2016 and $9 million
during 2015. Unallocated and other also includes gains and losses on pension and other postretirement plan remeasurements, which
resulted in a gain of $68 million in 2017, a gain of $18 million in 2016 and a loss of $46 million in 2015. Fluctuations in these
amounts from year to year result primarily from changes in the discount rate but are also partially affected by differences between the
41
expected and actual return on plan assets during each year as well as other changes in other actuarial assumptions such as changes in
demographic data or mortality assumptions.
In 2017, Unallocated and other also includes $32 million of separation costs, $16 million of income related to adjustments associated
with the Ashland tax indemnity and $5 million of income from the release of previously-estimated insurance reserves. In 2016,
Unallocated and other included $6 million of separation costs in 2016 and $1 million of other legacy costs allocated from Ashland to
Valvoline.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA and Adjusted EBITDA presentation is provided as a means to enhance the understanding of financial
measurements that Valvoline has internally determined to be relevant measures of comparison for the results of Unallocated and other.
Adjusted EBITDA results have been prepared to illustrate the ongoing effects of Valvoline’s operations, which exclude certain key
items.
(In millions)
Operating income
Depreciation and amortization
Net loss on acquisition and divestiture
EBITDA
(Gain) loss on pension and other postretirement plan remeasurements
Separation costs
Adjustment associated with Ashland tax indemnity
Change in estimate - insurance reserves
Net loss on acquisition and divestiture
Adjusted EBITDA
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Overview
For the years ended September 30
2017
2016
2015
$
127
$
—
—
127
(68)
32
(16)
(5)
—
$
70
$
28
—
(1)
27
(18)
6
—
—
1
16
$
$
(37)
—
(26)
(63)
46
—
—
—
26
9
In periods prior to Valvoline's IPO, the primary source of liquidity for Valvoline’s business was the cash flow provided by operations,
which was transferred to Ashland to support its overall centralized cash management strategy. Transfers of cash to and from Ashland’s
cash management system have been reflected in Ashland's net investment in the historical Consolidated Balance Sheets, Consolidated
Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity (Deficit). In connection with Valvoline’s
reorganization and initial separation from Ashland's other businesses in fiscal 2016, the Company received $60 million in cash from
Ashland. Since its IPO, Valvoline maintains its own cash management and financing functions for its operations.
Operating activities
The cash generated during each period is primarily driven by net earnings, adjusted for certain non-cash items such as depreciation
and amortization and remeasurement adjustments to the pension and other postretirement plans, as well as changes in working capital,
which are fluctuations within accounts receivable, inventory, trade payables and other accrued expenses. Valvoline continues to
emphasize working capital management as a high priority and focus.
42
The following table sets forth the cash flows associated with Valvoline’s operating activities:
(In millions)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash flows from operating activities
For the years ended September 30
2017
2016
2015
$
304
$
273
$
196
Depreciation and amortization
Debt issuance cost amortization
Deferred income taxes
Equity income from affiliates
Distributions from equity affiliates
Net loss on acquisition and divestiture
Impairment of equity method investment
Pension contributions
(Gain) loss on Valvoline pension and other postretirement plan
remeasurements
Stock-based compensation expense
Change in assets and liabilities (a)
Accounts receivable
Inventories
Payables and accrued liabilities
Other assets and liabilities
Total cash flows (used in) provided by operating activities
$
(a) Excludes changes resulting from operations acquired or sold.
42
3
117
(12)
8
—
—
(412)
(68)
9
(22)
(35)
—
(64)
(130) $
38
4
13
(12)
16
1
—
(2)
(42)
—
(17)
(4)
5
38
311
$
38
—
(9)
(12)
18
26
14
—
2
—
53
(6)
2
8
330
Cash flows from operating activities decreased by $441 million in 2017. The decrease in cash flows from operating activities was
primarily related to the Company's discretionary pension contribution of $394 million and other incremental pension contributions of
$16 million, as well as incremental cash payments of $92 million related to interest and tax payments during 2017, which included
tax-sharing payments to Ashland related to the pre-Distribution periods. These decreases were generally offset by improved net
earnings and non-cash stock-based compensation expense.
Cash provided by operating activities decreased by $19 million in 2016 from 2015. The decrease in cash flows provided by operating
activities was primarily related to a number of factors related to the separation and IPO, net of increased net income. These factors
resulted in increased receivables, net of increased accrued expenses and other liabilities, and increased deferred income tax expense.
The changes in working capital were primarily related to separation and financing activities in the fourth fiscal quarter of 2016 which
increased payables and accrued expenses offset by increased receivables as customer payments on Valvoline receivables were
collected by Ashland prior to year-end but were not remitted to Valvoline before September 30, 2016.
Investing activities
The following table sets forth the cash flows associated with Valvoline’s investing activities:
(In millions)
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisitions, net of cash required
Proceeds from sale of operations
Total cash flows used in investing activities
For the years ended September 30
2017
2016
2015
$
$
(68) $
1
(68)
—
(135) $
(66) $
1
(83)
—
(148) $
(45)
1
(5)
23
(26)
43
Cash used in investing activities was $135 million in 2017 compared to $148 million in 2016 and $26 million for 2015. Acquisitions
of $68 million during 2017 primarily relates to the acquisition of business assets from Time-It Lube and other small Quick Lubes
locations. Acquisitions of $83 million during 2016 primarily relates to the acquisition of Oil Can Henry’s as well as other small Quick
Lubes locations, while the prior year periods included $5 million in 2015 for nominal Quick Lube acquisitions. Fiscal 2017 included
cash outflows of $68 million and fiscal 2016 included cash outflows of $66 million for capital expenditures, both primarily related to
the Company’s investments leading up to full separation from Ashland to operate as a stand-alone public company, which included
expenditures primarily related to buildings, leasehold improvements and related machinery and equipment, including computer
equipment. This compares to capital expenditures of $45 million in 2015.
Financing activities
The following table sets forth the cash flows associated with Valvoline’s financing activities:
(In millions)
Cash flows from financing activities
Net transfers from (to) Ashland
Cash contributions from Ashland
Proceeds from initial public offering, net offering costs of $40
Proceeds from borrowings, net of issuance costs of $5 in 2017 and $15 in 2016
Repayment on borrowings
Repurchase of common stock
Cash dividends paid
Total cash flows provided by (used in) financing activities
For the years ended September 30
2017
2016
2015
$
$
5
—
—
470
(90)
(50)
(40)
295
$
$
(1,504) $
60
719
1,372
(637)
—
—
10
$
(304)
—
—
—
—
—
—
(304)
Cash flows from financing activities was an inflow of $295 million for 2017, an inflow of $10 million in 2016 and an outflow of $304
million in 2015. Cash flows provided by financing activities in 2017 were primarily related to net proceeds related to the issuance of
the 2025 Notes in the aggregate principal amount of $400 million and the accounts receivable securitization facility of $75 million,
offset by cash outflows related to payments on borrowings, the repurchase of common stock and the payment of dividends. Cash flows
provided by financing activities in 2016 were related to the various financing activities that Valvoline executed in the fiscal fourth
quarter of 2016 to establish borrowings and initial capitalization, net of remittances to Ashland for net cash transfers primarily from
borrowing proceeds and net income through the date of the IPO of September 28, 2016. As Ashland managed Valvoline’s cash and
financing arrangements prior to the IPO, all excess cash generated through earnings were remitted to Ashland and all sources of cash
were funded by Ashland.
Free cash flow and other liquidity information
The following table sets forth free cash flow for the disclosed periods and reconciles cash flows provided by operating activities to
free cash flow. Free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash
flows, such as allocated costs, and includes the pension and other postretirement plan remeasurement losses or gains. Refer to “Non-
GAAP Performance Metrics” within this Item 7 for additional information regarding this non-GAAP measure.
(In millions)
Cash flows (used in) provided by operating activities
Adjustments:
Additions to property, plant and equipment
Discretionary contributions to pension plans
Free cash flow
For the years ended September 30
2017
2016
2015
(130) $
311
$
(68)
394
196
$
(66)
—
245
$
330
(45)
—
285
$
$
At September 30, 2017, working capital (current assets minus current liabilities, excluding long-term debt due within one year) was
$327 million, compared to $349 million in 2016 and $178 million at the end of 2015. Working capital is affected by Valvoline’s use of
the last-in, first-out (“LIFO”) method of inventory valuation that valued inventories below their replacement costs by $33 million,
$29 million and $31 million as of September 30, 2017, 2016 and 2015, respectively. Liquid assets (cash, cash equivalents, and
44
accounts receivable) amounted to 123% of current liabilities at September 30, 2017 and 134% and 112% at September 30, 2016 and
2015, respectively.
Financial position
Valvoline had $201 million in cash and cash equivalents as of September 30, 2017, of which $102 million was held by foreign
subsidiaries. Valvoline currently has no plans to repatriate any amounts for which additional taxes would need to be accrued.
Debt
The following summary reflects Valvoline's debt as of September 30:
(In millions)
2017
2016
Short-term debt
Long-term debt (including current portion and debt issuance cost discounts)(a)
Total debt
$
$
75
1,049
1,124
$
$
—
743
743
(a) Amount includes $2 million of debt acquired through acquisitions, and is net of $13 million and $9 million of debt issuance cost discounts as of September
30, 2017 and 2016, respectively, which are direct reductions from the carrying amount of debt.
During August 2017, Valvoline completed the 2025 Notes issuance with an aggregate principal amount of $400 million, which is
outstanding as of September 30, 2017. The net proceeds of the offering of approximately $394 million (after deducting initial
purchasers' discounts and debt issuance costs) were used to make a voluntary contribution to the Company's U.S. qualified pension
plan. This discretionary contribution significantly reduces the underfunded position of this plan and is expected to minimize risk and
long-term volatility of the Company's underfunded obligation associated with this pension plan. As a result, overall balance sheet
obligations have not materially changed.
During the first fiscal quarter of 2017, Valvoline entered into an accounts receivable securitization facility with an extendable one-year
term, which makes available up to $125 million. Valvoline borrowed $75 million under this facility and applied the net proceeds to
reduce term loan borrowings by the same amount, which is described further below. As of September 30, 2017, $75 million remains
outstanding under this facility.
During 2016, Valvoline incurred $875 million in indebtedness under the 2016 Senior Credit Agreement, which provided for an
aggregate principal amount of $1,325 million in senior secured credit facilities, comprised of (i) a five-year $875 million term loan
and (ii) a five-year $450 million revolving credit facility (including a $100 million letter of credit sublimit). During 2016, Valvoline
fully drew on the term loans, receiving approximately $865 million (after deducting fees and expenses) and borrowed $137 million
under the revolving facility. These net proceeds were transferred to Ashland in 2016, and $500 million of term loan borrowings and all
of the outstanding revolver borrowings were repaid in 2016 using proceeds from the Valvoline IPO. As noted above, during 2017,
proceeds from the accounts receivable securitization facility of $75 million were utilized to reduce term loan borrowings, and
Valvoline also made quarterly payments during 2017 for total principal payments of $15 million. As of September 30, 2017, $285
million of term loan borrowings remain outstanding.
As of September 30, 2017, Valvoline has outstanding the 2024 Notes with an aggregate principal amount of $375 million, which were
issued in July 2016. The net proceeds from the offering of $370 million (after deducting initial purchasers’ discounts) were transferred
to Ashland in 2016.
Refer to Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K
for additional details regarding the Company’s debt instruments.
Debt covenant restrictions
Valvoline’s debt contains usual and customary representations and warranties, and usual and customary affirmative and negative
covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate
transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated
leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum consolidated net
leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are 4.5 and 3.0,
respectively. As of September 30, 2017, Valvoline is in compliance with all covenants of its debt obligations.
45
Contractual obligations and other commitments
The following table sets forth Valvoline’s obligations and commitments to make future payments under existing contracts at
September 30, 2017. Excluded from the table are contractual obligations for which the ultimate settlement of quantities or prices are
not fixed and determinable.
(In millions)
Contractual obligations
Long-term debt
Interest payments (a)
Operating lease obligations
Capital lease and financing obligations
Employee benefit obligations (b)
Unrecognized tax benefits (c)
Total contractual obligations
Total
Less than
1 Year
1-3
years
3-5
years
More than
5 years
$
$
1,137
308
113
83
139
10
1,790
$
$
90
47
21
6
21
—
185
$
$
60
92
33
13
31
—
229
$
$
211
82
21
12
26
—
352
$
$
776
87
38
52
61
10
1,024
(a) Includes interest expense on both variable and fixed rate debt assuming no prepayments. Variable interest rates have been assumed to remain constant through the
end of the term at the rates that existed as of September 30, 2017.
(b) Includes estimated funding of pension plans for 2017, as well as projected benefit payments through 2026 for Valvoline’s unfunded pension plans. Excludes the
benefit payments from the pension plan trust funds.
(c) Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, Valvoline is unable to determine the timing of
payments related to noncurrent unrecognized tax benefits, including interest and penalties. Therefore, these amounts were included in the “More than 5 years”
column.
Pension and other postretirement plan obligations
Prior to Valvoline's IPO, Ashland transferred certain pension and other postretirement benefit obligations to Valvoline, of which the
most substantial portion was related to the U.S. qualified pension plan. The unfunded portion of total pension and other postretirement
obligations as of September 30, 2017 was $357 million compared to $904 million at September 30, 2016.
No U.S. qualified pension plan contributions were required in 2017 and 2016; however, Valvoline made a discretionary contribution of
$394 million to the U.S. qualified pension plan with the proceeds from the 2025 Notes. Valvoline also contributed approximately $18
million and $6 million to the U.S. non-qualified pension plans and non-U.S. pension plans during 2017 and 2016, respectively. During
2018, Valvoline expects to contribute approximately $14 million to its pension plans related to its U.S. non-qualified and non-U.S.
pension plans. Refer to Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report
on Form 10-K for additional information regarding the Company's pension and other postretirement plans.
Tax-related commitments
Valvoline has been and generally will be included in Ashland income tax returns for historical periods through Distribution (“Interim
Period”), which was completed on May 12, 2017. Under the Tax Matters Agreement, Ashland makes all necessary tax payments to the
relevant tax authorities with respect to Ashland returns, and Valvoline makes tax-sharing payments to Ashland, which have been
determined as if Valvoline and each of its relevant subsidiaries included in the Ashland returns file their own separate tax returns for
the Interim Period.
For taxable periods after the Distribution, Valvoline is no longer included in any Ashland income tax returns and will file returns that
include only Valvoline and/or its subsidiaries, as appropriate. Valvoline will not be required to make tax-sharing payments to Ashland
for those taxable periods. Nevertheless, Valvoline has (and will continue to have following the Distribution) joint and several liability
with Ashland to the IRS for the consolidated U.S. federal income taxes of the Ashland group for the taxable periods in which
Valvoline was part of the Ashland consolidated group.
Pursuant to the terms of the Tax Matters Agreement, Valvoline has indemnified Ashland for certain U.S. federal, state or local taxes for
any tax period prior to full separation and Distribution that arise on audit or examination and are directly attributable to neither the
Valvoline business nor the Chemicals businesses. Any payment obligations that may arise as a result of Valvoline assuming liability
for such taxes could negatively affect Valvoline’s financial position and cash flows.
46
Stockholder dividends
Valvoline paid quarterly cash dividends to holders of its common stock for the year ended September 30, 2017 for a total of $40
million. Valvoline expects to pay quarterly cash dividends to the holders of its common stock; however, the declaration and payment
of dividends to holders of Valvoline common stock will be at the discretion of the Board after taking into account various factors,
including Valvoline’s financial condition, operating results, current and anticipated cash needs, cash flows, impact on Valvoline’s
effective tax rate, indebtedness, legal requirements and other factors that the Board considers relevant.
On November 14, 2017, the Company’s Board of Directors approved a quarterly cash dividend of $0.0745 per share of common stock.
The dividend is payable December 15, 2017 to shareholders on record on December 1, 2017.
Share repurchases
On April 24, 2017, Valvoline’s Board of Directors authorized a share repurchase program, under which Valvoline may repurchase up
to $150 million of its common stock through December 31, 2019. During the year ended September 30, 2017, $50 million of this
authorization was used to repurchase approximately 2 million shares of common stock. Repurchases were and will continue to be in
accordance with all applicable securities laws and regulations and funded from available liquidity. As of September 30, 2017, $100
million of share repurchase authorization remains.
Summary
As of September 30, 2017, cash and cash equivalents totaled $201 million and total debt was $1.1 billion. Valvoline's ability to
generate positive cash flows from operations is dependent on general economic conditions, and the competitive environment in the
industry, and is subject to the business and other risk factors described in Item 1A of Part I of this Annual Report on Form 10-K. 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. Valvoline's financial position has enabled it to achieve a Moody's
rating of Ba2 and a Standard & Poor’s rating of BB+, which was upgraded in the fourth fiscal quarter of 2017. Subsequent changes to
ratings may have an effect on Valvoline's borrowing rate or ability to access capital markets in the future. Borrowing capacity under
the 2016 Senior Credit Agreement was $436 million (due to a $14 million reduction for letters of credit) and up to $50 million under
the accounts receivable securitization facility as of September 30, 2017.
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, as well as operating requirements for the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2017, Valvoline has no contractual obligations that are reasonably likely to have a material effect on the
Company's consolidated financial statements that are not fully recorded on the Consolidated Balance Sheets or fully disclosed in the
Notes to Consolidated Financial Statements. As part of Valvoline’s normal course of business, it is a party to certain financial
guarantees and other commitments, and while these arrangements involve elements of performance and credit risk that are not
included in the Consolidated Balance Sheets, such risk is not currently considered reasonably likely to have a material effect on the
Company's consolidated financial statements. The possibility that Valvoline would have to make actual cash expenditures in
connection with these obligations is largely dependent on the performance of the party whose obligations Valvoline guarantees, or the
occurrence of future events.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion and analysis of recently issued and adopted accounting pronouncements and the impact on Valvoline, refer to Note 2
of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of Valvoline’s consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosures of contingent
assets and liabilities. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived
assets (including goodwill), sales deductions, employee benefit obligations and income taxes. Although management bases its
estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual
results could differ significantly from the estimates under different assumptions or conditions.
47
Long-lived Assets
Tangible assets
The cost of property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets. Buildings
are depreciated principally over 5 to 35 years and machinery and equipment principally over 5 to 15 years. As of September 30, 2017,
Property, plant and equipment is approximately $390 million. Property, plant and equipment asset groups are evaluated for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Examples of events or
changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow
losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset group, or a current
expectation that an asset group will be sold or disposed of before the end of its previously estimated useful life. Various factors are
used in determining whether a trigger requiring impairment assessment have occurred, such as changes in the expected use of the
assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance
and changes in expected future cash flows.
Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal
of the property, plant and equipment asset groups, as well as specific appraisals in certain instances. These evaluations occur at the
lowest level for which identifiable cash flows are largely independent of cash flows associated with other property, plant and
equipment asset groups. This determination of the asset group to be tested for recoverability is based on company-specific operating
characteristics, including shared cost structures and interdependency of revenues between assets, and the determination of future
undiscounted cash flows includes estimates of forecasted revenue and costs that may be associated with an asset as well as the
expected periods that the asset (or asset group) may be utilized.
If the future undiscounted cash flows result in a value that is less than the carrying value, then the long-lived asset is considered
impaired and a loss is recognized based on the amount by which the carrying amount exceeds the estimated fair value. Fair value is
determined based on the highest and best use of the assets considered from the perspective of market participants, which may be
different than the Company’s actual intended use of the asset (or asset group). Because judgment is involved in identifying long-lived
asset impairment triggering events, determining asset groups, future undiscounted cash flows and the fair value of asset groups, there
is risk that the carrying value of these assets may require adjustment in future periods.
Goodwill
Goodwill is tested at the reporting unit level for impairment on an annual basis during the fourth quarter as of July 1 or more
frequently if certain events occur indicating that the carrying value of goodwill may be impaired. Judgment is involved in determining
if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change
in legal factors or in the business climate, a decision to sell a business, unanticipated competition, or slower growth rates, among
others. Valvoline’s reporting units are consistent with its reportable segments of Core North America ($89 million in goodwill as of
September 30, 2017), Quick Lubes ($201 million in goodwill as of September 30, 2017), and International ($40 million in goodwill as
of September 30, 2017).
In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative assessment to determine whether further
impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying
amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit
unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors include
macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, among others. These factors
require significant judgment and estimates, and application of alternative assumptions could produce different results.
If under the quantitative assessment, the fair value of a reporting unit is less than its carrying amount, then the amount of the
impairment loss, if any, must be measured under step two of the impairment analysis. In step two of the analysis, an impairment loss
will be recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value. Fair values of the
reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The
income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates
are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes
and prices, costs to produce, tax rates, capital spending, discount rate and working capital changes. Several of these assumptions vary
among reporting units. The cash flow forecasts are generally based on approved strategic operating plans. The market approach is
performed using the Guideline Public Companies method which is based on earnings multiple data. The Company also performs a
reconciliation between market capitalization and the estimate of the aggregate fair value of the reporting units, including consideration
of a control premium.
48
Valvoline elected to perform a qualitative assessment during the fiscal 2017 and determined that it is not more likely than not that the
fair values of Valvoline's reporting units are less than carrying amounts. In fiscal 2016, a quantitative assessment indicated that each
reporting unit had a fair value that exceeded book value by 300% and more.
Valvoline’s assessment of an impairment charge on goodwill could change in future periods if any or all of the following events were
to occur with respect to a particular reporting unit: a significant change in projected business results, a divestiture decision, significant
changes to certain cash flow assumptions, economic deterioration that is more severe or of a longer duration than anticipated, or other
significant economic events.
Sales Deductions
Valvoline recognizes revenue when persuasive evidence of an arrangement exists, products are delivered or services are provided to
customers, the sales price is fixed or determinable and collectability is reasonably assured. Provisions are made at the time of revenue
recognition for sales rebates and discounts consisting primarily of promotion rebates and customer pricing discounts. These provisions
are recorded as a reduction of revenue based on contract terms and the Company’s historical experience with similar programs and
require management’s judgment with respect to estimating customer participation and performance levels. Differences between
estimated expense and actual sales incentives provided are generally immaterial and are recognized in earnings in the period such
differences are determined. The cost of these programs is recognized as incurred and recorded as a reduction of sales and totaled
$360 million, $388 million and $345 million in the Consolidated Statements of Comprehensive Income for September 30, 2017, 2016
and 2015, respectively.
Employee benefit obligations
As a result of the transfer of pension and other postretirement liabilities from Ashland to Valvoline in fiscal 2016 prior to Valvoline's
IPO, Valvoline assumed full responsibility as plan sponsor of these plans. From the point of transfer forward, Valvoline accounts for
the plans as single-employer plans, recognizing net liabilities and the full amount of any costs or gains. Prior to the transfer of plan
sponsorship, Valvoline had certain international single-employer pension plans and accounted for its participation in the Ashland
sponsored plans as multiemployer plans whereby costs were allocated based on Valvoline employee plan participation. As of
September 30, 2017, Valvoline’s net unfunded pension and other postretirement plan liabilities included in the Consolidated Balance
Sheets totaled $357 million, and the U.S. plans represented 94% of this total employee benefit obligation. Total pension and other
postretirement net periodic benefit costs included in the Consolidated Statements of Comprehensive Income were as follows for the
year ended September 30, 2017:
(In millions)
Service costs
Non-service pension and other postretirement net periodic income (a)
(Gains) losses on pension and other postretirement plans remeasurement
Subtotal
Total pension and other postretirement net periodic benefit (income) cost
2017
2
(70)
(68)
(138)
(136)
$
$
(a) This non-service pension and other postretirement net periodic income includes the expected return on plan assets and amortization of prior service credit, net of
interest costs.
Valvoline recognizes the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each
fiscal year and whenever a plan is determined to qualify for a remeasurement. The remaining components of pension and other
postretirement benefits cost are recorded ratably throughout the year. The service cost component of pension and other postretirement
benefits costs is allocated to each reportable segment on a ratable basis, while the remaining non-service and remeasurement
components of pension and other postretirement benefits costs are excluded from segment results and included in Unallocated and
other as those items are not included in the evaluation of segment performance. Refer to Note 20 of the Notes to Consolidated
Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for a reconciliation of segment results to
consolidated operating income.
Actuarial assumptions
The Company’s pension and other postretirement benefit costs and obligations are dependent on actuarial valuations and various
assumptions that attempt to anticipate future events and are used in calculating the expense and liabilities relating to these plans. These
assumptions include estimates and judgments the Company makes about interest rates, expected long-term investment return on plan
49
assets, rate of increase in healthcare costs, rates of future compensation increases and mortality. Though management considers
current market conditions and other relevant factors in establishing these assumptions, the actuarial assumptions used may differ
materially from actual results due to changing market and economic conditions, longer or shorter life spans of participants, and
differences between the actual and expected return on plan assets. These differences may result in a significant impact to the amount
of pension or other postretirement benefits cost recorded or that may be recorded.
Under the Company's accounting policy, changes in the actual return on plan assets and the actuarial gains and losses recognized are
calculated using updated actuarial assumptions as of the measurement date, which for Valvoline is September 30, unless a plan
qualifies for an interim remeasurement during the year. Changes in assumptions or asset values may have a significant effect on the
measurement of expense or income. Significant assumptions the Company must review and set annually and at each measurement
date related to its pension and other postretirement benefit obligations are:
• Expected long-term return on plan assets — Based on long-term historical actual asset return information, the mix of
investments that comprise plan assets and future estimates of long-term investment returns. The Company also deducts
various expenses using the fair value of plan assets to estimate expense. The weighted-average long-term expected rate of
return on assets assumption was 6.53% for 2017. In fiscal 2017, the global pension plan assets generated an actual weighted-
average return of 7.10%, primarily driven by the market performance of U.S. plan assets. However, the expected return on
plan assets is designed to be a long-term assumption, and therefore, actual returns will be subject to year-to-year variances.
The U.S. pension plans comprise the most significant portion of plan assets, and for fiscal 2018, the expected rate of return
on assets assumption for the U.S. pension plans will be 5.20%.
Plan assets are invested in equity securities, government and agency securities, corporate debt, other non-traditional assets
such as hedge funds. The investment goal of the U.S. pension plans is to achieve an adequate net investment return to provide
for future benefit payments to its participants. U.S. target asset allocation percentages as of September 30, 2017 were 20%
equity and 80% fixed income investments. The U.S. pension plans are managed by professional investment managers that
operate under investment management contracts that include specific investment guidelines, requiring among other actions,
adequate diversification and prudent use of risk management practices such as portfolio constraints relating to established
benchmarks. Valvoline’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are
consistent except in those countries where investment of plan assets is dictated by applicable regulations.
• Discount rate — Reflects the rates at which benefits could effectively be settled and is based on current investment yields of
high-quality corporate bonds. Consistent with the prior year, the Company uses an actuarially-developed full yield curve
approach, the above mean yield curve, to match the timing of cash flows of expected future benefit payments from the plans
by applying specific spot rates along the yield curve to determine the assumed discount rate. Valvoline’s 2017 expense,
excluding actuarial gains and losses, for both U.S. and non-U.S. pension plans was determined using the spot discount rate as
of the beginning of the fiscal year. The service cost and interest cost discount rates for 2017 pension expense were 2.15% and
2.84%, respectively, and 2.95% and 2.64%, respectively, for other postretirement expense. The weighted-average discount
rate at the end of fiscal 2017 was 3.76% for the pension plans and 3.48% for the postretirement health and life plans.
• Mortality – Based on the Society of Actuaries RP-2014 mortality base tables with mortality improvements after 2006
removed and replaced with a mortality improvement scale based on the intermediate projection in the Social Security
Administration’s Annual Trustees Report released in July 2017. Valvoline believes the updated mortality improvement scales
provide a reasonable assessment of current mortality trends and is an appropriate estimate of future mortality projections.
• Rate of compensation increase — Effective for fiscal 2017, this assumption is no longer applicable to the U.S. pension plans
due to the benefit accrual freeze as of September 30, 2016. In addition, some of the non-U.S. pension plans are also frozen,
while those that remain open relate to areas where local laws require plans to operate within the applicable country. The
weighted-average rate of compensation increase assumption for these non-U.S. plans was 2.99% for 2017.
• Healthcare cost trend rate — Because Valvoline’s retiree healthcare plans contain various caps that limit Valvoline’s
contributions and because medical inflation is expected to continue at a rate in excess of these caps, the healthcare cost trend
rate has not had a significant impact on Valvoline’s postretirement healthcare benefit costs.
50
The following table illustrates the estimated increases in pension and other postretirement expense that would have resulted from a
one percentage point change in each of the following significant assumptions for 2017 and 2016:
(In millions)
Increase in pension costs from
Decrease in the discount rate
Increase in the salary adjustment rate
Decrease in expected return on plan assets
Increase in other postretirement costs from
Decrease in the discount rate
2017
2016
$
$
$
281
1
21
6
$
352
1
23
5
Based on the Company's investing strategy, plan assets hedge approximately 80% of the movement in liabilities related to changes in
the discount rate.
For the year ended September 30, 2017, the asset and actuarial net gains on pension and other postretirement benefit plan
remeasurements reflected in operating income was $68 million, which was primarily attributed to increases in discount rates, higher
than expected returns on plan assets, and reduced mortality improvements.
Income Taxes
Valvoline is subject to income taxes in the United States and numerous foreign jurisdictions. Judgment in forecasting the taxable
income using historical and projected future operating results is required in determining Valvoline’s provision for income taxes and the
related assets and liabilities. The provision for income taxes includes current income taxes as well as deferred income taxes. Under
U.S. GAAP, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets
and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the deferred assets or liabilities
are expected to be settled or realized. The effect of changes in tax rates on deferred taxes is recognized in the period in which the
enactment date changes.
Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to
be realized when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to
whether a deferred tax asset will be realized is based on the evaluation of positive and negative evidence, which includes historical
profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and
tax planning strategies. The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis.
As of September 30, 2017, the Company had $281 million of net deferred tax assets, including $8 million in valuation allowances
related to certain deferred income tax assets in jurisdictions where there is uncertainty as to ultimate realization of a benefit from those
tax assets. If the Company is unable to generate sufficient future taxable income, or if there is a material change in the actual effective
tax rates or the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change
unfavorably, then Valvoline could be required to increase the valuation allowance against deferred tax assets, resulting in an increase
in the effective tax rate. Each increase of $5 million to the valuation allowance as of September 30, 2017 would impact the fiscal 2017
effective tax rate by one percentage point.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized as part of the
provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant
tax law until such time that the related tax benefits are recognized. The provision for income taxes may change period-to-period based
on nonrecurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the
geographic mix of income before taxes, state and local taxes and the effects of various income tax strategies. The Company is subject
to ongoing tax examinations and assessments in various jurisdictions, including those in pre-Distribution periods where Valvoline may
be required to indemnify Ashland. The Company's ongoing assessments of its tax positions require judgment and can materially
increase or decrease the effective tax rate, as well as impact the operating results.
For the periods prior to the Distribution, Valvoline’s operating results are included in Ashland’s consolidated U.S., state, and in certain
Ashland international subsidiaries' income tax returns. For these periods, the income tax provision in these Consolidated Statements of
Comprehensive Income has been calculated on a separate return basis as if Valvoline was operating on a stand-alone basis and filed
separate tax returns in the jurisdictions in which it operates. Accordingly, Valvoline’s tax results as presented include estimates due to
the timing of completion and filing of income tax returns and may not necessarily be reflective of actual results or the results that
Valvoline would have generated on a stand-alone basis.
51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Valvoline is exposed to market risks arising from adverse changes in:
•
•
•
Foreign currency exchange rates;
Inflation and changing prices;
Interest rates; and
• Credit risk.
Foreign Currency Exchange Risk
Since a significant portion of Valvoline's operations and revenue occur outside the U.S., and in currencies other than the U.S. Dollar,
results can be significantly impacted by changes in foreign currency exchange rates. Valvoline’s foreign currency risk is primarily
limited to the Euro, Australian Dollar, Canadian Dollar and Chinese Yuan with respect to sales, profits, and assets and liabilities
denominated in currencies other than the U.S. Dollar. Although the Company uses financial instruments to hedge certain foreign
currency risks, Valvoline is not fully protected against foreign currency fluctuations and reported results of operations could be
affected by changes in foreign currency exchange rates. Valvoline believes its foreign currency risk is limited as 72% of Valvoline’s
revenue during the years ended September 30, 2017 and 2016 and 71% of Valvoline's revenue during the year ended September 30,
2015 was based in U.S. dollars. Valvoline does not have material exposures to market risk with respect to investments.
To manage exposures and mitigate the impact of currency fluctuations on the operations of foreign subsidiaries, the Company uses
derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated
balance sheet exposures. For these derivatives, changes in the fair value are recognized in income to offset the gain or loss on the
hedged item in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures. The
Company utilizes derivative instruments that are purchased exclusively from highly rated financial institutions. These contracts are
recorded on the Consolidated Balance Sheets as assets or liabilities at fair market value based upon market price quotations. The
Company did not enter into non-exchange traded contracts that require the use of fair value estimation techniques, and Valvoline did
not transact or have open any hedging contracts with respect to commodities or any related raw material requirements as of and for the
year ended September 30, 2017, nor does Valvoline employ derivatives for trading or speculative purposes.
For purposes of analyzing potential risk, sensitivity analysis is used to quantify potential impacts that market rate changes may have
on the fair values of the Company's derivative portfolio. The sensitivity analysis represents the hypothetical changes in value of the
derivative and does not reflect the related gain or loss on the forecasted underlying exposure. A 10% appreciation or depreciation in
the value of the U.S. Dollar against foreign currencies from the prevailing market rates would have resulted in a corresponding
increase or decrease of $4 million as of September 30, 2017 in the fair value of open derivative contracts. The Company expects that
any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in the underlying
exposures.
The U.S. Dollar was weaker in 2017 compared to 2016 based on comparable weighted averages for the Company's functional
currencies. This had a favorable impact of 0.1% on 2017 revenue versus 2016 revenue. This excludes the effects of derivative
activities and, therefore, does not reflect the actual impact of fluctuations in exchange rates on the Company's operating income.
Inflation and Changing Prices
Valvoline’s financial statements are prepared on the historical cost method of accounting in accordance with U.S. GAAP and, as a
result, do not reflect changes in the purchasing power of the U.S. dollar. Monetary assets (such as cash, cash equivalents and accounts
receivable) lose purchasing power as a result of inflation, while monetary liabilities (such as accounts payable and indebtedness) result
in a gain, because they can be settled with dollars of diminished purchasing power. As of September 30, 2017, Valvoline’s monetary
assets exceed its monetary liabilities, leaving it currently more exposed to the effects of future inflation. However, given the recent
consistent stability of inflation in the United States in the past several years as well as forward economic outlooks, current inflationary
pressures seem moderate.
Certain of the industries in which Valvoline operates are capital-intensive, and replacement costs for Valvoline’s plants and equipment
generally would substantially exceed their historical costs. Accordingly, depreciation and amortization expense would be greater if it
were based on current replacement costs. However, because replacement facilities would reflect technological improvements and
changes in business strategies, such facilities would be expected to be more productive than existing facilities, mitigating at least part
of the risk of changing prices.
52
Valvoline uses the LIFO method to value a portion of its inventories to provide a better matching of revenues with current costs.
However, LIFO values such inventories below their replacement costs during inflationary periods.
Interest Rate Risk
The Company is subject to interest rate risk principally in relation to variable-rate debt. Approximately 68% of the Company's
outstanding borrowings as of September 30, 2017 had fixed rates. The increase in pre-tax interest expense for the year
ended September 30, 2017 from a hypothetical 100 basis point increase in variable interest rates would be approximately $4 million.
Concentrations of Credit Risk
The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments, such as
derivative instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The
maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit
approvals, credit limits, selecting major international financial institutions as counterparties to derivative transactions and monitoring
procedures. Valvoline's business often involves large transactions with customers for which the Company does not require collateral. If
one or more of those customers were to default in its obligations under applicable contractual arrangements, the Company could be
exposed to potentially significant losses. Moreover, a prolonged downturn in the global economy could have an adverse impact on the
ability of customers to pay their obligations on a timely basis. The Company believes that the reserves for potential losses are
adequate. As of September 30, 2017, there was not a significant concentration of credit risk related to financial instruments.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Valvoline Inc. and Consolidated Subsidiaries
We have audited the accompanying consolidated balance sheets of Valvoline Inc. and Consolidated Subsidiaries (the “Company”) as
of September 30, 2017 and 2016, and the related consolidated statements of comprehensive income, shareholders' deficit and cash
flows for each of the three years in the period ended September 30, 2017. Our audits also included the financial statement schedule
listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Valvoline Inc. and Consolidated Subsidiaries at September 31, 2017 and 2016, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when compared in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Valvoline
Inc. and Consolidated Subsidiaries’ internal control over financial reporting as of September 30, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated November 17, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 17, 2017
54
Valvoline Inc. and Consolidated Subsidiaries
Consolidated Statements of Comprehensive Income
Years ended September 30
(In millions except per share amounts)
2017
2016
2015
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Pension and other postretirement plan non-service income and
remeasurement adjustments, net
Separation costs
Equity and other income
Operating income
Net interest and other financing expense
Net loss on acquisition and divestiture
Income before income taxes
Income tax expense
Net income
NET INCOME PER SHARE(a)
Basic
Diluted
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (a)
Basic
Diluted
DIVIDENDS PAID PER COMMON SHARE
COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), net of tax
Unrealized translation gain (loss)
Pension and other postretirement obligation adjustment
Other comprehensive (loss) income
Comprehensive income
$
2,084
$
1,929
$
1,306
778
375
(136)
32
(25)
532
42
—
490
186
304
1.49
1.49
204
204
$
$
$
1,168
761
365
(22)
6
(19)
431
9
1
421
148
273
1.60
1.60
170
170
$
$
$
0.20
$
— $
304
$
273
$
7
(8)
(1)
8
(1)
7
303
$
280
$
$
$
$
$
$
$
(a) Refer to Note 17 for additional information regarding revisions to prior period earnings per share (“EPS”) calculations.
See Notes to Consolidated Financial Statements.
1,967
1,282
685
348
22
—
(8)
323
—
26
297
101
196
1.15
1.15
170
170
—
196
(34)
—
(34)
162
55
Valvoline Inc. and Consolidated Subsidiaries
Consolidated Balance Sheets
(In millions except per share amounts)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Noncurrent assets
Net property, plant and equipment
Goodwill and intangibles
Equity method investments
Deferred income taxes
Other noncurrent assets
Total noncurrent assets
Total assets
Liabilities and Stockholders’ Deficit
Current liabilities
Short-term debt
Current portion of long-term debt
Trade and other payables
Accrued expenses and other liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Other noncurrent liabilities
Total noncurrent liabilities
Commitments and contingencies
Stockholders’ deficit
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
Common stock, par value $0.01 per share, 400 shares authorized, 203 and 205 shares
issued and outstanding at September 30, 2017 and 2016, respectively
Paid-in capital
Retained deficit
Ashland's net investment
Accumulated other comprehensive income (loss)
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
See Notes to Consolidated Financial Statements.
56
At September 30
2017
2016
$
201
385
175
29
790
391
335
30
281
88
172
363
139
56
730
324
267
26
389
89
1,125
1,915
$
1,095
1,825
75
15
192
196
478
1,034
342
—
178
1,554
—
2
5
(167)
—
43
(117)
1,915
$
$
—
19
177
204
400
724
886
2
143
1,755
—
2
710
—
(1,039)
(3)
(330)
1,825
$
$
$
$
Valvoline Inc. and Consolidated Subsidiaries
Consolidated Statements of Stockholders’ Deficit
(In millions except per share amounts)
Balance at September 30, 2014
Net income
Currency translation adjustments
Net transfers to Ashland
Balance at September 30, 2015
Net income
Net transfers to Ashland
Contribution of net liabilities from Ashland
Issuance of common stock to Ashland and in
connection with initial public offering, net of
offering costs
Currency translation adjustments
Amortization of pension and other postretirement
prior service credits in income
Balance at September 30, 2016
Net income
Contribution of net liabilities from Ashland
Net transfers from Ashland
Distribution of Ashland's net investment
Currency translation adjustments
Stock-based compensation
Amortization of pension and other postretirement
prior service credits in income
Repurchase of common stock
Dividends paid, $0.049 per common share
Balance at September 30, 2017
See Notes to Consolidated Financial Statements.
Common stock
Shares Amount
Paid-in
capital
Retained
deficit
Accumulated
other
comprehensive
(loss) income
Ashland's
net
investment
$
Total
724
196
(34)
(269)
617
273
(1,500)
(439)
712
8
(1)
(330)
304
(10)
5
—
7
5
(8)
(50)
(40)
751
196
—
(269)
678
273
(1,500)
(490)
—
—
—
(1,039)
—
(2)
5
1,036
—
—
—
—
—
(27) $
—
(34)
—
(61)
—
—
51
—
8
(1)
(3)
—
47
—
—
7
—
(8)
—
—
43
$
— $ (117)
— $ — $ — $
— $
—
—
—
—
—
—
—
205
—
—
205
—
—
—
—
—
—
—
(2)
—
203
$
—
—
—
—
—
—
—
2
—
—
2
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
710
—
—
710
—
—
—
(710)
—
5
—
—
—
5
$
—
—
—
—
—
—
—
—
—
—
—
304
(55)
—
(326)
—
—
—
(50)
(40)
(167) $
$
57
Valvoline Inc. and Consolidated Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
Cash flows from operating activities
Net income
Adjustments to reconcile to cash flows from operations
Depreciation and amortization
Debt issuance cost amortization
Deferred income taxes
Equity income from affiliates
Distributions from equity affiliates
Net loss on acquisition and divestiture
Impairment of equity investment
Pension contributions
(Gain) loss on Valvoline pension and other postretirement plan
remeasurements
Stock-based compensation expense
Change in assets and liabilities (a)
Accounts receivable
Inventories
Payables and accrued liabilities
Other assets and liabilities
Total cash (used in) provided by operating activities
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisitions, net of cash required
Proceeds from sale of operations
Total cash used in investing activities
Cash flows from financing activities
Net transfers from (to) Ashland
Cash contributions from Ashland
Proceeds from initial public offering, net of offering costs of $40
Proceeds from borrowings, net of issuance costs of $5 in 2017 and $15 in 2016
Repayments on borrowings
Repurchase of common stock
Cash dividends paid
Total cash provided by (used in) financing activities
Effect of currency exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Supplemental disclosures
Interest paid
Income taxes paid
(a) Excludes changes resulting from operations acquired or sold.
See Notes to Consolidated Financial Statements.
58
$
$
$
Years ended September 30
2017
2016
2015
$
304
$
273
$
196
42
3
117
(12)
8
—
—
(412)
(68)
9
(22)
(35)
—
(64)
(130)
(68)
1
(68)
—
(135)
5
—
—
470
(90)
(50)
(40)
295
(1)
29
172
201
35
26
38
4
13
(12)
16
1
—
(2)
(42)
—
(17)
(4)
5
38
311
(66)
1
(83)
—
(148)
(1,504)
60
719
1,372
(637)
—
—
10
(1)
172
—
$
$
$
172
$
— $
$
17
38
—
(9)
(12)
18
26
14
—
2
—
53
(6)
2
8
330
(45)
1
(5)
23
(26)
(304)
—
—
—
—
—
—
(304)
—
—
—
—
—
—
Valvoline Inc. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide producer, marketer, and supplier of engine and automotive maintenance
products and services. Valvoline is one of the most recognized and respected premium consumer brands in the global automotive
lubricant industry, known for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans
over 150 years, during which it has developed powerful name recognition across multiple product and service channels.
Valvoline was incorporated in May 2016 as a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and
consolidated subsidiaries is referred to as “Ashland”). Prior to this time, Valvoline operated as an unincorporated commercial unit of
Ashland. Following a series of restructuring steps prior to the initial public offering (“IPO”) of Valvoline common stock, the Valvoline
business was transferred from Ashland to Valvoline such that the Valvoline business included substantially all of the historical
Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities transferred to Valvoline from
Ashland (the “Contribution”). In connection with the IPO on September 28, 2016, 34.5 million shares of Valvoline common stock
were sold to investors and Ashland retained 170 million shares for 83% of the total outstanding shares of Valvoline common stock.
On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the “Distribution”) through a
pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017, marking
the completion of Valvoline's separation from Ashland. Effective upon Distribution, Ashland no longer owns any shares of Valvoline
common stock, and Valvoline is no longer a controlled and consolidated subsidiary of Ashland.
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and U.S. Securities and Exchange Commission (“SEC”) regulations. The financial
statements are presented on a consolidated basis for all periods presented and include the accounts of the Company and its majority-
owned subsidiaries. All intercompany transactions and balances within Valvoline have been eliminated in consolidation. Certain prior
period amounts have been reclassified in the accompanying consolidated financial statements and notes thereto to conform to the
current period presentation. Refer to Note 17 for information regarding a revision to correct an immaterial error in the net earnings per
share (“EPS”) calculations previously reported in the consolidated financial statements for the periods prior to and including
September 30, 2016.
The Contribution of the Valvoline business by Ashland to Valvoline was treated as a reorganization of entities under common Ashland
control. As a result, Valvoline has retrospectively presented the consolidated financial statements of Valvoline and its subsidiaries for
periods presented prior to the completion of the Contribution, which have been prepared on a stand-alone basis and derived from
Ashland’s consolidated financial statements and accounting records using the historical results of operations, and assets and liabilities
attributed to Valvoline’s operations, as well as allocations of expenses from Ashland. The consolidated financial statements for periods
presented subsequent to the completion of the Contribution reflect the transfer of various assets and liabilities from Ashland on a
carryover basis (historical cost) and the consolidated operations of Valvoline and its majority-owned subsidiaries as a separate, stand-
alone entity.
All transactions and balances between Valvoline and Ashland have been reported in the consolidated financial statements. For periods
prior to the IPO, these transactions were considered to be effectively settled for cash at the time the transactions were recorded. These
transactions and net cash transfers to and from Ashland’s centralized cash management system are reflected as a component of
Ashland's net investment on the Consolidated Balance Sheets and as a financing activity within the accompanying Consolidated
Statements of Cash Flows. In the Consolidated Statements of Stockholders’ Deficit, Ashland's net investment on the Consolidated
Balance Sheets represents the cumulative net investment by Ashland in Valvoline through the IPO, including net income through the
completion of the IPO and net cash transfers to and from Ashland through Distribution. Valvoline's retained earnings from the IPO
through September 30, 2017 were not material and accordingly, were not separately presented in the Consolidated Balance Sheets or
Consolidated Statements of Stockholders’ Deficit. Concurrent with the Distribution, Ashland's net investment in Valvoline was
reduced to zero with a corresponding adjustment to Paid-in capital and Retained deficit.
Prior to the completion of the IPO, Valvoline utilized centralized functions of Ashland to support its operations, and in return, Ashland
allocated certain of its expenses to Valvoline. Such expenses represent costs related, but not limited to, treasury, legal, accounting,
insurance, information technology, payroll administration, human resources, stock incentive plans and other services. These costs,
59
together with an allocation of Ashland overhead costs, are included within the Selling, general and administrative expense in the
Consolidated Statements of Comprehensive Income and are disclosed in more detail in Note 19. Where it was possible to specifically
attribute such expenses to activities of Valvoline, these amounts were charged or credited directly to Valvoline without allocation or
apportionment. Allocation of all other such expenses was based on a reasonable reflection of the utilization of service provided or
benefits received by Valvoline during the periods presented on a consistent basis, such as headcount, square footage, tangible assets or
sales. However, the allocations of these shared expenses may not represent the amounts that would have been incurred had Valvoline
operated autonomously or independently from Ashland in those periods. Actual costs that would have been incurred if Valvoline had
been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions in various
areas, including information technology and infrastructure. Upon completion of the IPO, Valvoline assumed responsibility for the
costs of these functions.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Valvoline’s significant accounting policies, which conform to U.S. GAAP and are applied on a consistent basis in all years presented,
except as indicated, are described below.
Use of estimates, risks and uncertainties
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and
liabilities. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets
(including goodwill), sales deductions, employee benefit obligations and income taxes. Although management bases its estimates on
historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could
differ significantly from the estimates under different assumptions or conditions.
Cash and cash equivalents
All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
Valvoline records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses for accounts
receivable. Valvoline estimates the allowance for doubtful accounts based on a variety of factors, including the length of time
receivables are past due, the financial health of its customers, macroeconomic conditions, past transaction history with the customer
and changes in customer payment terms. If the financial condition of its customers deteriorates or other circumstances occur that result
in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes
off uncollectible trade accounts receivable against the allowance for doubtful accounts when collections efforts have been exhausted
and/or any legal action taken by the Company has concluded.
Inventories
Inventories are carried at the lower of cost or market value. Inventories are primarily stated at cost using the weighted-average cost
method. Cost includes materials, labor and manufacturing overhead related to the purchase and production of inventories. In addition,
certain lubricants are valued at cost using the last-in, first-out (“LIFO”) method. The Company regularly reviews inventory quantities
on hand and the estimated utility of inventory. Excess and obsolete reserves are established based on forecasted usage, product
demand and life cycle, as well as utility.
Property, plant and equipment
The cost of property, plant and equipment is depreciated by the straight-line method over the estimated useful lives of the
assets. Buildings are depreciated principally over 5 to 35 years and machinery and equipment principally over 5 to 15 years. Property,
plant and equipment is relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired.
Gains or losses on the dispositions of property, plant and equipment are included in the Consolidated Statements of Comprehensive
Income. Property, plant and equipment carrying values are evaluated for recoverability when impairment indicators are present and are
conducted at the lowest identifiable level of cash flows. Such indicators could include, among other factors, operating losses, unused
capacity, market value declines and technological obsolescence. Recorded values of asset groups of property, plant and equipment that
are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is
determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).
60
Business combinations
The financial results of the businesses that Valvoline has acquired are included in the Company’s consolidated financial results based
on the respective dates of the acquisitions. The Company allocates the purchase consideration to the identifiable assets acquired and
liabilities assumed in the business combination based on their acquisition-date fair values. The excess of the purchase consideration
over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill. Factors giving rise to goodwill generally
include synergies that are anticipated as a result of the business combination, including access to new customers and markets. The fair
values of identifiable intangible assets acquired in business combinations are generally determined using an income approach,
requiring financial forecasts and estimates as well as market participant assumptions.
Goodwill and other intangible assets
Valvoline tests goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have
occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current
carrying value. Valvoline’s reporting units are Core North America, Quick Lubes, and International.
In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative assessment to determine whether further
impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying
amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit
unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors include
macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, among others.
If under the quantitative assessment, the fair value of a reporting unit is less than its carrying amount, then the amount of the
impairment loss, if any, must be measured under step two of the impairment analysis. In step two of the analysis, an impairment loss
will be recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value. Fair values of the
reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The
income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates
are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes
and prices, costs to produce, tax rates, capital spending, discount rate, weighted average cost of capital, terminal values and working
capital changes. Several of these assumptions vary among reporting units. The cash flow forecasts are generally based on approved
strategic operating plans. The market approach is performed using the Guideline Public Companies method which is based on earnings
multiple data. The Company also performs a reconciliation between market capitalization and the estimate of the aggregate fair value
of the reporting units, including consideration of a control premium.
Valvoline elected to perform a qualitative assessment during the fiscal 2017 and determined that it is not more likely than not that the
fair values of Valvoline's reporting units are less than carrying amounts. In fiscal 2016, a quantitative assessment indicated that each
reporting unit had a fair value that exceeded book value by 300% and more.
Acquired finite-lived intangible assets principally consist of certain trademarks and trade names, intellectual property, and customer
relationships. Intangible assets acquired in an asset acquisition are carried at cost, less accumulated amortization. For intangible assets
acquired in a business combination, the estimated fair values of the assets acquired are used to establish the carrying value, which is
determined using common techniques, and the Company employs assumptions developed using the perspective of a market
participant. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Valvoline reviews finite-
lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not
be recoverable and any not expected to be recovered through undiscounted future net cash flows and assets are written down to current
fair value.
Equity method investments
Investments in companies, including joint ventures, where Valvoline has the ability to exert significant influence, but not control, over
operating and financial policies of the investee are accounted for under the equity method of accounting. As of September 30, 2017
and 2016, Valvoline’s investments in these unconsolidated affiliates were $30 million and $26 million, respectively. Judgment
regarding the level of influence over each investment includes considering key factors such as the Company’s ownership interest,
representation on the board of directors, and participation in policy-making decisions. The Company’s proportionate share of the net
income or loss of these companies is included in the Consolidated Statements of Comprehensive Income.
The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the
carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method
investment for impairment include the length of time and extent to which the fair value of the equity method investment has been less
61
than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of
time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.
Pension and other postretirement benefit plans
Prior to the Contribution in fiscal 2016, Valvoline employees were eligible to participate in pension and other postretirement benefit
plans sponsored by Ashland in many of the countries where the Company does business. Prior to the Contribution, the Company
accounted for its participation in Ashland-sponsored pension and other postretirement benefit plans as a participation in a
multiemployer plan, and recognized its allocated portion of net periodic benefit cost based on Valvoline-specific plan participants. In
conjunction with the Contribution, certain of Ashland's pension and other postretirement benefit obligations and plan assets were
transferred to and assumed by the Company, for which Valvoline accounts for as single-employer plans prospectively from the
Contribution in late fiscal 2016. As single-employer plans, Valvoline recognizes the net liabilities and the full amount of any costs or
gains. Valvoline also had certain international single-employer pension plans prior to the Contribution for which the net liabilities and
associated costs have been recognized in the historical periods.
The majority of U.S. pension plans have been closed to new participants since January 1, 2011 and effective September 30, 2016, the
accrual of pension benefits for participants were frozen. In addition, most foreign pension plans are closed to new participants while
those that remain open relate to areas where local laws require plans to operate within the applicable country. In addition, Valvoline
sponsors healthcare and life insurance plans for certain qualifying retired or disabled employees. During March 2016, these other
postretirement benefit plans were amended to reduce retiree life and medical benefits effective October 1, 2016 and January 1, 2017,
respectively.
The funded status of Valvoline’s pension and other postretirement benefit plans is recognized in the Consolidated Balance Sheets. The
funded status is measured as the difference between the fair value of plan assets and the benefit obligation at September 30, the
measurement date, and whenever a remeasurement is triggered. The fair value of plan assets represents the current market value of
assets held by irrevocable trust funds for the sole benefit of participants. For defined benefit pension plans, the benefit obligation is the
projected benefit obligation (“PBO”) and for other postretirement benefit plans, the benefit obligation is the accumulated
postretirement benefit obligation (“APBO”). The PBO represents the actuarial present value of benefits expected to be paid upon
retirement based on estimated future compensation levels. The APBO represents the actuarial present value of other postretirement
benefits attributed to employee services already rendered. The measurement of the benefit obligations is based on estimates and
actuarial valuations. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age
and years of service, as well as certain key assumptions that require significant judgment, including, but not limited to, estimates of
discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
Valvoline recognizes the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each
fiscal year and whenever a plan is determined to qualify for a remeasurement. Such gains and losses may be related to actual results
that differ from assumptions as well as changes in assumptions, which may occur each year. The remaining components of pension
and other postretirement benefits expense are recorded ratably on a quarterly basis. The service cost component of pension and other
postretirement benefits costs is allocated to each reportable segment on a ratable basis, while the remaining non-service and
remeasurement components of pension and other postretirement benefits costs are excluded from segment results and included in
Unallocated and other as those items are not included in the evaluation of segment performance.
Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal costs such as outside counsel
fees and expenses are charged to expense in the period incurred and are recorded in Selling, general and administrative expense in the
Consolidated Statements of Comprehensive Income.
Valvoline partially insures its workers’ compensation claims and other general business insurance needs. Prior to the IPO, Ashland
charged Valvoline for the applicable portion of costs. As part of the Contribution, Valvoline was transferred certain active and legacy
Ashland insurance reserves. Valvoline records accrued liabilities related to these costs based upon specific claims filed and loss
development factors, which contemplate a number of factors including claims history and expected trends. These loss development
factors are developed in consultation with external actuaries.
Revenue recognition
Sales generally are recognized when persuasive evidence of an arrangement exists, products are delivered or services are provided to
customers, the sales price is fixed or determinable and collectability is reasonably assured. Valvoline reports all sales net of tax
assessed by qualifying governmental authorities. Certain shipping and handling costs paid by the customer are recorded in sales, while
those costs paid by Valvoline are recorded in cost of sales.
62
Sales rebates and discounts, consisting primarily of promotional rebates and customer pricing discounts, are offered through various
programs to customers. Sales are recorded net of these rebates and discounts totaling $360 million, $388 million and $345 million in
the Consolidated Statements of Comprehensive Income for the years ended September 30, 2017, 2016 and 2015, respectively. Sales
rebates and discounts are recognized as incurred, generally at the time of the sale, or over the term of the sales contract. Valvoline
bases its estimates on historical rates of customer discounts and rebates as well as the specific identification of discounts and rebates
expected to be realized.
Franchise revenue is also included within sales and was $28 million, $25 million, and $22 million during 2017, 2016, and 2015,
respectively. Franchise revenue generally consists of initial franchise fees and royalties. Initial franchise fees are recognized when all
material obligations have been substantially performed and the store has opened for business. Franchise royalties are based upon a
percentage of monthly sales of the franchisees and are recognized in the month such sales occur.
Expense recognition
Cost of sales include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving,
inspection, warehousing, internal transfers and all other distribution network costs. Selling, general and administrative expenses are
expensed as incurred and include sales and marketing costs, advertising, customer support, environmental remediation, and
administrative costs, including allocated corporate charges from Ashland for periods prior to the IPO. Advertising costs ($61 million in
2017, $58 million in 2016 and $56 million in 2015) and research and development costs ($13 million in each 2017 and 2016, and $11
million in 2015) are expensed as incurred.
Stock-based compensation
For the periods prior to the Distribution, share-based awards for key Valvoline employees and directors were principally settled in
Ashland common stock and expense was allocated to Valvoline based on the awards and terms previously granted. In connection with
the Distribution, outstanding Ashland share-based awards held by Valvoline employees were converted to equivalent share-based
awards of Valvoline. Stock-based compensation expense is generally recognized based on the grant date fair value of new or modified
awards over the requisite vesting period. The Company’s outstanding stock-based compensation awards are primarily classified as
equity, with certain liability-classified awards based on award terms and conditions. Valvoline accounts for forfeitures when they
occur and recognizes stock-based compensation expense within the Selling, general and administrative expense caption of the
Consolidated Statements of Comprehensive Income.
Income taxes
For the periods prior to Distribution, Valvoline’s operating results are included in Ashland’s consolidated U.S., state, and certain
Ashland international subsidiaries' income tax returns. For these periods, the income tax provision in these Consolidated Statements of
Comprehensive Income has been calculated as if Valvoline was operating on a stand-alone basis and filed separate tax returns in the
jurisdictions in which it operates.
Income tax expense is provided based on income before income taxes. Deferred income taxes reflect the impact of temporary
differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes.
These deferred taxes are determined based on the enacted tax rates expected to apply in the periods in which the deferred assets or
liabilities are expected to be settled or realized. Valvoline records valuation allowances related to its deferred income tax assets when it
is more likely than not that some portion or all of the deferred income tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being sustained upon examination by authorities. Interest and penalties related to uncertain tax positions are recognized
as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable
under relevant tax law and until such time that the related tax benefits are recognized.
Derivatives
Valvoline's derivative instruments consist of foreign currency exchange contracts, which are accounted for as either assets or liabilities
in the Consolidated Balance Sheets at fair value and the resulting gains or losses are recognized as adjustments to earnings. Valvoline
does not currently have any derivative instruments that are designated and qualify as hedging instruments.
63
Fair value measurements
Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a
liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based
measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for
considering such assumptions, the guidance prioritizes the inputs used to measure fair value into the three-tier fair value hierarchy. The
fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). An instrument’s categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the instrument’s fair value measurement.
Except for pension plan assets, which are reviewed on annual basis, the Company reviews the fair value hierarchy classification on a
quarterly basis. Changes to the observability of valuation inputs may result in a reclassification of levels for certain securities within
the fair value hierarchy. Valvoline measures its financial assets and financial liabilities at fair value based on one or more of the
following three valuation techniques:
• Market approach: Prices and other relevant information generated by market transactions involving identical or comparable
assets or liabilities.
• Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
•
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations
(including present value techniques, option pricing and excess earnings models).
The Company generally uses a market approach, when practicable, in valuing financial instruments. In certain instances, when
observable market data is lacking, the Company uses valuation techniques consistent with the income approach whereby future cash
flows are converted to a single discounted amount. The Company uses multiple sources of pricing as well as trading and other market
data in its process of reporting fair values. The fair values of cash and cash equivalents, trade receivables and accounts payable
approximate their carrying values due to the relatively short-term nature of the instruments.
Foreign currency translation
Operations outside the United States are measured primarily using the local currency as the functional currency. Upon consolidation,
the results of operations of the subsidiaries and affiliates whose functional currency is other than the U.S. dollar are translated into
U.S. dollars at the average exchange rates for the year while assets and liabilities are translated at year-end exchange
rates. Adjustments to translate assets and liabilities into U.S. dollars are recorded in the stockholders’ equity section of the
Consolidated Balance Sheets as a component of accumulated other comprehensive loss and are included in net earnings only upon sale
or substantial liquidation of the underlying foreign subsidiary or affiliated company.
Earnings per share
Basic EPS is calculated by dividing net income by the weighted-average number of shares outstanding during the reported period. The
calculation of diluted EPS is similar to basic EPS, except that the weighted-average number of shares outstanding includes the
additional dilution from potential common stock such as stock-based compensation awards. Refer to Note 17 for information
regarding a revision to correct an immaterial error in the net EPS calculations previously reported in the consolidated and condensed
consolidated financial statements for the periods prior to and including September 30, 2016. While there were no shares of common
stock outstanding prior to Valvoline’s IPO, the weighted average number of shares outstanding in these historical periods are based on
the 170 million shares of common stock issued to Ashland.
64
New accounting pronouncements
Accounting Standards Updates Recently Adopted
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance to help entities evaluate the
accounting for fees paid by a customer in a cloud computing arrangement. Cloud computing arrangements represent the delivery of
hosted services over the internet which includes software, platforms, infrastructure and other hosting arrangements. Under the
guidance, customers that gain access to software in a cloud computing arrangement account for the software as internal-use software
only if the arrangement includes a software license. Valvoline adopted this standard on a prospective basis on October 1, 2016, and as
a result, certain costs related to these arrangements will be expensed when incurred. The adoption of this guidance did not have a
material impact on the Company's financial condition, results of operations or cash flows.
In May 2015, the FASB issued accounting guidance which removed the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset value per share practical expedient. Valvoline adopted this standard on
October 1, 2016. Accordingly, certain investments that were measured using the net asset value per share practical expedient have not
been categorized within the fair value hierarchy tables and have been separately disclosed. This guidance does not impact the
valuation or recognition of these investments, and relevant disclosure amendments have been retrospectively applied to all periods
presented in the Notes to Consolidated Financial Statements. Refer to Note 14 for additional information.
In March 2016, the FASB issued new accounting guidance for certain aspects of share-based payments to employees, which includes
multiple provisions intended to simplify various aspects of the accounting for share-based payments. In particular, the tax effects of all
stock-based compensation awards will be included in income, windfall tax benefits and deficiencies will be reported as discrete items
in the interim period when they arise, all tax-related cash flows from share-based payments will be reported as operating activities in
the statement of cash flows, the classification of awards as liabilities or equity due to tax withholdings may change, and accounting for
forfeitures may change. This guidance is effective for the Company beginning October 1, 2017; however, Valvoline elected to early
adopt this guidance in the quarter ended June 30, 2017, with all relevant adjustments applied as of the beginning of the fiscal year.
This guidance also allows entities to make an accounting policy election to either estimate the number of awards that are expected to
vest or account for forfeitures when they occur. The Company has elected to recognize forfeitures as they occur rather than estimate a
forfeiture rate. The impact on Valvoline's consolidated financial statements as a result of adopting this new guidance was not material.
Accounting Standards Updates Issued But Not Yet Effective
In May 2014, the FASB issued accounting guidance outlining a single comprehensive five step model for entities to use in accounting
for revenue arising from contracts with customers (ASC 606, Revenue from Contracts with Customers). The new guidance supersedes
most current revenue recognition guidance, in an effort to converge the revenue recognition principles within U.S. GAAP. This new
guidance also requires entities to disclose certain quantitative and qualitative information regarding the nature, amount, timing and
uncertainty of qualifying revenue and cash flows arising from contracts with customers. Entities have the option of using a full
retrospective or a modified retrospective approach to adopt the new guidance. This guidance becomes effective for Valvoline on
October 1, 2018. Valvoline is in the process of evaluating its revenue streams, as well as the available implementation options, and
cannot currently estimate the financial statement impact of adoption, though certain reclassifications are expected to be required in
presentation of the Consolidated Statements of Comprehensive Income. The Company expects to complete its implementation
assessment in early 2018 and will provide updated disclosures of the anticipated impact of adoption in future filings.
In July 2015, the FASB issued accounting guidance to simplify the subsequent measurement of certain inventories by replacing the
current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for
which cost is determined by methods other than LIFO and the retail inventory method. This guidance became effective
prospectively for Valvoline on October 1, 2017. Valvoline utilizes LIFO to value approximately 72% of its gross inventory and does
not expect there to be material differences in the Company's current valuation methodology for its remaining inventory using lower of
cost or market to net realizable value.
In February 2016, the FASB issued new accounting guidance related to lease transactions. The primary objective of this guidance is to
increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance
sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. The presentation of
the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Cash Flows is largely unchanged under
this guidance. This guidance retains a distinction between finance leases and operating leases, and the classification criteria for
distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing
between capital leases and operating leases in the current accounting literature. The guidance will become effective for Valvoline on
October 1, 2019. Valvoline is currently evaluating the impact this guidance will have on Valvoline’s consolidated financial statements
and developing specific assessment and implementation plans. The Company currently expects that most of its operating lease
65
commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
Thus, the Company expects adoption will result in a material increase to the assets and liabilities on the Consolidated Balance Sheets.
In January 2017, the FASB issued accounting guidance which simplifies the subsequent measurement of goodwill by eliminating the
second step of the two-step impairment test under which the implied fair value of goodwill is determined as if the reporting unit were
being acquired in a business combination. The guidance instead requires entities to compare the fair value of a reporting unit with its
carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair
value. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2020, with early adoption
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Valvoline's annual
evaluation of goodwill for impairment is performed as of July 1. As this guidance simplifies the process for measuring impairment,
management does not expect there will be an impact on the consolidated financial statements given the Company's historical excess
fair value of its reporting units.
In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or
postretirement benefit plans present the net periodic benefit cost in the Consolidated Statements of Comprehensive Income. This
guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the
Consolidated Statements of Comprehensive Income as other employee compensation costs from services rendered during the period.
All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This
guidance must be applied retrospectively and will become effective for Valvoline on October 1, 2018, with early adoption being
optional. Valvoline adopted this guidance on October 1, 2017, which will have a significant impact on the presentation of the
Consolidated Statements of Comprehensive Income as it will result in a reclassification of current and historical Pension and other
postretirement plan non-service income and remeasurement adjustments, net from within operating income to non-operating income
beginning with the Quarterly Report on Form 10-Q that will be filed for the first fiscal quarter of 2018.
The FASB issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on
Valvoline's financial statements, and therefore, is not described above.
NOTE 3 – FAIR VALUE MEASUREMENTS
Valvoline uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and
liabilities measured at fair value, and related disclosures for instruments measured at fair value. Fair value accounting guidance
establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the
instrument’s fair value measurement. Valvoline measures assets and liabilities using inputs from the following three levels of fair value
hierarchy:
Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.
Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date.
Unobservable inputs reflect Valvoline’s own assumptions about what market participants would use to price the asset or liability. The
inputs are developed based on the best information available in the circumstances, which may include Valvoline’s own financial data
such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination
requires significant management judgment.
For assets that are measured using quoted prices in active markets (Level 1), the total fair value is the published market price per unit
multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using
significant other observable inputs (Level 2) are primarily valued by reference to quoted prices of similar assets or liabilities in active
markets, adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which unobservable inputs are
used (Level 3), fair value is derived by using fair value models, such as a DCF model or other standard pricing models that Valvoline
considers reasonable.
66
The following table sets forth, by level within the fair value hierarchy, the Company's financial assets and liabilities that were
accounted for at fair value on a recurring basis.
(In millions)
Assets
Cash equivalents
Foreign currency derivatives
Non-qualified trust
Total assets at fair value
$
$
Liabilities
Foreign currency derivatives $
Total liabilities at fair value
$
September 30, 2017
September 30, 2016
Quoted prices in active
markets for identical assets
Quoted prices in active
markets for identical assets
Fair Value
Level 1
Fair Value
Level 1
46
1
30
77
1
1
$
$
$
$
46
1
30
77
1
1
$
$
$
$
12
—
34
46
$
$
$
— $
— $
12
—
34
46
—
—
There were no Level 2 or 3 financial assets or liabilities that were accounted for at fair value on a recurring basis in fiscal 2017 or
2016. Furthermore, there were no transfers between levels of the fair value hierarchy during fiscal 2017 or 2016.
Cash equivalents
Cash equivalents are included in Cash and cash equivalents on the Consolidated Balance Sheets. The Company's policy is to consider
all highly liquid investments with an original maturity of three months or less at the Company's date of purchase to be cash
equivalents. The carrying value of cash equivalents approximates fair value because of the short-term maturity of these instruments.
Derivatives
Until the IPO, Valvoline participated in Ashland’s centralized derivative programs that engage in certain hedging activities, which
Ashland used to manage its exposure to fluctuations in foreign currencies. Gains and losses related to a hedge were either recognized
in Ashland’s income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the equity section of
Ashland’s balance sheet as a component of accumulated other comprehensive loss and subsequently recognized in Ashland’s income
when the underlying hedged item was recognized in earnings. Gains or losses on hedges during the year ended September 30, 2016
were not material and are reflected in Valvoline’s Consolidated Statements of Comprehensive Income through allocation from Ashland
in Selling, general and administrative expense.
Valvoline began its own derivative program in September 2016 to manage exposure to fluctuations in foreign currency as a result of
its global operating activities. The Company uses derivatives not designated as hedging instruments consisting primarily of forward
contracts to hedge foreign currency denominated balance sheet exposures and exchange one foreign currency for another for a fixed
rate at a future date of twelve months or less. For these derivatives, changes in the fair value are recognized in Selling, general and
administrative expense in the Consolidated Statements of Comprehensive Income to offset the gain or loss on the hedged item in the
same period as the remeasurement losses and gains of the related foreign currency-denominated exposures. Gains and losses
recognized during the years ended September 30, 2017 and 2016 related to changes in fair value of these instruments were not
material. The Company utilizes derivative instruments that are purchased exclusively from highly rated financial institutions. The
Company had outstanding contracts with notional values of $47 million and $10 million as of September 30, 2017 and 2016,
respectively. The fair value of these outstanding contracts were recorded on the Consolidated Balance Sheets as assets or liabilities in
Other current assets or Accrued expense and other liabilities, respectively, as shown above at fair market value based upon market
price quotations.
Non-qualified trust funds
The Company maintains a non-qualified trust to fund benefit payments for certain of its U.S. non-qualified pension plans, which
primarily consists of highly liquid fixed income U.S. government bonds and are classified as Other noncurrent assets in the
Consolidated Balance Sheets. Gains and losses related to these investments are immediately recognized within the Consolidated
Statements of Comprehensive Income. Fair value measurements for these investments are based on quoted market prices in active
markets and are categorized as Level 1.
67
Long-term debt
The Company's outstanding senior notes consist of $375 million of fixed rate senior unsecured notes issued in July 2016 (the “2024
Notes”) and $400 million of fixed rate senior unsecured notes issued in August 2017 (the “2025 Notes”).
The fair values shown in the table below are based on the prices at which the bonds have recently traded in the market as well as the
overall market conditions on the date of valuation, stated coupon rates, the number of coupon payments each year and the maturity
dates. The fair value of the debt is included in the Consolidated Balance Sheets at carrying value, rather than fair value, and is
therefore excluded from the fair value table above. The fair value of the 2024 Notes and the 2025 Notes is based on quoted market
prices, which are Level 1 inputs within the fair value hierarchy. Carrying values shown in the following table are net of unamortized
discounts and issuance costs.
(In millions)
2024 Notes
2025 Notes
Total
September 30, 2017
September 30, 2016
Fair value
Carrying
value
Unamortized
discount and
issuance costs
Fair value
Carrying
value
Unamortized
discount and
issuance costs
$
$
401
408
809
$
$
370
394
764
$
$
5
6
11
$
$
394
—
394
$
$
369
—
369
$
$
6
—
6
Refer to Note 11 for details of other debt instruments that have variable interest rates, and accordingly, their carrying amounts
approximate fair value.
Pension plan assets
Pension plan assets must be measured at least annually in accordance with accounting guidance on employers' accounting for
pensions. The fair value measurement guidance requires that the valuation of plan assets comply with its definition of fair value,
which is based on the notion of an exit price and the maximization of observable inputs. The fair value measurement guidance does
not apply to the calculation of pension and other postretirement obligations since the liabilities are not measured at fair value. Refer to
Note 14 for disclosures regarding the fair value of plan assets, including fair value and classification within the fair value hierarchy.
NOTE 4 – ACQUISITIONS AND DIVESTITURES
2017 Acquisitions
During fiscal 2017, Valvoline completed several acquisitions in the Quick Lubes reportable segment, including the acquisition of
several stores from Time-It Lube LLC and Time-It Lube of Texas, LP (collectively, “Time-It Lube”) on January 31, 2017. In total,
Valvoline acquired 43 locations for an aggregate purchase price of $72 million, of which $4 million was paid in fiscal 2016. Of the
$72 million, approximately $66 million was allocated to goodwill and the remainder was allocated to working capital, customer
relationships and trade names.
Goodwill is calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic
benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing
to the recognition of goodwill were based on strategic benefits that are expected to be realized from these acquisitions. All of the
goodwill is expected to be deductible for income tax purposes.
2016 Acquisitions
During fiscal 2016, Valvoline completed several acquisitions in the Quick Lubes reportable segment, including the acquisition of OCH
International, Inc. (“Oil Can Henry’s”) on February 1, 2016. In total, Valvoline acquired 104 locations, 42 of which were franchise
locations. The aggregate purchase price, net of cash acquired for all acquisitions in fiscal 2016 was $79 million. Of the $79 million,
$94 million was allocated to goodwill, $16 million to other assets, including working capital; property, plant and equipment;
intangible assets; and other noncurrent assets. Valvoline also assumed $11 million of debt, $11 million of current liabilities and $9
million of other noncurrent liabilities.
68
The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from these
acquisitions. Approximately $83 million of the goodwill recognized in 2016 was not deductible for income tax purposes.
From the date of acquisition through September 30, 2016, the total revenue for Oil Can Henry’s company-owned and franchise
locations totaled $34 million with operating income of $2 million.
Car Care Products Divestiture
During 2015, Ashland entered into a definitive sale agreement to sell Valvoline’s car care product assets within the Core North
America reportable segment for $24 million, which included Car Brite™ and Eagle One™ automotive appearance products. Prior to
the sale, Valvoline recognized a pre-tax loss of $26 million in 2015 to recognize the assets at fair value less cost to sell, using Level 2
nonrecurring fair value measurements. The loss is reported within the Net loss on acquisition and divestiture caption within the
Consolidated Statements of Comprehensive Income. The transaction closed on June 30, 2015 and Valvoline received net proceeds of
$19 million after adjusting for certain customary closing costs and final working capital amounts.
The sale of Valvoline’s car care product assets did not qualify for discontinued operations treatment since it did not represent a
strategic shift that had or will have a major effect on Valvoline’s operations and financial results.
Venezuela Equity Method Investment Divestiture
During 2015, Valvoline sold the equity method investment in Venezuela within the International reportable segment. Prior to the sale,
Valvoline recognized a $14 million impairment in 2015, for which there was no tax effect, using Level 2 nonrecurring fair value
measurements within the Equity and other income caption of the Consolidated Statements of Comprehensive Income.
Valvoline’s decision to sell the equity investment and the resulting impairment charge recorded during 2015 was reflective of the
continued devaluation of the Venezuelan currency (Bolivar) based on changes to the Venezuelan currency exchange rate mechanisms
during the fiscal year. In addition, the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar had restricted
the equity method investee’s ability to pay dividends and obligations denominated in U.S. dollars. These exchange regulations and
cash flow limitations, combined with other recent Venezuelan regulations and the impact of declining oil prices on the Venezuelan
economy, had significantly restricted Valvoline’s ability to conduct normal business operations through the joint venture arrangement.
Valvoline determined this divestiture did not represent a strategic shift that had or will have a major effect on Valvoline’s operations
and financial results, and thus, it did not qualify for discontinued operations treatment.
NOTE 5 – EQUITY METHOD INVESTMENTS
Summarized financial information for companies accounted for on the equity method is presented in the following table, along with a
summary of the amounts recorded in the consolidated financial statements. The results of operations and amounts recorded by
Valvoline as of and for the years ended September 30, 2017, 2016 and 2015 include results for the Valvoline equity method investment
within Venezuela prior to its divestiture in 2015. Refer to Note 4 for further information on this divestiture in 2015. Valvoline has a
strategic relationship with Cummins Inc. (“Cummins”), a leading heavy duty engine manufacturer for co-branding products in the
heavy duty business and has a 50% interest in joint ventures in India and China and smaller joint ventures in select countries in South
America and Asia.
69
At September 30, 2017 and 2016, Valvoline’s stockholders’ deficit included $28 million and $26 million, respectively, of undistributed
earnings from affiliates accounted for on the equity method. The summarized financial information for all companies accounted for on
the equity method by Valvoline is as of and for the years ended September 30, 2017, 2016 and 2015 as follows:
(In millions)
Financial position
Current assets
Current liabilities
Working capital
Noncurrent assets
Noncurrent liabilities
Stockholders’ equity
Results of operations
Sales
Income from operations
Net income
Amounts recorded by Valvoline
Investments and advances
Equity income (loss) (a)
Distributions received
2017
2016
2015
$
$
$
$
$
$
$
$
105
(69)
36
25
(1)
60
289
53
25
30
12
8
86
(55)
31
24
(2)
53
255
$
46
23
26
12
16
$
275
48
24
29
(2)
18
(a) 2015 includes a $14 million impairment of the equity method investment in Venezuela as further discussed in Note 4.
NOTE 6 - ACCOUNTS RECEIVABLE
The following summarizes Valvoline’s accounts receivable as of the Consolidated Balance Sheet dates:
(In millions)
Trade and other accounts receivable
Less: Allowance for doubtful accounts
September 30,
2017
September 30,
2016
$
$
390
(5)
385
$
$
368
(5)
363
Prior to the Distribution in May 2017, Ashland was party to an agreement to sell certain Valvoline customer accounts receivable in the
form of drafts or bills of exchange to a financial institution. Each draft constituted an order to pay for obligations of the customer to
Ashland arising from the sale of goods to the customer. The intention of the arrangement was to decrease the time accounts receivable
is outstanding and increase cash flows as Ashland in turn remitted payment to Valvoline. During fiscal 2017 and prior to the
Distribution, there was $40 million of accounts receivable sold, and during the year ended September 30, 2016, there was $126 million
of accounts receivable sold to the financial institution under this agreement.
Following the Distribution, Valvoline became party to the arrangement to sell certain customer accounts receivable in the form of draft
or bills of exchange to the financial institution. Following Distribution through the remainder of the year ended September 30, 2017,
Valvoline sold $50 million of accounts receivable to the financial institution.
70
NOTE 7 – INVENTORIES
Inventories are carried at the lower of cost or market value. Inventories are primarily stated at cost using the weighted-average cost
method. In addition, certain lubricants with a replacement cost of $83 million at September 30, 2017 and $68 million at September 30,
2016 are valued at cost using the LIFO method.
The following summarizes Valvoline’s inventories in the Consolidated Balance Sheets as of September 30:
(In millions)
Finished products
Raw materials, supplies and work in process
LIFO reserves
Excess and obsolete inventory reserves
2017
2016
$
$
180
$
31
(33)
(3)
175
$
149
21
(29)
(2)
139
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the various components of property, plant and equipment within the Consolidated Balance Sheets as
of September 30:
(In millions)
Land
Buildings (a)
Machinery and equipment
Construction in progress
Total property, plant and equipment
Accumulated depreciation (b)
Net property, plant and equipment
2017
2016
$
$
51
$
286
442
44
823
(432)
391
$
50
216
382
79
727
(403)
324
(a) Includes $28 million and $7 million of assets under capitalized leases as of September 30, 2017 and September 30, 2016 respectively.
(b) Includes $4 million and $2 million for assets under capitalized leases as of September 30, 2017 and September 30, 2016, respectively.
Non-cash accruals included in total property, plant and equipment totaled $39 million and $25 million for the years ended September
30, 2017 and 2016, respectively. There were no non-cash accruals included in total property, plant and equipment in 2015.
The following summarizes property, plant and equipment charges included within the Consolidated Statements of Comprehensive
Income.
(In millions)
2017
2016
2015
Depreciation (includes capital leases)
$
42
$
38
38
71
NOTE 9 – GOODWILL AND OTHER INTANGIBLES
Goodwill
The following summarizes the changes in the carrying amount of goodwill for each reportable segment and in total during 2017 and
2016:
(In millions)
Balance at September 30, 2015
Acquisitions (a)
Balance at September 30, 2016
Acquisitions (b)
Balance at September 30, 2017
Core North
America
Quick Lubes
International
Total
$
$
89
—
89
—
89
$
$
$
41
94
135
66
201
$
40
—
40
—
40
$
$
170
94
264
66
330
(a) Relates to the acquisition of Oil Can Henry's in 2016, as well as other smaller Quick Lubes acquisitions in 2016.
(b) Relates to the acquisition of the business assets of Time-It Lube of $44 million and $22 million for the acquisition of 15 additional locations within the Quick
Lubes reportable segment during 2017.
Other intangible assets
Valvoline's purchased intangible assets were specifically identified when acquired and have finite lives. These assets are reported in
Goodwill and intangibles in the Consolidated Balance Sheets. The following summarizes the gross carrying amounts and accumulated
amortization of the Company's intangible assets as of September 30:
(In millions)
Definite-lived intangible assets
Trademarks and trade names
Customer relationships
Other intangible assets
Total definite-lived intangible assets
2017
2016
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
$
$
2
5
1
8
$
(1) $
(2)
—
(3) $
1
3
1
5
$
$
1
3
1
5
$
$
$
$
— $
(2)
—
(2) $
1
1
1
3
Amortization expense recognized on intangible assets during the years ended September 30, 2017 and 2016, as well as the expected
amortization expense for the next five years is immaterial in each period and in the aggregate.
72
NOTE 10 – OTHER NONCURRENT ASSETS AND CURRENT AND NONCURRENT LIABILITIES
The following table provides the components of Other noncurrent assets in the Consolidated Balance Sheets as of September 30:
(In millions)
Non-qualified trust investments
Notes receivable from customers
Customer incentive programs
Other
2017
2016
30
35
11
12
88
$
$
34
26
16
13
89
$
$
The following table provides the components of Accrued expenses and other liabilities in the Consolidated Balance Sheets as of
September 30:
(In millions)
Sales deductions and rebates
Accrued pension and other postretirement plans
Incentive compensation
Accrued vacation
Accrued taxes (excluding income taxes)
Accrued payroll
Accrued interest
Other current taxes payable
Other
2017
2016
$
$
54
20
23
20
6
10
7
1
55
$
196
$
67
24
21
18
14
9
4
5
42
204
The following table provides the components of Other noncurrent liabilities in the Consolidated Balance Sheets as of September 30:
(In millions)
Obligations to Ashland (a)
Self-insurance reserves
Deferred compensation
Unfavorable leasehold interest
Capitalized lease obligations
Financing obligations
Other
2017
2016
$
$
74
17
14
6
25
33
9
$
178
$
71
25
8
7
6
19
7
143
(a) Principally includes amounts due to Ashland under the terms of the Tax Matters Agreement further described in Note 13. Under the Tax Matters Agreement,
amounts due to Ashland include the value of certain tax attributes as well as amounts payable to Ashland for various uncertain tax positions and tax-related
indemnification obligations.
73
NOTE 11 – DEBT
The following table summarizes Valvoline’s short-term borrowings and long-term debt at September 30:
(In millions)
2025 Notes
2024 Notes
Term Loans
2017 Accounts Receivable Securitization
Revolver
Other (a)
Total debt
Short-term debt
Current portion of long-term debt
Long-term debt
2017
2016
$
$
$
$
$
400
375
285
75
—
(11)
1,124
$
75
15
1,034
$
—
375
375
—
—
(7)
743
—
19
724
(a) At September 30, 2017, Other includes $13 million of debt issuance costs and discounts and $2 million of debt acquired through acquisitions. At September 30,
2016, Other included $9 million of debt issuance costs cost discounts and $2 million of debt acquired through acquisitions.
Senior Notes Due 2025
During August 2017, Valvoline completed the issuance of 4.375% senior unsecured notes due 2025 with an aggregate principal
amount of $400 million. The 2025 Notes are guaranteed by each of Valvoline's subsidiaries that guarantee obligations under the
existing senior secured credit facility. The net proceeds of the offering of $394 million (after deducting initial purchasers' discounts
and debt issuance costs) were used to make a voluntary contribution to the Company's qualified U.S. pension plan.
The 2025 Notes contain customary events of default for similar debt securities, which if triggered may accelerate payment of
principal, premium, if any, and accrued but unpaid interest on the 2025 Notes. Such events of default include non-payment of principal
and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change
of control repurchase event occurs, Valvoline may be required to offer to purchase the 2025 Notes from the holders thereof. The 2025
Notes are not otherwise required to be repaid prior to maturity, although they may be redeemed at the option of Valvoline at any time
prior to their maturity in the manner specified in the indentures governing the 2025 Notes.
Senior Notes Due 2024
During July 2016, Valvoline completed the issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount
of $375 million. The 2024 Notes are guaranteed by each of Valvoline's subsidiaries that guarantee obligations under the existing senior
secured credit facility. The net proceeds of the offering of $370 million (after deducting initial purchasers’ discounts and debt issuance
costs) were transferred to Ashland.
The 2024 Notes contain customary events of default for similar debt securities, which if triggered may accelerate payment of
principal, premium, if any, and accrued but unpaid interest on the 2024 Notes. Such events of default include non-payment of principal
and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change
of control repurchase event occurs, Valvoline may be required to offer to purchase the 2024 Notes from the holders thereof. The 2024
Notes are not otherwise required to be repaid prior to maturity, although they may be redeemed at the option of Valvoline at any time
prior to their maturity in the manner specified in the indentures governing the 2024 Notes.
Senior Credit Agreement
The 2016 Senior Credit Agreement provides for an aggregate principal amount of $1,325 million in senior secured credit facilities
(“2016 Credit Facilities”), comprised of (i) a five-year $875 million term loan A facility (“Term Loans”) and (ii) a five-year $450
million revolving credit facility (including a $100 million letter of credit sublimit) (“Revolver”).
On September 26, 2016, Valvoline borrowed the full $875 million available under the Term Loans, resulting in approximately $865
million of net proceeds (after deducting fees and expenses). On September 27, 2016, Valvoline borrowed $137 million under the
Revolver. The net proceeds of these borrowings under the Term Loans and Revolver were transferred to Ashland. On September 28,
74
2016, Valvoline used $637 million of the net proceeds received from the IPO to repay $500 million of the $875 million outstanding
under the Term Loans and the full $137 million balance outstanding under the Revolver. The 2016 Credit Facilities are guaranteed by
Valvoline’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing
subsidiaries, regulated subsidiaries, foreign subsidiaries and certain other subsidiaries), and are secured by a first-priority security
interest in substantially all the personal property assets, and certain real property assets, of Valvoline and the guarantors, including all
or a portion of the equity interests of certain of Valvoline’s domestic subsidiaries and first-tier foreign subsidiaries. The 2016 Credit
Facilities may be prepaid at any time without premium.
At Valvoline’s option, the loans issued under the 2016 Senior Credit Agreement bear interest at either LIBOR or an alternate base rate,
in each case plus the applicable interest rate margin. The interest rate fluctuates between LIBOR plus 1.500% per annum and LIBOR
plus 2.500% per annum (or between the alternate base rate plus 0.500% per annum and the alternate base rate plus 1.500% annum),
based upon Valvoline’s corporate credit ratings or the consolidated first lien net leverage ratio (as defined in the 2016 Senior Credit
Agreement).
The 2016 Senior Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative
and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers,
affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum
consolidated leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum
consolidated leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are
4.5 and 3.0, respectively.
As of September 30, 2017, Valvoline is in compliance with all covenants under the 2016 Senior Credit Agreement. As of September
30, 2017 and 2016, there were no amounts outstanding on the Revolver. Total borrowing capacity remaining under the 2016 Senior
Credit Agreement was $436 million under the Revolver, due to a reduction of $14 million for letters of credit at September 30, 2017.
Accounts Receivable Securitization
In November 2016, Valvoline entered into a $125 million accounts receivable securitization facility (the “2017 Accounts Receivable
Securitization”) with various financial institutions. The Company may from time to time, obtain up to $125 million (in the form of
cash or letters of credit) through the sale of an undivided interest in its accounts receivable. The agreement has a term of one year but
is extendable at the discretion of the Company and the financial institutions. The Company accounts for the 2017 Accounts Receivable
Securitization as secured borrowings, which are classified as Short-term debt, and the receivables sold remain in Accounts receivable
in the Consolidated Balance Sheets.
During the first quarter of 2017, Valvoline borrowed $75 million under the 2017 Accounts Receivable Securitization and used the net
proceeds to repay an equal amount of the Term Loans. As a result, the Company recognized an immaterial charge related to the
accelerated amortization of previously capitalized debt issuance costs, which is included in Net interest and other financing expense in
the Consolidated Statements of Comprehensive Income for the year ended September 30, 2017. At September 30, 2017, $75 million
was outstanding and the total borrowing capacity remaining under the 2017 Accounts Receivable Securitization was up to $50 million.
The weighted average interest rate for this instrument was 1.8% for the year ended September 30, 2017.
Deferred Debt Issuance Costs and Discounts
As of September 30, 2017 and 2016, Valvoline had approximately $16 million and $13 million, respectively, in deferred debt issuance
costs and discounts, comprised of $3 million in both periods in Other noncurrent assets related to the Revolver as there was no balance
outstanding and the remainder recorded in Long-term debt as a direct reduction to the related debt obligations on the Consolidated
Balance Sheets. During fiscal 2017, Valvoline recorded an additional $6 million in deferred debt issuance costs and discounts related
to the 2025 Notes and $3 million in amortization expense in Net interest and other financing expense in the Consolidated Statements
of Comprehensive Income, which included $1 million of accelerated amortization due to the repayment on the Term Loans in
connection with the 2017 Accounts Receivable Securitization borrowing. During fiscal 2016, Valvoline deferred debt issuance costs
and discounts of $17 million, of which approximately $4 million of amortization was accelerated as a result of the repayment on the
Term Loans. Debt issuance costs and discounts that are incurred by the Company in connection with the issuance of debt are deferred
and generally amortized to interest expense using the effective interest method over the contractual term of the underlying
indebtedness.
75
Long-term Debt Maturities
The future estimated maturities of long-term debt, excluding debt issuance costs and discounts, are as follows:
(In millions)
Year ending September 30
2018
2019
2020
2021
2022
Thereafter
Total
NOTE 12 – LEASE COMMITMENTS
$
90
30
30
211
—
776
$
1,137
Valvoline and its subsidiaries are lessees of office buildings, Quick Lubes stores, transportation equipment, warehouses and storage
facilities, other equipment, and other facilities and properties under leasing agreements that expire at various dates. Capitalized lease
obligations are primarily included in Other noncurrent liabilities while capital lease assets are included in Net property, plant and
equipment.
As of September 30, 2017, future minimum rental payments for operating leases, capital leases and other financing obligations are as
follows:
(In millions)
2018
2019
2020
2021
2022
Thereafter
Total future minimum lease payments
Operating leases (a)
Capital leases and
financing obligations
$
$
$
21
19
14
11
10
38
113
$
(a) Minimum payments have not been reduced by minimum sublease rentals of $5 million due in the future under noncancelable subleases.
Rental expense under operating leases for operations was as follows for the years ended September 30:
(In millions)
2017
2016
2015
Minimum rentals (including rentals under short-term leases)
Contingent rentals
Sublease rental income
$
$
18
$
2
(1)
19
$
15
$
2
(1)
16
$
76
6
6
7
6
6
52
83
12
2
(1)
13
NOTE 13 – INCOME TAXES
For the years ended September 30, income tax expense consisted of the following:
(In millions)
Current
Federal
State
Foreign
Deferred
Federal (a)
State (b)
Foreign
2017
2016
2015
$
47
$
$
99
24
12
135
14
2
(3)
13
81
16
13
110
(5)
(1)
(3)
(9)
8
14
69
106
12
(1)
117
186
Income tax expense
$
$
148
$
101
(a) Federal deferred income taxes of $106 million net of $96 million operating loss generated in the current year.
(b) State deferred income taxes of $12 million net of $10 million operating loss generated in the current year and a $4 million valuation allowance release.
Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting
purposes. As of September 30, 2017, management intends to indefinitely reinvest approximately $47 million of foreign earnings.
Because these earnings are considered indefinitely reinvested, no U.S. tax provision has been accrued related to the repatriation of
these earnings, and it is not practicable to estimate the amount of U.S. tax that might be payable if these earnings were ever to be
remitted.
77
Temporary differences that give rise to significant deferred tax assets and liabilities are presented in the following table as of
September 30:
(In millions)
Deferred tax assets
Federal net operating loss carryforwards (a)
Foreign net operating loss carryforwards (b)
State net operating loss carryforwards (c)
Employee benefit obligations
Compensation accruals
Environmental, self-insurance and litigation reserves (net of receivables)
Credit carryforwards (d)
Other items
Valuation allowances (e)
Total deferred tax assets
Deferred tax liabilities
Goodwill and other intangibles (f)
Property, plant and equipment
Unremitted earnings
Total deferred tax liabilities
Net deferred tax asset
2017
2016
$
96
$
1
28
132
29
6
13
7
(8)
304
3
17
3
23
$
281
$
—
1
18
351
17
10
20
5
(12)
410
—
21
2
23
387
(a) Gross federal net operating loss carryforwards of $273 million will expire in 2037.
(b) Gross foreign net operating loss carryforwards of $5 million will expire in the years 2020 to 2037.
(c) Apportioned net operating loss carryforwards of $620 million will expire in future years as follows: $8 million in 2019, and the remaining balance in the years
2020 to 2037.
(d) Credit carryforwards consist primarily of foreign tax credits of $5 million expiring in 2027, research and development credits of $7 million expiring in the years
2034 to 2037 and alternative minimum tax credits of $1 million with no expiration date.
(e) Valuation allowances primarily relate to certain state and foreign net operating loss carryforwards, and certain other deferred tax assets.
(f) The total gross amount of goodwill as of September 30, 2017 expected to be deductible for tax purposes is $79 million.
As of September 30, 2017 and 2016, valuation allowances of $8 million and $12 million, respectively, were recorded on the
Consolidated Balance Sheets related to deferred tax assets that are not expected to be realized or realizable.
78
The U.S. and foreign components of income before income taxes and a reconciliation of the statutory federal income tax with the
provision for income taxes follow.
(In millions)
Income before income taxes
United States (a)
Foreign
Total income before income taxes
Income taxes computed at U.S. statutory rate (35%)
Increase (decrease) in amount computed resulting from
$
$
$
Uncertain tax positions
State taxes
International rate differential
Permanent items (b)
Tax Matters Agreement activity
Other items
Income tax expense
2017
2016
2015
433
$
382
$
57
490
171
$
$
2
17
(7)
(8)
10
1
39
421
147
$
$
3
16
(5)
(11)
—
(2)
245
52
297
104
1
9
(8)
(5)
—
—
$
186
$
148
$
101
(a) A significant component of the fluctuations within this caption relates to the remeasurements of the U.S. pension and other postretirement plans.
(b) Permanent items in each year relate primarily to the domestic manufacturing deduction and income from equity affiliates. Further, 2017 includes adjustments
related to certain non-deductible separation costs of $2 million, and 2015 includes adjustments related to the sale of the Venezuela joint venture of $6 million.
Income tax expense for the year ended September 30, 2017 was $186 million or an effective tax rate of 38.0% compared to an expense
of $148 million or an effective tax rate of 35.2% for the year ended September 30, 2016 and expense of $101 million or an effective
tax rate of 34.0% for the year ended September 30, 2015. The increase in the 2017 and 2016 effective tax rates is partially due to the
increase in income from pension and other postretirement benefits that generated significant income amounts in higher tax rate
jurisdictions. Additionally, in fiscal 2017, the effective tax rate was impacted by income tax expense resulting from the Tax Matters
Agreement activity with Ashland, certain non-deductible separation costs, and the partial loss of certain tax deductions from the $394
million voluntary contribution to the U.S. qualified pension plan, partially offset by a benefit from a state valuation allowance release.
For fiscal years 2017 through 2015, the effective tax rate was impacted favorably by the lower tax rate on foreign earnings and net
favorable permanent items. These favorable items are offset by the unfavorable impact of state taxes, and these adjustments net to an
immaterial overall impact to the effective tax rate for each year.
Unrecognized tax benefits
U.S. GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax
positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires
Valvoline to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical
merits of the position. The second step requires Valvoline to recognize in the financial statements each tax position that meets the
more likely than not criteria, measured at the amount of benefit that has a greater than 50% likelihood of being realized. Valvoline had
$10 million and $8 million of unrecognized tax benefits at September 30, 2017 and 2016, respectively. As of September 30, 2017, the
total amount of unrecognized tax benefits that, if recognized, would affect the tax rate was $10 million. The remaining unrecognized
tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing
of such deductibility. Recognition of these tax benefits would not have an impact on the effective tax rate.
Valvoline recognizes interest and penalties related to uncertain tax positions as a component of income tax expense in the
Consolidated Statements of Comprehensive Income. Such interest and penalties were immaterial in each of the years ended September
30, 2017, 2016 and 2015. Valvoline had $1 million in interest and penalties related to unrecognized tax benefits accrued as of
September 30, 2017 and 2016.
79
The table below is a rollforward of the changes in gross unrecognized tax benefits for the past three fiscal years:
(In millions)
Balance at September 30, 2014
Increases related to positions taken on items from prior years
Balance at September 30, 2015
Increases related to positions taken on items from prior years
Increases related to positions taken in the current year
Balance at September 30, 2016
Increases related to positions taken in the current year
Balance at September 30, 2017
$
$
4
1
5
2
1
8
2
10
From a combination of statute expirations and audit settlements in the next twelve months, Valvoline expects no significant decrease
in the amount of accrual for uncertain tax positions. For the remaining balance as of September 30, 2017, it is reasonably possible that
there could be changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues,
reassessment of existing uncertain tax positions, or the expiration of applicable statute of limitations; however, Valvoline is not able to
estimate the impact of these items at this time.
Valvoline or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions,
or it is included in a consolidated return in these jurisdictions. Foreign taxing jurisdictions significant to Valvoline include Australia,
Canada, Mexico, China, Singapore, India and the Netherlands. Valvoline is subject to U.S. federal income tax examinations, either
directly or as part of a consolidated return, by tax authorities for periods after September 30, 2011 and U.S. state income tax
examinations by tax authorities for periods after September 30, 2006. With respect to countries outside of the United States, with
certain exceptions, Valvoline’s foreign subsidiaries are subject to income tax audits for years after 2006.
Tax Matters Agreement
For the periods prior to the separation from Ashland and Distribution, Valvoline is included in Ashland’s consolidated U.S. and state
income tax returns and in tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). Under
the Tax Matters Agreement between Valvoline and Ashland that was entered into on September 22, 2016, Ashland will generally make
all necessary tax payments to the relevant tax authorities with respect to Ashland Group Returns, and Valvoline will make tax sharing
payments to Ashland, inclusive of tax attributes utilized. The amount of the tax sharing payments will generally be determined as if
Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed their own consolidated, combined or
separate tax returns for the period from the IPO to Distribution that include only Valvoline and/or its relevant subsidiaries, as the case
may be. During fiscal 2017, Valvoline made $48 million in net tax-sharing payments to Ashland for the period prior to Distribution. In
addition, Valvoline recognized a $16 million benefit in Selling, general and administrative expense for a reduction in amounts due to
Ashland under the Tax Matters Agreement as a result of Ashland’s estimated utilization of Valvoline tax attributes in the Ashland
Group Returns. This benefit was offset by additional income tax expense of $16 million.
For taxable periods that begin on or after the day after the date of Distribution, Valvoline is not included in any Ashland Group
Returns and will file tax returns that include only Valvoline and/or its subsidiaries, as appropriate. Valvoline will not be required to
make tax sharing payments to Ashland for those taxable periods. Nevertheless, Valvoline has (and will continue to have following
Distribution) joint and several liability with Ashland to the U.S. Internal Revenue Service (“IRS”) for the consolidated U.S. federal
income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland consolidated
group.
The Tax Matters Agreement also generally provides that Valvoline has indemnified Ashland for the following items:
• Taxes of Valvoline for all taxable periods that begin on or after the day after the date of the Distribution;
• Taxes of Valvoline for the period between the IPO and full separation from Ashland and Distribution that are not attributable to
Ashland Group Returns;
• Taxes for the pre-IPO period that arise on audit or examination and are directly attributable to the Valvoline business;
• Certain U.S. federal, state or local taxes for the pre-IPO period of Ashland and/or its subsidiaries for that period that arise on
audit or examination and are directly attributable to neither the Valvoline business nor the Ashland chemicals business;
• Certain tax attributes inherited from Ashland as the result of the Contribution from Ashland; and
• Transaction Taxes (as defined below) that are allocated to Valvoline under the Tax Matters Agreement.
80
Total liabilities related to these and other obligations owed to Ashland under the Tax Matters Agreement are $62 million and $66
million at September 30, 2017 and 2016, respectively. The net liability at September 30, 2017 consisted of $1 million recorded in
Accrued expenses and other liabilities and $61 million recorded in Other noncurrent liabilities in the Consolidated Balance Sheets. As
of September 30, 2016, the net liability consisted of $5 million of receivables recorded in Other current assets and $71 million
recorded in Other noncurrent liabilities in the Consolidated Balance Sheets.
The Tax Matters Agreement also provides that Valvoline indemnify Ashland for any taxes (and reasonable expenses) resulting from
the failure of the Distribution to qualify for non-recognition of gain and loss or certain reorganization transactions related to the
Contribution or the Distribution to qualify for their intended tax treatment (“Transaction Taxes”), where the taxes result from (1)
breaches of covenants (including covenants containing the restrictions described below that are designed to preserve the tax-free
nature of the Stock Distribution), (2) the application of certain provisions of U.S. federal income tax law to the Distribution with
respect to acquisitions of Valvoline’s common stock or (3) any other actions that Valvoline knows or reasonably should expect would
give rise to such taxes. The Tax Matters Agreement also requires Valvoline to indemnify Ashland for a portion of certain other
Transaction Taxes allocated to Valvoline based on Valvoline’s market capitalization relative to the market capitalization of Ashland.
Valvoline will have either sole control, or joint control with Ashland, over any audit or examination related to taxes for which
Valvoline is required to indemnify Ashland.
The Tax Matters Agreement imposes certain restrictions on Valvoline and its subsidiaries (including restrictions on share issuances or
repurchases, business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free nature of the
Distribution. These restrictions will apply for the two-year period after the Distribution. However, Valvoline will be able to engage in
an otherwise restricted action if Valvoline obtains an appropriate opinion from counsel or ruling from the IRS.
NOTE 14 – EMPLOYEE BENEFIT PLANS
Pension and other postretirement plans
Prior to the Contribution in fiscal 2016, Valvoline employees were eligible to participate in pension and other postretirement benefit
plans sponsored by Ashland in many of the countries where the Company does business. Prior to the Contribution, the Company
accounted for its participation in Ashland-sponsored pension and other postretirement benefit plans as a participation in a
multiemployer plan, and recognized its allocated portion of net periodic benefit cost based on Valvoline-specific plan participants. In
conjunction with the Contribution, certain of Ashland's pension and other postretirement benefit obligations and plan assets were
transferred to and assumed by the Company, for which Valvoline accounts for as single-employer plans prospectively from the
Contribution in late fiscal 2016. As single-employer plans, Valvoline recognizes the net liabilities and the full amount of any costs or
gains. Valvoline also had certain international single-employer pension plans prior to the Contribution for which the net liabilities and
associated costs have been recognized in the historical periods.
Valvoline recognizes the funded status of each applicable plan on the Consolidated Balance Sheets whereby each underfunded plan is
recognized as a liability. Changes in the fair value of plan assets and net actuarial gains or losses are recognized upon remeasurement,
which is at least annually in the fourth quarter of each year.
The majority of U.S. pension plans have been closed to new participants since January 1, 2011 and effective September 30, 2016, the
accrual of pension benefits for participants were frozen. In addition, most foreign pension plans are closed to new participants while
those that remain open relate to areas where local laws require plans to operate within the applicable country.
In addition, Valvoline sponsors healthcare and life insurance plans for certain qualifying retired or disabled employees. During March
2016, these other postretirement benefit plans were amended to reduce retiree life and medical benefits effective October 1, 2016 and
January 1, 2017, respectively. The effect of these plan amendments resulted in a remeasurement gain of $8 million within Pension and
other postretirement plan non-service income and remeasurement adjustments, net in the Consolidated Statements of Comprehensive
Income during the first fiscal quarter of 2017. These plans have limited the annual per capita costs to an amount equivalent to base
year per capita costs, plus annual increases of up to 1.5% per year for costs incurred. As a result, health care cost trend rates do not
have a significant impact on the Company's future obligations for these plans. The assumed pre-65 health care cost trend rate as of
September 30, 2017 was 7.9% and continues to be reduced to 4.5% in 2037 and thereafter.
Pension annuity programs
On August 29, 2017, Valvoline used pension assets to purchase a non-participating annuity contract from an insurer that will pay and
administer future pension benefits for approximately 6,000 participants within the qualified U.S. pension plan. Valvoline transferred
approximately $585 million of the outstanding pension benefit obligation in exchange for pension trust assets whose value
approximated the liability value.
81
On September 15, 2016, Valvoline used pension assets to purchase a non-participating annuity contract from an insurer that will pay
and administer future pension benefits for 14,800 participants within the qualified U.S. pension plan. Valvoline transferred
approximately $378 million of the outstanding pension benefit obligation in exchange for pension trust assets whose value
approximated the liability value.
The annuity purchase transactions did not generate a material settlement adjustment during 2017 or 2016. The insurers have
unconditionally and irrevocably guaranteed the full payment of benefits to plan participants associated with the annuity purchase and
benefit payments will be in the same form that was in effect under the plan. The insurers have also assumed all investment risk
associated with the pension assets that were delivered as annuity contract premiums.
Components of net periodic benefit costs (income)
For segment reporting purposes, service cost is allocated to each reportable segment, while all other net periodic benefit costs are
recorded within Unallocated and other. The following table summarizes the components of pension and other postretirement plans net
periodic benefit costs (income) and the assumptions used in this determination for the years ended September 30:
(In millions)
Net periodic benefit (income) costs
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit (a)
Actuarial (gain) loss
Pre-separation allocation from Ashland (b)
Weighted-average plan assumptions (c)
Discount rate for service cost (d)
Discount rate for interest cost (d)
Rate of compensation increase
Expected long-term rate of return on plan assets
Pension benefits
Other postretirement benefits
2017
2016
2015
2017
2016
2015
$
$
2
86
(145)
—
(63)
—
$
3
11
(17)
—
(42)
21
$
(120)
$
(24)
$
1
3
(3)
—
2
43
46
$
— $
— $
1
—
(12)
(5)
—
—
—
(1)
—
—
$
(16)
$
(1)
$
2.15%
2.84%
2.99%
6.56%
4.10%
3.23%
3.23%
6.77%
4.08%
4.08%
3.15%
5.34%
2.95%
2.64%
—
—
4.25%
2.92%
—
—
—
—
—
—
—
—
—
—
—
—
—
(a) Other postretirement plan changes announced in March 2016 resulted in negative plan amendments that are being amortized within this caption during 2017 and
2016.
(b) The pre-Contribution allocation from Ashland are costs in fiscal 2015 and 2016 until the transfer of plans to Valvoline at September 1, 2016. The allocation during
2016 and 2015 is comprised of service cost of $7 million and $8 million, respectively; non-service income of $10 million and $9 million, respectively; and
actuarial losses of $24 million and $44 million, respectively.
(c ) The plan assumptions are a blended weighted-average rate for Valvoline’s U.S. and non-U.S. plans. The assumptions for 2015 only reflect Valvoline stand-alone
plans. The 2016 assumptions reflect a combination of a full year of Valvoline stand-alone plans and one month for the plans transferred to Valvoline on September
1, 2016. The U.S. pension plans represented approximately 97% of the total pension benefits projected benefit obligation at September 30, 2017. Other
postretirement benefit plans consist of U.S. and Canada, with the U.S. plan representing approximately 76% of the total other postretirement projected benefit
obligation at September 30, 2017. Non-U.S. plans use assumptions generally consistent with those of U.S. plans.
(d) Weighted-average discount rates reflect the adoption of the full yield curve approach in 2016.
82
The following table shows the amortization of prior service cost (credit) recognized in accumulated other comprehensive loss.
(In millions)
Pension benefits
Other postretirement
benefits
2017
2016
2017
2016
Transfer in of unrecognized prior service cost (credit)
$
— $
1
$
— $
Amortization of prior service credit
Total amount recognized in accumulated other comprehensive income
Net periodic benefit income
—
—
(120)
—
1
(24)
12
12
(16)
Total amount recognized in net periodic benefit income and accumulated
other comprehensive income
$
(120) $
(23) $
(4) $
(81)
1
(80)
(1)
(81)
Amounts to be Recognized
The following table shows the amount of prior service credit in accumulated other comprehensive loss at September 30, 2017 that is
expected to be recognized as a component of net periodic benefit cost (income) during the fiscal 2018:
(In millions)
Prior service credit
Obligations and funded status
Pension benefits
Other postretirement benefits
$
— $
(12)
Summaries of the change in benefit obligations, plan assets, funded status of the plans, amounts recognized in the balance sheet, and
assumptions used to determine the benefit obligations for 2017 and 2016 follow for the Valvoline-sponsored pension and other
postretirement benefit plans included within the Consolidated Balance Sheets.
83
(In millions)
Change in benefit obligations
Benefit obligations at October 1
Transfer from Ashland
Service cost
Interest cost
Participant contributions
Benefits paid
Actuarial (gain)
Foreign currency exchange rate changes
Transfers in
Curtailment/Settlement
Benefit obligations at September 30
Change in plan assets
Value of plan assets at October 1
Transfer from Ashland
Actual return on plan assets
Employer contributions
Participant contributions
Benefits paid
Foreign currency exchange rate changes
Curtailment/Settlement
Transfers in
Value of plan assets at September 30
Unfunded status of the plans
Amounts recognized in the Consolidated Balance Sheets
Current benefit liabilities
Noncurrent benefit liabilities
Net amount recognized
Pension benefits
Other postretirement
benefits
2017
2016
2017
2016
$
3,138
$
59
$
—
2
86
—
(210)
(60)
4
6
(585)
2,381
2,307
—
148
412
—
(210)
3
(585)
6
2,081
(300)
(11)
(289)
(300)
2
2
3,523
3
11
—
(20)
(66)
1
—
(373)
3,138
46
2,653
(7)
6
—
(20)
2
(373)
—
2,307
(831)
(11)
(820)
(831)
2
2
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
73
—
—
1
3
(16)
(5)
1
—
—
57
$
$
— $
—
—
13
3
(16)
—
—
—
— $
—
75
—
—
1
(3)
—
—
—
—
73
—
—
—
2
1
(3)
—
—
—
—
(57)
$
(73)
(8)
(49)
(57)
(68)
(68)
$
$
$
(11)
(62)
(73)
(80)
(80)
Amounts recognized in accumulated other comprehensive income (loss)
Prior service cost (credit)
$
Total amount in accumulated other comprehensive income (loss)
$
Weighted-average plan assumptions
Discount rate
Rate of compensation increase
3.76%
3.13%
3.54%
3.10%
3.48%
—
2.92%
—
84
The accumulated benefit obligation for all pension plans was $2.4 billion at September 30, 2017 and $3.1 billion at September 30,
2016. Information for pension plans with a benefit obligation in excess of plan assets follows for the plans included within the
Consolidated Balance Sheets as of September 30:
2017
2016
(In millions)
Benefit
Obligation
Plan Assets
Benefit
Obligation
Plan Assets
Plans with projected benefit obligation in excess of plan assets
$
2,381
$
2,081
$
3,138
$
Plans with accumulated benefit obligation in excess of plan assets
2,368
2,072
3,125
2,307
2,298
Plan assets
The weighted average expected long-term rate of return on pension plan assets was 6.56% and 6.77% for 2017 and 2016,
respectively. The basis for determining the expected long-term rate of return is a combination of future return assumptions for various
asset classes in Valvoline’s investment portfolio, historical analysis of previous returns, market indices and a projection of inflation.
The following table summarizes the various investment categories that the pension plan assets are invested in and the applicable fair
value hierarchy that the financial instruments are classified within these investment categories as of September 30, 2017. For
additional information and a detailed description of each level within the fair value hierarchy, refer to Note 3.
(In millions)
Cash and cash equivalents
U.S. government securities
Other government securities
Corporate debt instruments
Corporate stocks
Other investments
Total assets in fair value hierarchy
Investments measured at net asset value:
Private equity and hedge funds
Total investments measured at net asset value
Total assets at fair value
Quoted prices in
active markets
for identical
assets
Level 1
Significant
other
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Total fair value
$
$
$
$
$
13
$
13
$
— $
339
86
1,197
16
16
207
—
934
—
—
132
86
263
16
—
1,667
$
1,154
$
497
$
414
414
2,081
$
$
— $
1,154
$
— $
497
$
—
—
—
—
—
16
16
—
16
85
The following table summarizes the various investment categories that the pension plan assets are invested in and the applicable fair
value hierarchy that the financial instruments are classified within these investment categories as of September 30, 2016.
(In millions)
Cash and cash equivalents
U.S. government securities
Other government securities
Corporate debt instruments
Corporate stocks
Other investments
Total assets in fair value hierarchy
Investments measured at net asset value:
Private equity and hedge funds
Total investments measured at net asset value
Total assets at fair value
Quoted prices in
active markets for
identical assets
Level 1
Significant
other
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Total fair value
$
$
$
$
$
$
81
85
73
1,077
242
23
81
—
—
877
134
—
$
— $
85
73
200
108
—
1,581
$
1,092
$
466
$
726
726
2,307
$
$
— $
1,092
$
— $
466
$
—
—
—
—
—
23
23
—
23
Valvoline’s pension plans hold a variety of investments designed to diversify risk. Investments classified as a Level 1 fair value
measure principally represent marketable securities priced in active markets. Cash and cash equivalents and public equity and debt
securities are well diversified and invested in U.S. and international small-to-large companies across various asset managers and
styles. Investments classified as a Level 2 fair value measure principally represent fixed-income securities in U.S. treasuries and
agencies and other investment grade corporate bonds and debt obligations.
Investments measured at net asset value primarily consist of private equity and hedge funds and are not categorized within the fair
value hierarchy. Valvoline's investments in these funds are primarily valued using the net asset value per share of underlying
investments as determined by the respective individual fund administrators on a daily, weekly or monthly basis, depending on the
fund. These investments have redemption notice periods that generally range from 5 to 90 days and various redemption frequencies,
ranging from monthly to annually. Valvoline’s pension plans also hold Level 3 investments primarily within real estate investments
subject to valuation techniques based on unobservable valuation methodologies and data employed by the fund manager to value these
investments. Such valuations are reviewed by portfolio managers who determine the estimated value of the collective funds based on
these inputs. The following table provides a reconciliation of the beginning and ending balances for these Level 3 assets.
(In millions)
Balance at September 30, 2015
Transfer in
Balance at September 30, 2016
Actual return on plan assets related to assets held at September 30, 2017
Balance at September 30, 2017
Investments and Strategy
Total Level 3 assets
$
$
$
—
23
23
(7)
16
In developing an investment strategy for its defined benefit plans, Valvoline has considered the following factors: the nature of the
plans’ liabilities, the allocation of liabilities between active, deferred and retired members, the funded status of the plans, the
applicable investment horizon, the respective size of the plans and historical and expected investment returns. Valvoline’s U.S. pension
plan assets are managed by outside investment managers, which are monitored against investment return benchmarks and Valvoline’s
established investment strategy. Investment managers are selected based on an analysis of, among other things, their investment
process, historical investment results, frequency of management turnover, cost structure and assets under management. Assets are
86
periodically reallocated between investment managers to maintain an appropriate asset mix and diversification of investments and to
optimize returns.
The current target asset allocation for the U.S. plan is 80% fixed securities and 20% equity securities. Fixed income securities
primarily include long duration high grade corporate debt obligations. Risk assets include both traditional equity as well as a mix of
non-traditional assets such as hedge funds and private equity. Investment managers may employ a limited use of derivatives to gain
efficient exposure to markets.
Valvoline’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are consistent with those
for U.S. plans, except in those countries where investment of plan assets is dictated by applicable regulations. The weighted-average
asset allocations for Valvoline’s U.S. and non-U.S. plans at September 30, 2017 and 2016 by asset category follow.
Plan assets allocation
Equity securities
Debt securities
Other
Funding and Benefit Payments
Target
2017
2016
10-30%
70-90%
0-20%
20%
78%
2%
100%
46%
52%
2%
100%
During fiscal 2017 and 2016, Valvoline contributed $412 million and $6 million, respectively, to its pension plans. The 2017
contributions include $394 million of discretionary contributions made to the U.S. qualified pension plan funded by the proceeds
received from the 2025 Notes described in Note 11. Valvoline does not plan to contribute to the U.S. qualified pension plan in 2018,
but expects to contribute approximately $14 million to its U.S. non-qualified and non-U.S. pension plans during 2018.
The following benefit payments, which reflect future service expectations, are projected to be paid in each of the next five years and in
aggregate for five years thereafter.
(In millions)
2018
2019
2020
2021
2022
Thereafter
Total
Other plans
Pension benefits
Other postretirement benefits
$
$
$
145
145
146
147
148
737
1,468
$
8
6
4
3
3
15
39
During 2017, Valvoline began sponsoring its own savings plan. This plan provides matching contributions subject to a maximum
percentage. Expense associated with this plan in 2017 was $14 million. For 2016 and 2015, qualifying Valvoline employees were
eligible to participate in Ashland’s qualified savings plan, and Valvoline’s allocated expense related to these defined contributions was
$11 million in each 2016 and 2015. After the IPO, Valvoline sponsors various other benefit plans, some of which are required by
different countries. Total current and noncurrent liabilities associated with these plans were $1 million and $4 million, respectively, as
of September 30, 2017, and $2 million and $4 million, respectively, as of September 30, 2016.
NOTE 15 – LITIGATION, CLAIMS AND CONTINGENCIES
From time to time Valvoline is involved in claims and legal actions that arise in the ordinary course of business. While Valvoline
cannot predict with certainty the outcome, costs recognized with respect to such actions were immaterial during the year ended
September 30, 2017. Valvoline does not have any currently pending claims or litigation which Valvoline believes, individually or in
the aggregate, will have a material adverse effect on its financial position, results of operations, liquidity or capital resources. While
Valvoline cannot predict with certainty the outcome of such matters, it believes that adequate reserves have been recorded, where
87
appropriate, which were immaterial as of September 30, 2017 and 2016. There is a reasonable possibility that a loss exceeding
amounts already recognized may be incurred related to these matters; however, Valvoline believes that such potential losses will not be
material.
NOTE 16 - STOCK-BASED COMPENSATION PLANS
Prior to the Distribution, share-based awards for key Valvoline employees and directors were principally settled in Ashland common
stock and granted through participation in Ashland’s stock incentive plans, primarily in the form of stock appreciation rights
(“SARs”), restricted stock, performance shares and other nonvested stock awards. In periods preceding the Distribution, stock-based
compensation expense was allocated to Valvoline based on the awards and terms previously granted. In connection with the
Distribution on May 12, 2017, outstanding Ashland share-based awards held by Valvoline employees and directors were converted to
equivalent share-based awards of Valvoline based on an exchange ratio of Ashland’s fair market value prior to Distribution in relation
to Valvoline’s fair market value post-Distribution.
The 2016 Valvoline Inc. Incentive Plan (the “Valvoline Incentive Plan”) was adopted by Valvoline's Board of Directors, effective
October 1, 2016, after having been approved by Ashland as controlling stockholder on September 27, 2016. Share-based awards
granted under the Valvoline Incentive Plan contain similar terms and conditions as those granted under the Ashland stock incentive
plans. A total of 7 million shares are authorized to be issued under the Valvoline Incentive Plan, with approximately 5 million
remaining available for issuance as of September 30, 2017.
Valvoline recognizes stock-based compensation expense within the Selling, general and administrative expense caption of the
Consolidated Statements of Comprehensive Income. In the periods following the Distribution, Valvoline recognizes stock-based
compensation expense based on the grant date fair value of new or modified awards over the requisite vesting period. Stock-based
compensation expense was $10 million, $11 million, and $9 million for the years ended September 30, 2017, 2016 and 2015,
respectively. During the prior year periods, this expense was based on an allocation from Ashland, and during the year ended
September 30, 2017, these allocations were $4 million. Included in the total stock-based compensation expense below is
approximately $1 million for the year ended September 30, 2017 related to certain awards that are cash-settled and liability-classified;
therefore, fair value is remeasured at the end of each reporting period until settlement.
The following is a summary of stock-based compensation expense recognized by the Company during the year ended September 30,
2017:
(In millions)
Stock appreciation rights
Nonvested stock awards
Performance awards
Total stock-based compensation expense, pre-tax
Tax benefit
Total stock-based compensation expense, net of tax
Stock Appreciation Rights
2017
3
5
2
10
(4)
6
$
$
Through Valvoline’s participation in Ashland’s stock incentive plans, SARs were granted to certain Valvoline employees to provide
award holders with the ability to profit from the appreciation in value of a set number of shares of Ashland’s common stock over a
period of time by exercising their award and receiving the sum of the increase in shares. SARs were granted at a price equal to the fair
market value of the stock on the date of grant and typically vest and become exercisable over a period of one to three years.
Unexercised SARs lapse ten years and one month after the date of grant.
In connection with the Distribution, Ashland SARs held by Valvoline employees were converted to equivalent Valvoline SARs based
on the exchange ratio described above, which modified the number of SARs outstanding as well as the exercise price. The conversion
was treated as a modification for accounting purposes, and accordingly, Valvoline estimated its pre- and post-modification fair value
using the Black-Scholes option pricing model, which resulted in an immaterial increase in the incremental fair value of the awards.
This model requires several assumptions, which were developed and updated based on historical trends and current market
observations.
88
The following table illustrates the weighted average of key assumptions used within the Black-Scholes option-pricing model to
estimate fair value of the modified SARs at Distribution.
Weighted average fair value per share of SARs
$
Assumptions (weighted average)
Risk-free interest rate (a)
Expected dividend yield
Expected volatility (b)
Expected term (in years) (c)
7.44
1.7%
0.9%
22.8%
7.45
(a) The range of risk-free interest rates used for the SARs converted to Valvoline shares at Distribution was 1.1% to 1.9%.
(b) The range of expected volatility used for the SARs converted to Valvoline shares at Distribution was 21.5% to 24.4%.
(c) For SARs that were fully vested at Distribution, the expected term is based on the mid-point of the Distribution date and the expiration date.
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the modification for the
expected term of the instrument. The dividend yield reflected the assumption at the time that the current dividend payout will continue
with no anticipated increases. Due to the lack of historical data for Valvoline, the volatility assumption was calculated by utilizing
average volatility of peer companies with look-back periods commensurate with the expected term for each tranche of awards. The
expected term is based on the vesting period and contractual term for each vesting tranche of awards, which generally utilized the mid-
point between the vesting date and the expiration date as the expected term.
The following table summarizes the activity relative to SARs for the year ended September 30, 2017:
Number of
Shares
(in thousands)
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Term
(in years)
Aggregate
Intrinsic Value
(in millions)
SARs outstanding at September 30, 2016
Conversion of Ashland awards to awards in Valvoline stock
Exercised (a)
Forfeited
SARs outstanding at September 30, 2017
SARs exercisable at September 30, 2017
(a) The aggregate intrinsic value of awards exercised was less than $1 million.
— $
1,896
(45)
(27)
1,824
975
$
$
—
17.53
17.93
20.24
17.48
14.90
$
$
$
7.1 years
5.6 years
—
—
11
8
As of September 30, 2017, there was $2 million of total unrecognized compensation costs related to SARs, which is expected to be
recognized over a weighted average period of 2.0 years.
Nonvested stock awards
Primarily through Valvoline’s participation in Ashland’s stock incentive plans, nonvested stock awards in the form of Restricted Stock
Awards (“RSAs”) and Restricted Stock Units (“RSUs”) were granted to certain Valvoline employees and directors. These awards were
granted at a price equal to the fair market value of the underlying common stock on the grant date, generally vest over a one to three-
year period, and are subject to forfeiture upon termination of service before the vesting period ends. These awards were primarily
granted as RSUs that settle in shares upon vesting, while RSAs result in share issuance at grant, which entitle award holders to voting
rights that are restricted until vesting. Dividends on nonvested stock awards granted are in the form of additional units or shares of
nonvested stock awards, which are subject to vesting and forfeiture provisions.
In connection with the Distribution, Ashland nonvested stock awards held by Valvoline employees were converted to equivalent
Valvoline awards based on the exchange ratio described above, which modified the number of awards outstanding. The conversion
was treated as a modification for accounting purposes, and accordingly, Valvoline determined its pre- and post-modification fair value,
which resulted in an immaterial increase in the incremental fair value of the awards that will be expensed ratably over the remaining
vesting period of each award.
89
The following table summarizes nonvested share activity for the year ended September 30, 2017:
Number of
Shares
(in thousands)
Weighted Average Modified
Grant Date Fair Value per
Share
Outstanding balance at September 30, 2016
Conversion of Ashland service-based awards to Valvoline awards
Granted
Vested and distributed
Forfeitures
Outstanding shares at September 30, 2017
— $
843
447
(7)
(8)
1,275
$
—
22.65
22.82
22.65
22.55
22.71
As of September 30, 2017, there was $12 million of total unrecognized compensation costs related to nonvested stock awards, which
is expected to be recognized over a weighted average period of 2.7 years. The aggregate intrinsic value of the nonvested stock awards
as of September 30, 2017 is $30 million.
Performance awards
Through Valvoline’s participation in Ashland’s stock incentive plans, performance shares/units were awarded to certain key Valvoline
employees that were tied to Ashland’s overall financial performance relative to the financial performance of selected industry peer
groups and/or internal targets. Awards were granted annually, with each award covering a three-year performance and vesting
period. Each performance share/unit is convertible to one share of common stock, and the actual number of shares issuable upon
vesting is determined based upon actual performance compared to market and financial performance targets. Nonvested performance
shares/units generally do not entitle employees to vote the shares or to receive any dividends thereon.
In connection with the Distribution, Ashland performance awards held by Valvoline employees were converted to equivalent Valvoline
awards based on the exchange ratio described above, which modified the number of awards outstanding. In addition, certain terms and
conditions of the original grants were modified relative to the performance and market measures and related performance periods. The
conversion was treated as a modification for accounting purposes, and accordingly, Valvoline estimated its pre- and post-modification
fair value, which resulted in an immaterial increase in the incremental fair value of the awards that will be expensed ratably over the
remaining vesting period of each award.
For those awards with remaining post-Distribution performance and market conditions, Valvoline estimated its modified fair value of
each award using a two-step approach to consider both the performance and market conditions. With regard to the performance
conditions, the modified fair value is equal to the fair market value of Valvoline's common stock on the modification date, and
compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied.
For the market conditions, compensation cost is recognized regardless of whether the conditions are satisfied and based on the
modified fair value that was estimated using a Monte Carlo simulation valuation model using key assumptions summarized in the
following table:
Assumptions (weighted average)
Risk-free interest rate (a)
Expected dividend yield
Expected volatility (b)
Expected term (in years)
1.2%
1.0%
21.0%
1.9
(a) The range of risk-free interest rates used for the performance awards converted to Valvoline shares at Distribution was 0.9% to 1.5%.
(b) The range of expected volatility used for the performance awards converted to Valvoline shares at Distribution was 18.9% to 22.4%.
90
The following table summarizes performance award activity for the year ended September 30, 2017:
Outstanding balance at September 30, 2016
Conversion of Ashland performance-based awards to Valvoline awards
Cancellations
Outstanding shares at September 30, 2017
— $
258
(76)
182
$
—
18.44
7.15
23.20
Number of
Shares
(in thousands)
Weighted Average Modified
Grant Date Fair Value per
Share
As of September 30, 2017, there was $2 million of unrecognized compensation costs related to nonvested performance share awards,
which is expected to be recognized over a weighted average period of approximately 1.6 years. The aggregate intrinsic value of the
nonvested stock awards as of September 30, 2017 is $4 million.
NOTE 17 - EARNINGS PER SHARE
The Company corrected an immaterial error in the EPS calculations previously reported in the consolidated and condensed
consolidated financial statements for the periods prior to and including September 30, 2016. EPS was previously reported in these
periods based on weighted average common shares outstanding of 204.5 million, which included both the 170 million shares issued to
Ashland in the Contribution as well as the 34.5 million shares issued in the IPO on September 28, 2016. The weighted average number
of shares outstanding included in the EPS calculation have been revised for the respective prior year periods to include the IPO shares
only for the period they were outstanding in the year ended September 30, 2016. The impact of this revision did not affect the fiscal
2017 financial statements or reported net income, financial position or cash flows for any previous period.
Basic and diluted EPS previously reported in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016 were
$1.33, $0.96 and $0.84 for the years ended September 30, 2016, 2015 and 2014, respectively. After correction of the weighted average
number of common shares outstanding, revised basic and diluted EPS were $1.60, $1.15 and $1.02 for the years ended September 30,
2016, 2015 and 2014, respectively. The Company evaluated the impact of the revision on prior periods, assessing materiality
quantitatively and qualitatively and concluded that the error was not material to any of the interim and annual periods previously
presented. The referenced periods presented herein have been revised accordingly.
EPS is determined under the treasury stock method. The following is the summary of basic and diluted EPS for the years ended
September 30:
(In millions except per share data)
Numerator
Net income
Denominator
Weighted average shares used to compute basic EPS (a)
Effect of dilutive securities (b)
Weighted average shares used to compute diluted EPS
Earnings per share
Basic
Diluted
2017
2016
2015
$
304
$
273
$
204
—
204
170
—
170
196
170
—
170
$
$
1.49
1.49
$
$
1.60
1.60
$
$
1.15
1.15
(a) The weighted average number of shares outstanding for the years ended September 30, 2016 and 2015 are based on the 170 million shares issued to Ashland in the
Contribution.
(b) During the year ended September 30, 2017, share-based awards that were previously denominated in Ashland common stock were converted to Valvoline common
stock at Distribution. As presented in the table, there was not a significant dilutive impact for the year ended September 30, 2017 from potential common shares.
91
NOTE 18 - STOCKHOLDERS’ DEFICIT
Separation from Ashland
On May 12, 2017, Ashland completed the Distribution of all 170 million shares of Valvoline common stock as a pro rata dividend on
shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017. Based on the shares of
Ashland common stock outstanding on the record date, each share of Ashland common stock received 2.745338 shares of Valvoline
common stock in the Distribution. Concurrent with the Distribution, Ashland's net investment in Valvoline was reduced to zero with a
corresponding adjustment to Paid-in capital and Retained deficit. Refer to Note 1 for additional information regarding the separation
from Ashland.
Stockholder dividends
The Company's dividend activity during the year ended September 30, 2017 was as follows:
Declaration Date
Record Date
Payment Date
November 15, 2016
December 5, 2016
December 20, 2016
January 24, 2017
April 27, 2017
July 27, 2017
March 1, 2017
June 1, 2017
March 15, 2017
June 15, 2017
September 1, 2017
September 15, 2017
Dividend Per
Common
Share
$
$
$
$
0.049
0.049
0.049
0.049
Cash Outlay
(in millions)
10
$
10
$
10
$
10
$
Cash Paid to
Ashland
(in millions)
8
$
8
$
—
$
—
$
Share repurchases
On April 24, 2017, Valvoline's Board of Directors authorized a share repurchase program under which Valvoline may repurchase up to
$150 million of shares of its common stock through December 31, 2019. During the year ended September 30, 2017, $50 million was
used to repurchase approximately 2 million shares of common stock, which were retired on repurchase and recorded as a reduction in
Common stock for par value, with the price paid in excess of par value recorded as an increase in Retained deficit. As of September
30, 2017, $100 million remains available for repurchase under this authorization.
Other comprehensive income (loss)
Components of other comprehensive income (loss) recorded in the Consolidated Statements of Comprehensive Income are presented
in the following table, before tax and net of tax effects, for the years ended September 30:
(In millions)
Other comprehensive income (loss)
2017
Tax
benefit
(expense) Net of tax
Before
tax
Before
tax
2016
Tax
benefit
(expense) Net of tax
Unrealized translation gain
$
9
$
(2) $
7
$
10
$
(2) $
8
Pension and other postretirement obligation
adjustment:
Amortization of unrecognized prior
service credits included in net income (a)
(12)
Total other comprehensive income (loss)
$
(3) $
4
2
$
(8)
(1) $
(1)
9
$
—
(2) $
(1)
7
(a) Amortization of unrecognized prior service credits are included in net periodic benefit income for pension and other postretirement plans and are included in
Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Consolidated Statements of Comprehensive Income.
92
NOTE 19 – RELATED PARTY TRANSACTIONS
Ashland Transactions
Separation from Ashland
Immediately prior to the Distribution, Ashland owned 170 million shares of Valvoline common stock, representing approximately 83%
of the outstanding shares of Valvoline common stock. Effective upon the Distribution, Ashland no longer holds any shares of
Valvoline common stock. Refer to Note 1 for further information on the separation from Ashland. Also refer to Note 16 for
information regarding the conversion of share-based awards from Ashland to Valvoline at Distribution.
Cash management and treasury
For periods prior to the IPO in 2016, Valvoline participated in Ashland’s centralized treasury and cash management processes.
Accordingly, the cash and cash equivalents were held by Ashland at the corporate level and were not attributed to Valvoline.
Transactions in periods prior to the IPO were considered to be effectively settled for cash at the time the transactions were recorded.
These transactions and net cash transfers to and from Ashland’s centralized cash management system are reflected as a component of
Ashland's net investment on the Consolidated Balance Sheets and as a financing activity within the accompanying Consolidated
Statements of Cash Flows. In the Consolidated Statements of Stockholders’ Equity, Ashland's net investment on the Consolidated
Balance Sheets represents the cumulative net investment by Ashland in Valvoline, including net income through the completion of the
IPO and net cash transfers to and from Ashland. In the Consolidated Statement of Stockholders’ Deficit, Ashland's net investment
represents the cumulative net investment by Ashland in Valvoline through IPO, including net cash transfers to and from Ashland
through Distribution.
All significant transactions between Valvoline and Ashland have been included in the consolidated financial statements. In the periods
preceding the IPO and Distribution, Valvoline also participated in certain of Ashland's treasury activities related to derivatives and
accounts receivable factoring and securitization. Refer to Notes 3 and 6 for additional information.
Transition Services Agreements
Valvoline also entered into a Transition Services Agreement (“TSA”) and Reverse Transition Services Agreement (“RTSA”) and
certain other agreements in connection with the Separation Agreement with Ashland to cover certain continued corporate services
provided by Valvoline and Ashland to each other following the completion of Valvoline’s IPO. In connection with the IPO, Valvoline
began to set up its own corporate functions, and pursuant to the TSA, Ashland provided various corporate support services, including
certain accounting, human resources, information technology, office and building, risk, security, tax and treasury services. Pursuant to
the RTSA, Valvoline provided various corporate support services, including certain human resources, information technology, office
and building, security and tax services, as well as certain regulatory compliance services required during the period in which Valvoline
remained a majority-owned subsidiary of Ashland. Additional services may be identified from time to time and also be provided under
the TSA and RTSA. In general, these agreements began following the completion of the IPO and cover a period not expected to
exceed 24 months. The charges associated with these services were not material during the years ended September 30, 2016 and 2017,
and are consistent with expenses that Ashland has historically allocated or incurred with respect to such services, plus a mark-up of
five percent.
Related party receivables and payables
At September 30, 2017, Valvoline had total net obligations due to Ashland of $74 million, of which $2 million was recorded in
Accrued expenses and other liabilities and the remainder was primarily recorded and Other noncurrent liabilities in the Consolidated
Balance Sheets. These liabilities generally relate to net obligations due to Ashland under the Tax Matters Agreement as well as
reimbursements payable to Ashland for certain other contractual obligations, including those related to transition services and other
obligations that are intended to transfer to Valvoline as part of the Distribution. Refer to Note 13 for additional details regarding the
Tax Matters Agreement and related obligations.
At September 30, 2016, Valvoline had receivables from Ashland of $30 million recorded in Other current assets on the Consolidated
Balance Sheets. Also, at September 30, 2016, Valvoline had obligations to Ashland of $73 million, of which $2 million was in Accrued
expenses and other liabilities in the Consolidated Balance Sheets and $71 million was recorded in Other noncurrent liabilities in the
Consolidated Balance Sheets. The long-term liability related primarily to the obligations under the Tax Matters Agreement.
93
Corporate allocations
Prior to the completion of the IPO, Valvoline utilized centralized functions of Ashland to support its operations, and in return, Ashland
allocated certain of its expenses to Valvoline. Such expenses represent costs related, but not limited to, treasury, legal, accounting,
insurance, information technology, payroll administration, human resources, incentive plans and other services. These costs, together
with an allocation of Ashland overhead costs, are included within the Selling, general and administrative caption of the Consolidated
Statements of Comprehensive Income. Where it was possible to specifically attribute such expenses to activities of Valvoline, amounts
have been charged or credited directly to Valvoline without allocation or apportionment. Allocation of all other such expenses was
based on a reasonable reflection of the utilization of service provided or benefits received by Valvoline during the periods presented on
a consistent basis, such as headcount, square footage, tangible assets or sales. Valvoline’s management supports the methods used in
allocating expenses and believes these methods to be reasonable estimates.
There were no general corporate expenses allocated to Valvoline during the year ended September 30, 2017, while there were $79
million allocated during each of the years ended September 30, 2016 and 2015. The following table summarizes the centralized and
administrative support costs of Ashland that were allocated to Valvoline for the years ended September 30:
(In millions)
Information technology
Financial and accounting
Building services
Legal and environmental
Human resources
Shared services
Other general and administrative
Total
Joint Venture Transactions
2016
2015
$
$
20
12
11
6
5
2
23
79
$
$
17
13
10
7
4
2
26
79
As described in Note 5, Valvoline has a 50% interest in joint ventures with Cummins in India and China and smaller joint ventures in
select countries in Central and South America and Asia. Sales to these joint ventures were $12 million and $10 million in 2017 and
2016, respectively, with $3 million in receivable balances outstanding as of September 30, 2017 and 2016.
NOTE 20 – REPORTABLE SEGMENT INFORMATION
Valvoline’s business is managed within reportable segments based on how operations are managed internally for the products and
services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining
resource allocation methodologies used for reportable segments. Valvoline’s operating segments are identical to its reportable
segments. Operating income is the primary measure reviewed by the chief operating decision maker in assessing each reportable
segment’s financial performance. Valvoline’s businesses are managed within three reportable operating segments: Core North
America, Quick Lubes, and International. Additionally, to reconcile to total consolidated Operating income, certain corporate and
other non-operational costs are included in Unallocated and other.
Reportable segment business descriptions
The Core North America reportable segment sells Valvoline™ and other branded products in the United States and Canada to both
retailers for consumers to perform their own automotive maintenance, referred to as “Do-It-Yourself” or “DIY” consumers, as well as
to installer customers who use Valvoline products to service vehicles owned by “Do-It-For Me” or “DIFM” consumers. Valvoline DIY
sales are primarily to national retail auto parts stores, leading mass merchandisers and independent auto part stores. Valvoline DIFM
sales to installer customers include car dealers, general repair shops, and third-party quick lube chains. Valvoline directly serves these
customers as well as through a network of distributors. Valvoline’s installer channel also sells branded products and solutions to heavy
duty customers such as on-highway fleets and construction companies.
Through its Quick Lubes reportable segment, Valvoline operates Valvoline Instant Oil Change (“VIOC”), a quick-lube service chain
involving both Company-owned and franchised stores. Valvoline also sells its products and provides Valvoline branded signage to
independent quick lube operators through its Express Care program.
94
The International reportable segment sells Valvoline™ and Valvoline’s other branded products in approximately 140 countries outside
of the United States and Canada. Valvoline’s key international markets include China, India, EMEA, Latin America and Australia
Pacific. The International reportable segment sells products for both consumer and commercial vehicles and equipment, and is served
by company-owned plants in the United States, Australia and the Netherlands, as well as third-party warehouses and toll
manufacturers in other regions. In most of the countries where Valvoline’s products are sold, Valvoline goes to market via independent
distributors.
Unallocated and other generally includes items that are non-operational in nature and not directly attributable to any of the reportable
segments, such as components of pension and other postretirement benefit plan expense/income (excluding service costs, which are
allocated to the reportable segments), certain significant company-wide restructuring activities and legacy costs or adjustments that
relate to divested businesses, including costs related to the separation from Ashland and the $26 million loss from the sale of car care
products during 2015.
Valvoline did not have a single customer that represented 10% of consolidated net sales in 2015, 2016 or 2017.
Entity-wide disclosures
Information about Valvoline’s domestic and international operations follows. Valvoline’s international operations are primarily
captured within the International reportable segment and Valvoline does not have material operations in any individual international
country.
(In millions)
United States
International
Sales from external customers
Net (liabilities) assets
Property, plant and
equipment - net
2017
2016
2015
2017
2016
2017
2016
$
$
1,504
580
2,084
$
$
1,397
$
1,413
$
(321) $
(520) $
532
554
204
190
1,929
$
1,967
$
(117) $
(330) $
352
39
391
$
$
286
38
324
Sales by geography expressed as a percentage of total consolidated sales were as follows:
Sales by Geography
North America (a)
Europe
Asia Pacific
Latin America & other
For the years ended September 30
2016
2017
2015
74%
7%
14%
5%
100%
75%
7%
14%
4%
100%
74%
8%
14%
4%
100%
(a)
Valvoline includes only the United States and Canada in its North American designation.
95
Reportable segment results
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 Valvoline’s reportable segments are not necessarily comparable with similar information for other companies. Valvoline
allocates all costs to its reportable segments except for certain significant non-operational or corporate matters, such as restructuring
plans and/or other costs or adjustments that relate to former businesses that Valvoline no longer operates. The service cost component
of pension and other postretirement benefits costs is allocated to each reportable segment on a ratable basis (currently, the only plans
with ongoing service costs are international plans within the International reportable segment), while the remaining components of
pension and other postretirement benefits costs are recorded in Unallocated and other.
Valvoline determined that disclosing sales by specific product was impracticable. As such, the following tables provide a summary of
sales by product category for each reportable segment for the years ended September 30:
Core North America
Quick Lubes
International
Sales by Product Category for Sales by Product Category
Lubricants
Chemicals
Antifreeze
Filters
2017
2016
86%
87%
4%
7%
3%
4%
7%
2%
100%
100%
Lubricants
Chemicals
Filters
2017
2016
94%
1%
5%
94%
1%
5%
Lubricants
Chemicals
Antifreeze
100%
100%
Filters
2017
2016
89%
89%
4%
6%
1%
7%
3%
1%
100%
100%
96
The following table presents various financial information for each reportable segment. The operating results of divested assets during
2015 that did not qualify for discontinued operations accounting treatment are included in the financial information until the date of
sale.
Reportable Segment Information
(In millions)
Sales
Core North America
Quick Lubes
International
Equity income (loss)
Core North America
Quick Lubes
International
Other income
Core North America
Quick Lubes
International
Operating income (loss)
Core North America
Quick Lubes
International
Unallocated and other (a)
Additions to property, plant and equipment
Core North America
Quick Lubes
International
Unallocated and other
Depreciation and amortization (b)
Core North America
Quick Lubes
International
Years ended September 30
2017
2016
2015
1,004
$
541
539
$
979
457
493
2,084
$
1,929
$
1,061
394
512
1,967
— $
— $
—
12
12
3
3
7
13
25
199
130
76
127
532
35
29
3
1
$
$
$
$
68
$
$
15
22
5
—
12
12
1
2
4
7
19
$
$
212
117
74
28
431
$
$
$
$
41
20
5
—
66
16
17
5
42
$
38
$
—
—
(2)
(2)
1
2
7
10
8
200
95
65
(37)
323
20
19
6
—
45
17
16
5
38
$
$
$
$
$
$
$
$
$
$
(a) During 2017, 2016, and 2015, Unallocated and other also includes a gain of $68 million, a gain of $18 million, and a loss of $46 million, respectively, related to
the actuarial remeasurements of pension and other postretirement benefit plans.
(b) Depreciation and amortization by reportable segment is based upon allocations across reportable segments as certain assets service more than one reportable
segment.
97
(In millions)
Assets (a)
Core North America
Quick Lubes
International
Unallocated and other
Equity method investments
Core North America
Quick Lubes
International
Unallocated and other
Property, plant and equipment, net (a)
Core North America
Quick Lubes
International
Unallocated and other
Years ended September 30
2017
2016
$
554
483
306
572
525
370
271
659
1,915
$
1,825
— $
—
30
—
30
117
183
47
44
$
$
391
$
—
—
26
—
26
123
149
46
6
324
$
$
$
$
$
$
(a) Some assets by reportable segment are based upon allocations across reportable segments as certain assets service more than one reportable segment.
NOTE 21 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents quarterly financial information and per share data:
(In millions except per share
amounts)
Sales
Cost of sales
Gross profit as a percentage of
sales
Operating income
Net income
Net income per common share (a)
Basic (a)
Diluted (a)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
489
304
2016
$ 456
$ 280
2017
$ 514
$ 316
37.8%
120
72
38.6%
96
65
$
$
38.5%
$ 117
71
$
$
$
$
$
2016
480
288
40.0%
104
68
$
$
$
$
$
$
$
$
2017
534
337
36.9%
104
56
$
$
$
$
2016
499
300
2017
$ 547
$ 349
39.9%
113
75
36.2%
$ 191
$ 105
$ 0.35
$ 0.35
$ 0.38
$ 0.38
$ 0.35
$ 0.35
$ 0.40
$ 0.40
$ 0.27
$ 0.27
$ 0.44
$ 0.44
$ 0.52
$ 0.52
2016
494
300
39.3%
118
65
0.38
0.38
$
$
$
$
$
$
Cash dividends per share
$ 0.05
$ — $ 0.05
$ — $ 0.05
$ — $ 0.05
$ —
(a) Refer to Note 17 for additional information regarding revisions to prior period EPS calculations. Net income per share in each quarter is computed using the
weighted-average number of shares outstanding during that quarter while net income per share for the full year is computed using the weighted-average number of
shares outstanding during the year. Thus, the sum of the four quarters’ net income per share will not necessarily equal the full-year net income per share.
98
NOTE 22 – GUARANTOR FINANCIAL INFORMATION
The 2024 Notes and 2025 Notes (collectively, the “Senior Notes”) are general unsecured senior obligations of Valvoline Inc. and
are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by the combined “Guarantor
Subsidiaries.” Other subsidiaries (the “Non-Guarantor Subsidiaries”) largely represent the international operations of the Company,
which do not guarantee the Senior Notes. Under the terms of the indentures, Valvoline Inc. and the Guarantor Subsidiaries each
fully and unconditionally, jointly and severally, guarantee the payment of interest, principal and premium, if any, on each of the
notes included in the Senior Notes. The Guarantor Subsidiaries are subject to release in certain circumstances, including (i) the sale
of all of the capital stock of the subsidiary, (ii) the designation of the subsidiary as an “Unrestricted Subsidiary” under the indenture
governing the Senior Notes; or (iii) the release of the subsidiary as a guarantor from the Company's 2016 Senior Credit Agreement
described further in Note 11.
In connection with the foregoing, the registration rights agreements with respect to the Senior Notes require the Company to use its
reasonable best efforts to consummate an offer to exchange the outstanding notes for substantially identical exchange notes
registered under the Securities Act of 1933, as amended. Accordingly, in November 2017, the Company is filing a Registration
Statement on Form S-4 to initiate the exchange offers for these Senior Notes in compliance with its registration obligations. The
Company will not receive any proceeds from the exchange offers.
The following tables should be read in conjunction with the consolidated financial statements herein and present, on a
consolidating basis, the condensed balance sheets; condensed statements of comprehensive income; and condensed statements of
cash flows for the parent issuer of these Senior Notes, the Guarantor Subsidiaries on a combined basis, the Non-Guarantor
Subsidiaries on a combined basis and the eliminations necessary to arrive at the Company's consolidated results. The principal
elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted
for its investments in its subsidiaries under the equity method.
In connection with the restructuring steps that occurred immediately prior to Valvoline's IPO as described in Note 1, certain
subsidiaries were created and contributed to Valvoline which formed a new organizational structure to affect the separation from
Ashland, which was completed in May 2017. Activity for the parent issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries
has been presented herein to reflect the guarantee structure in place at September 30, 2017 for all periods presented based upon the
historical activity that occurred within Valvoline's legal structure that existed in each respective period presented.
99
Condensed Consolidating Balance Sheets
For the year ended September 30, 2017
(In millions)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Noncurrent assets
Net property, plant and equipment
Goodwill and intangibles
Equity method investments
Investment in subsidiaries
Deferred income taxes
Other assets
Total noncurrent assets
Total assets
Liabilities and Stockholders' Deficit
Current Liabilities
Short-term debt
Current portion of long-term debt
Trade and other payables
Accrued expenses and other liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt
Employee benefit obligations
Other liabilities
Total noncurrent liabilities
Commitments and contingencies
Stockholders' deficit
Total liabilities and stockholders'
deficit
$
$
201
385
175
29
790
391
335
30
—
281
88
1,125
1,915
75
15
192
196
478
1,034
342
178
1,554
Valvoline Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
—
—
—
—
—
—
—
606
145
314
1,065
$
99
57
94
25
275
353
333
30
447
122
80
1,365
$
102
389
81
4
576
38
2
—
—
14
6
60
1,065
$
1,640
$
636
$
— $
(61)
—
—
(61)
—
—
—
(1,053)
—
(312)
(1,365)
(1,426) $
— $
— $
15
2
103
120
1,032
—
30
1,062
(117)
—
198
60
258
2
321
453
776
606
75
—
53
33
161
—
21
7
28
$
— $
—
(61)
—
(61)
—
—
(312)
(312)
447
(1,053)
(117)
$
1,065
$
1,640
$
636
$
(1,426) $
1,915
100
Condensed Consolidating Balance Sheets
For the year ended September 30, 2016
(In millions)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Noncurrent assets
Net property, plant and equipment
Goodwill and intangibles
Equity method investments
Investment in subsidiaries
Deferred income taxes
Other assets
Total noncurrent assets
Total assets
Liabilities and Stockholders' Deficit
Current Liabilities
Current portion of long-term debt
Trade and other payables
Accrued expenses and other liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities
Total noncurrent liabilities
Commitments and contingencies
Stockholders' deficit
Total liabilities and stockholders'
deficit
$
$
Valvoline Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
93
$
1
—
5
6
—
—
—
354
36
25
415
421
304
72
50
519
288
265
26
160
336
80
1,155
1,674
$
$
$
79
64
67
1
211
36
2
—
—
17
5
60
271
$
19
$
— $
— $
6
4
29
722
—
—
722
131
172
303
2
860
—
155
1,017
46
28
74
—
26
2
9
37
— $
(6)
—
—
(6)
—
—
—
(514)
—
(21)
(535)
(541) $
— $
(6)
—
(6)
—
—
—
(21)
(21)
172
363
139
56
730
324
267
26
—
389
89
1,095
1,825
19
177
204
400
724
886
2
143
1,755
(330)
354
160
(514)
(330)
$
421
$
1,674
$
271
$
(541) $
1,825
101
Condensed Consolidating Statements of Comprehensive Income
For the year ended September 30, 2017
Valvoline
Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$
— $
1,618
$
(In millions)
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Pension and other postretirement plan non-service
income and remeasurement adjustments, net
Separation costs
Equity and other income
Operating income
Net interest and other financing expense
(Loss) income before income taxes
Income tax (benefit) expense
Equity in net income of subsidiaries
Net income
Total comprehensive income
$
$
$
Eliminations Consolidated
(57) $
(57)
—
1,306
2,084
778
—
—
—
—
—
—
—
—
(363)
(363) $
(373) $
$
$
375
(136)
32
(25)
532
42
490
186
—
304
303
523
377
146
91
(2)
—
12
45
2
43
11
—
32
43
—
—
(7)
—
1
—
6
36
(30)
(3)
331
304
303
$
$
986
632
291
(134)
31
(37)
481
4
477
178
32
331
330
$
$
102
Condensed Consolidating Statements of Comprehensive Income
For the year ended September 30, 2016
Valvoline
Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$
— $
1,500
$
(In millions)
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Pension and other postretirement plan non-service
income and remeasurement adjustments, net
Separation costs
Equity and other income
Operating income
Net interest and other financing expense
Net loss on acquisition
(Loss) income before income taxes
Income tax (benefit) expense
Equity in net income of subsidiaries
Net income
Total comprehensive income
$
$
$
Eliminations Consolidated
(47) $
(47)
—
1,168
1,929
761
—
—
—
—
—
—
—
—
—
(322)
(322) $
(338) $
$
$
365
(22)
6
(19)
431
9
1
421
148
—
273
280
476
337
139
80
4
—
2
53
—
—
53
9
—
44
53
—
—
—
—
—
—
—
9
—
(9)
(4)
278
273
280
$
$
878
622
285
(26)
6
(21)
378
—
1
377
143
44
278
285
$
$
103
$
Eliminations Consolidated
(54) $
(54)
—
1,967
1,282
685
—
—
—
—
—
—
—
(250)
(250) $
(186) $
$
$
348
22
(8)
323
26
297
101
—
196
162
Condensed Consolidating Statements of Comprehensive Income
For the year ended September 30, 2015
(In millions)
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Pension and other postretirement plan non-service
income and remeasurement adjustments, net
Equity and other income
Operating income
Net loss on acquisition
(Loss) income before income taxes
Income tax (benefit) expense
Equity in net income of subsidiaries
Net income
Total comprehensive income
Valvoline
Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$
— $
1,527
$
—
—
—
—
—
—
—
—
—
196
196
162
$
$
$
$
985
542
275
22
(13)
258
26
232
90
54
196
162
$
$
494
351
143
73
—
5
65
—
65
11
—
54
24
104
Condensed Consolidating Statements of Cash Flows
For the year ended September 30, 2017
(In millions)
Cash flow (used in) provided by operating
activities
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from disposal of property, plant and
equipment
Acquisitions, net of cash required
Advance to subsidiary
Total cash used in investing activities
Cash flows from financing activities
Net transfers from Ashland
Proceeds from borrowings, net of issuance costs of
$5
Repayments on borrowings
Repurchase of common stock
Cash dividends paid
Other intercompany activity, net
Total cash provided by financing activities
Effect of currency exchange rate changes on cash
and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Valvoline
Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
97
$
(180) $
(47) $
— $
(130)
—
—
—
(312)
(312)
5
395
(90)
(50)
(40)
(5)
215
—
—
—
$
— $
(64)
1
(68)
—
(131)
—
—
—
—
—
317
317
—
6
93
99
(4)
—
—
—
(4)
—
75
—
—
—
—
75
(1)
23
79
—
—
—
312
312
—
—
—
—
—
(312)
(312)
—
—
—
$
102
$
— $
(68)
1
(68)
—
(135)
5
470
(90)
(50)
(40)
—
295
(1)
29
172
201
105
Condensed Consolidating Statements of Cash Flows
For the year ended September 30, 2016
(In millions)
Cash flows (used in) provided by operating
activities
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from disposal of property, plant and
equipment
Acquisitions, net of cash required
Total cash used in investing activities
Cash flows from financing activities
Net transfers to Ashland
Cash contributions from Ashland
Proceeds from initial public offering, net of offering
costs of $40
Proceeds from borrowings, net of issuance costs of
$15
Repayments on borrowings
Other intercompany activity, net
Total cash provided by (used in) financing
activities
Effect of currency exchange rate changes on cash
and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Valvoline
Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations Consolidated
$
(35) $
307
$
39
$
— $
311
—
—
—
—
(1,504)
60
719
1,372
(637)
25
35
—
—
—
$
— $
(60)
1
(83)
(142)
—
—
—
—
—
(72)
(72)
—
93
—
93
$
(6)
—
—
(6)
—
—
—
—
—
47
47
(1)
79
—
79
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
(66)
1
(83)
(148)
(1,504)
60
719
1,372
(637)
—
10
(1)
172
—
172
106
Condensed Consolidating Statements of Cash Flows
For the year ended September 30, 2015
(In millions)
Cash flows provided by operating activities
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from disposal of property, plant and
equipment
Acquisitions, net of cash required
Proceeds from sale of operations
Total cash used in investing activities
Cash flows from financing activities
Net transfers to Ashland
Other intercompany activity, net
Total cash used in financing activities
Effect of currency exchange rate changes on cash
and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Valvoline
Inc.
(Parent
Issuer)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations Consolidated
$
— $
247
$
83
$
— $
330
—
—
—
—
—
(304)
304
—
—
—
—
(40)
1
(5)
23
(21)
—
(226)
(226)
—
—
—
(5)
—
—
—
(5)
—
(78)
(78)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
— $
— $
— $
(45)
1
(5)
23
(26)
(304)
—
(304)
—
—
—
—
107
NOTE 23 – SUBSEQUENT EVENTS
On October 2, 2017, the Company completed the acquisition of 56 Quick Lubes franchise service centers from Henley Bluewater LLC
for $60 million. These stores build on the infrastructure and talent base of the existing company-owned operations in
northern Ohio and add company-owned locations in Michigan. Following the acquisition, the company has a network of 440
company-owned locations.
On November 14, 2017, the Company’s Board of Directors approved a quarterly cash dividend of $0.0745 per share of common stock.
The dividend is payable December 15, 2017 to shareholders on record on December 1, 2017.
108
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Valvoline's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the assistance of management, has evaluated
the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of the end of the period covered by this Annual Report on Form
10-K (the “Evaluation Date”), and based upon such evaluation, have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were effective. These controls are designed to ensure that information required to be disclosed in
the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is
accumulated and communicated to Valvoline's management, including the CEO and CFO, to allow timely decisions regarding required
disclosure.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act). Management assessed the effectiveness of the Company's internal control over
financial reporting as of September 30, 2017 based on the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in the 2013 Internal Control - Integrated Framework. Based on this assessment, management
concluded that the Company's internal control over financial reporting was effective as of September 30, 2017 based on those criteria.
The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Valvoline's
independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to the effectiveness of the
Company's internal control over financial reporting as of September 30, 2017, which appears below.
Changes in Internal Control
There were no changes in Valvoline's internal control over financial reporting during the fourth fiscal quarter ended September 30,
2017 that materially affected, or are reasonably likely to materially affect, Valvoline's internal control over financial reporting.
109
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Valvoline Inc. and Consolidated Subsidiaries
We have audited Valvoline Inc. and Consolidated Subsidiaries’ internal control over financial reporting as of September 30, 2017,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), (the COSO criteria). Valvoline Inc. and Consolidated Subsidiaries’ management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Valvoline Inc. and Consolidated Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Valvoline Inc. and Consolidated Subsidiaries as of September 30, 2017 and 2016, and the related
consolidated statements of comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended
September 30, 2017 of Valvoline Inc. Consolidated Subsidiaries and our report dated November 17, 2017 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 17, 2017
110
ITEM 9B. OTHER INFORMATION
None.
111
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
There is hereby incorporated by reference the information to appear under the caption “Proposal One - Election of Directors for a
One-Year Term” in Valvoline’s Proxy Statement, which will be filed with the SEC within 120 days after September 30, 2017. See also
the list of Valvoline’s executive officers and related information under “Executive Officers of Valvoline” included in Item 1 of Part I of
this Annual Report on Form 10-K.
There is hereby incorporated by reference the information to appear under the caption “Corporate Governance - Overview of
Governance Principles” in Valvoline’s Proxy Statement.
There is hereby incorporated by reference the information to appear under the caption “Corporate Governance - Shareholder
Nominations of Directors” in Valvoline’s Proxy Statement.
There is hereby incorporated by reference the information to appear under the caption “Audit Committee Report” regarding
Valvoline’s audit committee and audit committee financial experts, as defined under Item 407(d)(4) and (5) of Regulation S-K in
Valvoline’s Proxy Statement.
There is hereby incorporated by reference the information to appear under the caption “Corporate Governance - Section 16(a)
Beneficial Ownership Reporting Compliance” in Valvoline’s Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear under the captions “Compensation of Directors,” “Corporate
Governance - Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation Discussion
and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards for Fiscal 2017,” “Outstanding Equity Awards at
Fiscal 2017 Year End,” “Option Exercises and Stock Vested for Fiscal 2017,” “Pension Benefits for Fiscal 2017,” “Non-Qualified
Deferred Compensation for Fiscal 2017,” “Potential Payments Upon Termination or Change in Control for Fiscal 2017 Table,” and
“Report of the Compensation Committee” in Valvoline’s Proxy Statement.
112
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
There is hereby incorporated by reference the information to appear under the captions “Stock Ownership of Certain Beneficial
Owners” and “Stock Ownership of Directors, Director Nominees and Executive Officers” in Valvoline’s Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about the Company's equity compensation plans under which Valvoline Common Stock may
be issued as of September 30, 2017.
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
2,501,741 (1) $
17.42 (2)
5,499,828 (3)
429,786 (4) $
—
1,568,615 (5)
Plan Category
Equity compensation plans approved by
stockholders
Equity compensation plans not approved by
stockholders
(1) This figure includes the following shares issuable under the 2016 Valvoline Inc. Incentive Plan: (a) 1,823,802 shares that could be issued upon the
exercise of stock settled SARs (all of which were originally awarded by Ashland and assumed by Valvoline pursuant to the Employee Matters Agreements);
(b) 578,630 shares that could be issued under restricted stock units (276,563 of which were originally awarded by Ashland and assumed by Valvoline
pursuant to the Employee Matters Agreement); and (c) 99,309 shares that could be issued under earned long-term incentive plan awards for the 2015-2017
and 2016-2018 performance periods (all of which were originally awarded by Ashland and assumed by Valvoline pursuant to the Employee Matters
Agreement).
(2) The weighted-average exercise price excludes shares in Valvoline common stock that may be issued upon the settlement of restricted stock unit awards or
long-term incentive plan awards. Also excluded are shares that may be issued pursuant to the deferred compensation plans, as described in footnote 4 in this
table.
(3) This figure represents the shares available for issuance under the 2016 Valvoline Inc. Incentive Plan. Full value awards, which include all awards other
than options and stock-settled SARs, reduce the available share reserve on a 4.5-to-1 basis.
(4) This figure includes 203,161 shares that may be issued under the 2016 Deferred Compensation Plan for Non-Employee Directors (the “Director Plan”)
and 226,625 shares that may be issued under the 2016 Deferred Compensation Plan for Employees (the “Employee Plan”). Both plans are unfunded,
nonqualified deferred compensation plans. Eligible Directors in the Director Plan may elect to defer all or a portion of their annual retainer and other fees in
hypothetical investment options, including mutual funds and Valvoline Common Stock. The Company has reserved 1,000,000 shares of its Common Stock
for issuance under the Director Plan. The Employee Plan provides an opportunity for a select group of management and highly compensated employees to
elect to defer up to 50% of their eligible base salary and up to 75% of their incentive compensation as a means of saving for retirement or other future
purposes. Participants elect how to invest their account balances from a diverse set of hypothetical investment options, including mutual funds and Valvoline
Common Stock. The Company has reserved 1,000,000 shares of its Common Stock for issuance under the Employee Plan. Because these plans are not
equity compensation plans as defined by the rules of NYSE, neither plan required approval by the Company's stockholders.
(5) This figure includes 795,240 shares available for issuance under the 2016 Deferred Compensation Plan for Non-Employee Directors and 773,375 shares
available for issuance under the 2016 Deferred Compensation Plan for Employees.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
There is hereby incorporated by reference the information to appear under the captions “Corporate Governance – Valvoline's Board of
Directors - Independence,” “Corporate Governance - Related Person Transaction Policy,” and “Audit Committee Report” in
Valvoline’s Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
There is hereby incorporated by reference the information with respect to principal accountant fees and services to appear under the
captions “Audit Committee Report” and “Proposal Two - Ratification of Independent Registered Public Accounting Firm” in
Valvoline’s Proxy Statement.
113
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Documents filed as part of this Report
(1) Financial Statements
PART IV
The consolidated financial statements of Valvoline filed as part of this Annual Report on Form 10-K are included under Part II, Item 8.
Separate financial statements of unconsolidated affiliates are omitted because none of these companies constitute significant subsidiaries
using the 20% tests when considered individually. Summarized financial information for all unconsolidated affiliates is disclosed in Note
5 of the Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Financial Statement Schedule II - Valuation and Qualifying Accounts included in this Form 10-K. All other schedules are not required
under the related instructions or are not applicable.
(3) Exhibits
See Item 15(b) included in this Annual Report on Form 10-K.
(b) Documents required by Item 601 of Regulation S-K
3.1*
3.2
4.1
4.2
-
-
-
-
4.3
-
Amended and Restated Articles of Incorporation of Valvoline Inc.
Amended and Restated By-laws of Valvoline Inc. (incorporated by reference to Exhibit 3.2 to Valvoline's Annual
Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Valvoline’s Registration Statement on
Form S-1 (File No. 333-211720) filed on September 12, 2016).
Indenture, dated as of July 20, 2016, among Valvoline Inc. (as successor to Valvoline Finco Two LLC), Ashland
Inc., the Subsidiary Guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to
Exhibit 10.10 to Valvoline’s Registration Statement on Form S-1 (File No. 333-211720) filed on September 12,
2016).
First Supplemental Indenture, dated as of September 26, 2016, among Valvoline Inc., the Subsidiary Guarantors
and U.S. Bank National Association, as trustee to the Indenture dated as of July 20, 2016 among Valvoline Inc.
(as successor to Valvoline Finco Two LLC), Ashland Inc., the subsidiary guarantor, and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.3 to Valvoline's Annual Report on Form 10-K (File
No. 001-37884) filed on December 19, 2016).
4.4
-
Registration Rights Agreement, dated as of September 26, 2016, among Valvoline Inc., the Subsidiary Guarantors
and Citigroup Global Markets Inc., as representative of the Initial Purchasers, in respect of the 5.500% Senior
Notes due 2024 (incorporated by reference to Exhibit 4.4 to Valvoline's Annual Report on Form 10-K (File No.
001-37884) filed on December 19, 2016).
4.5
-
Registration Rights Agreement, dated as of September 22, 2016, between Ashland Global Holdings Inc. and
Valvoline Inc. (incorporated by reference to Exhibit 10.22 to Valvoline's Annual Report on Form 10-K (File No.
001-37884) filed on December 19, 2016).
4.6
-
4.7
-
Indenture, dated as of August 8, 2017, among Valvoline Inc., the Subsidiary Guarantors, and U.S. Bank
National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Valvoline's Quarterly Report on
Form 10-Q (File No. 001-37884) filed on August 8, 2017).
Registration Rights Agreement, dated as of August 8, 2017, among Valvoline Inc., the Subsidiary Guarantors
and Citigroup Global Markets Inc., as representative of the Initial Purchasers, in respect of the 4.375% Senior
Notes due 2025 (incorporated by reference to Exhibit 4.2 to Valvoline's Quarterly Report on Form 10-Q (File
No. 001-37884) filed on August 8, 2017).
114
The following Exhibits 10.1 through 10.22 are contracts or compensatory plans or arrangements or management contracts required to
be filed as exhibits pursuant to Items 601(b)(10)(ii)(A) and 601(b)(10)(iii)(A) and (B) of Regulations S-K.
10.1
10.2
10.3
10.4
-
-
-
-
10.5
-
10.6
-
10.7*
10.8
-
-
Valvoline Inc. 2016 Deferred Compensation Plan for Employees (incorporated by reference to Exhibit 10.1 to
Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
Valvoline Inc. 2016 Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.6 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
2016 Valvoline Inc. Incentive Plan (incorporated by reference to Exhibit 10.2 to Valvoline's Annual Report on
Form 10-K (File No. 001-37884) filed on December 19, 2016).
Form of (Outside Directors) Restricted Stock Award Agreement pursuant to the 2016 Valvoline Inc. Incentive Plan
(incorporated by reference to Exhibit 10.3 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed
on December 19, 2016).
Form of Performance Unit Award Agreement pursuant to the 2016 Valvoline Inc. Incentive Plan (incorporated
by reference to Exhibit 10.5 to Valvoline's Current Report on Form 8-K (File No. 001-37884) filed on May 15,
2017).
Form of Stock Appreciation Right Award Agreement pursuant to the 2016 Valvoline Inc. Incentive Plan
(incorporated by reference to Exhibit 10.6 to Valvoline's Current Report on Form 8-K (File No. 001-37884)
filed on May 15, 2017).
Form of Restricted Stock Unit Award Agreement pursuant to the 2016 Valvoline Inc. Incentive Plan.
Form of Restricted Stock Unit Award Agreement (Cash-Settled) pursuant to the 2016 Valvoline Inc. Incentive
Plan (incorporated by reference to Exhibit 10.8 to Valvoline's Current Report on Form 8-K (File No.
001-37884) filed on May 15, 2017).
10.9
-
Form of Inducement Restricted Stock Award Agreement entered into between Mary Meixelsperger and Ashland
Inc. (assumed by Valvoline on April 27, 2017) (incorporated by reference to Exhibit 4.1 to Valvoline's Registration
Statement on Form S-8 (File No. 333-218580) filed on June 7, 2017).
10.10
-
10.11
-
10.12*
10.13
-
-
Valvoline Inc. Nonqualified Defined Contribution Plan (incorporated by reference to Exhibit 10.4 to Valvoline's
Annual Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
Letter Agreement between Valvoline LLC and David J. Scheve dated September 6, 2016 (incorporated by reference
to Exhibit 10.5 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
Ashland Inc. Nonqualified Excess Benefit Pension Plan.
Amendment to Ashland Inc. Nonqualified Excess Benefit Pension Plan, effective as of September 1, 2016
(incorporated by reference to Exhibit 10.7 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed
on December 19, 2016).
10.14
-
Amendment to Ashland Inc. Nonqualified Excess Benefit Pension Plan, effective as of September 30, 2016
(incorporated by reference to Exhibit 10.9 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed
on December 19, 2016).
10.15*
10.16*
10.17*
10.18
-
-
-
-
10.19
-
10.20
-
10.21
-
10.22
-
Ashland Inc. Supplemental Early Retirement Plan for Certain Employees (“Ashland SERP”).
Amendment to Ashland SERP, effective as of January 1, 2015.
Amendment to Ashland SERP, effective as of September 1, 2016.
Amendment to Ashland SERP, effective as of September 30, 2016 (incorporated by reference to Exhibit 10.8 to
Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
Form of CEO Change in Control Agreement (incorporated by reference to Exhibit 10.1 to Valvoline's Current
Report on Form 8-K (File No. 001-37884) filed on May 15, 2017).
Form of Executive Officer Change in Control Agreement (incorporated by reference to Exhibit 10.2 to
Valvoline's Current Report on Form 8-K (File No. 001-37884) filed on May 15, 2017).
Valvoline Change in Control Severance Plan (incorporated by reference to Exhibit 10.3 to Valvoline's Current
Report on Form 8-K (File No. 001-37884) filed on May 15, 2017).
Valvoline Severance Pay Plan (incorporated by reference to Exhibit 10.4 to Valvoline's Current Report on Form
8-K (File No. 001-37884) filed on May 15, 2017).
115
10.23
-
Credit Agreement dated as of July 11, 2016, among Valvoline Finco One LLC, as Initial Borrower, The Bank of
Nova Scotia, as Administrative Agent, Swing Line Lender and an L/C Issuer, Citibank, N.A., as Syndication Agent,
and the Lenders from time to time party thereto (“Valvoline Credit Agreement”) (incorporated by reference to
Exhibit 10.9 to Valvoline’s Registration Statement on Form S-1 (File No. 333-211720) filed on September 12,
2016).
10.24
-
Amendment No. 1, dated as of September 21, 2016, to Valvoline Credit Agreement (incorporated by reference to
Exhibit 10.11 to Valvoline's Annual Report on Form 10-K (File No. 001-37884) filed on December 19, 2016).
10.25
-
10.26
-
10.27
-
10.28
-
10.29
-
10.30
-
10.31
-
10.32
-
10.33** -
10.34** -
12.1*
21*
23.1*
24*
31.1*
-
-
-
-
-
31.2*
-
32*
-
Transfer and Administration Agreement, dated as of November 29, 2016, among LEX Capital LLC, Valvoline
LLC, and each other entity from time to time party hereto as an Originator, as Originators, Valvoline LLC, as
initial Master Servicer, PNC Bank, National Association, as the Agent, a Letter of Credit Issuer, a Managing Agent
and a Committed Investor, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as a Managing Agent, an
Administrator and a Committed Investor, Gotham Funding Corporation, as a Conduit Investor and an Uncommitted
Investor, PNC Capital Markets, LLC, as Structuring Agent and the various investor groups, managing agents,
letter of credit issuers and Administrators from time to time parties thereto (incorporated by reference to Exhibit
10.1 to Valvoline’s Current Report on Form 8-K (File No. 001-37884) filed on December 2, 2016).
Sale Agreement, dated as of November 29, 2016, by and between Valvoline LLC and LEX Capital LLC
(incorporated by reference to Exhibit 10.2 to Valvoline Current Report on Form 8-K (File No. 001-37884) filed
on December 2, 2016).
Parent Undertaking, dated as of November 29, 2016, by Valvoline Inc. in favor of PNC Bank National Association
and the Secured Parties. (incorporated by reference to Exhibit 10.3 to Valvoline’s Current Report on Form 8-K
(File No. 001-37884) filed on December 2, 2016.
Separation Agreement, dated as of September 22, 2016, by and between Ashland Global Holdings Inc. and
Valvoline Inc. (incorporated by reference to Exhibit 10.15 to Valvoline's Annual Report on Form 10-K (File No.
001-37884) filed on December 19, 2016).
Transition Services Agreement, dated as of September 22, 2016, by and between Ashland Global Holdings Inc.
and Valvoline Inc. (incorporated by reference to Exhibit 10.16 to Valvoline's Annual Report on Form 10-K (File
No. 001-37884) filed on December 19, 2016).
Reverse Transition Services Agreement, dated as of September 22, 2016, by and between Valvoline Inc. and
Ashland Global Holdings Inc. (incorporated by reference to Exhibit 10.17 to Valvoline's Annual Report on Form
10-K (File No. 001-37884) filed on December 19, 2016).
Tax Matters Agreement, dated as of September 22, 2016, by and between Ashland Global Holdings Inc. and
Valvoline Inc. (incorporated by reference to Exhibit 10.18 to Valvoline's Annual Report on Form 10-K (File No.
001-37884) filed on December 19, 2016).
Employee Matters Agreement, dated as of September 22, 2016, by and between Ashland Global Holdings Inc.
and Valvoline Inc. (incorporated by reference to Exhibit 10.19 to Valvoline's Annual Report on Form 10-K (File
No. 001-37884) filed on December 19, 2016).
Supplier Terms & Conditions Agreement between Valvoline and Genuine Parts Company (NAPA oil), effective
as of January 1, 2016 (incorporated by reference to Exhibit 10.7 to Valvoline’s Registration Statement on Form
S-1 (File No. 333-211720) filed on August 23, 2016).
Supplier Terms & Conditions Agreement between Valvoline and Genuine Parts Company (Valvoline Oil), effective
as of January 1, 2016 (incorporated by reference to Exhibit 10.8 to Valvoline’s Registration Statement on Form
S-1 (File No. 333-211720) filed on September 12, 2016).
Computation of Ratio of Earnings to Fixed Charges.
List of Subsidiaries.
Consent of Ernst & Young LLP.
Power of Attorney.
Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Mary E. Meixelsperger, Chief Financial Officer of Valvoline, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Samuel J. Mitchell, Jr., Chief Executive Officer of Valvoline, and Mary E. Meixelsperger, Chief
Financial Officer of Valvoline, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
116
* Filed herewith.
** Confidential treatment previously granted for certain portions which are omitted in the copy of the exhibit electronically filed
with the SEC. The omitted information has been filed separately with the SEC pursuant to Valvoline’s application for
confidential treatment.
SM Service mark, Valvoline or its subsidiaries, registered in various countries.
™ Trademark, Valvoline or its subsidiaries, registered in various countries.
†
Trademark owned by a third party.
Upon written or oral request, a copy of the above exhibits will be furnished at cost.
117
VALVOLINE INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended September 30, 2017, 2016 and 2015
(In millions)
(A)
(B)
(C)
Additions
(D)
(E)
Description
Allowance for doubtful accounts
Year ended September 30, 2017
Year ended September 30, 2016
Year ended September 30, 2015
Inventory excess and obsolete reserves
Year ended September 30, 2017
Year ended September 30, 2016
Year ended September 30, 2015
Deferred tax asset valuation allowance
Year ended September 30, 2017
Year ended September 30, 2016
Year ended September 30, 2015
Balance at
Beginning of
Period
Charged to
Expenses
Charged to
Other
Accounts
Deductions
Balance at
End of Period
$
(1)
— $
(1)
$
— $
— $
(1)
$
$
(4)
— $
— $
5
5
4
3
2
2
8
12
7
$
$
$
$
$
$
$
$
$
5
4
5
2
2
3
12
7
6
$
$
$
$
$
$
$
$
$
1 $
1 $
— $
1 $
— $
— $
— $
— $
1 $
— $
— $
— $
— $
— $
— $
— $
5
$
— $
118
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
VALVOLINE INC.
(Registrant)
By:
/s/ Mary E. Meixelsperger
Mary E. Meixelsperger
Chief Financial Officer
Date: November 17, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant, in the capacities indicated, on November 17, 2017.
Signatures
/s/ Samuel J. Mitchell, Jr.
Samuel J. Mitchell, Jr.
/s/ Mary E. Meixelsperger
Mary E. Meixelsperger
/s/ David J. Scheve
David J. Scheve
*
Stephen F. Kirk
*
Richard J. Freeland
*
Stephen E. Macadam
*
Vada O. Manager
*
Charles M. Sonsteby
*
Mary J. Twinem
*
William A. Wulfsohn
*By:
/s/ Julie M. O’Daniel
Julie M. O’Daniel
Attorney-in-Fact
Date: November 17, 2017
Capacity
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Controller and Chief Accounting Officer
(Principal Accounting Officer)
Non-Executive Chairman and Director
Director
Director
Director
Director
Director
Director
119
[THIS PAGE INTENTIONALLY LEFT BLANK]
Dividends
Valvoline’s current quarterly cash dividend is $0.0745
per share.
Valvoline offers electronic deposit of dividend checks.
For more information, please contact Wells Fargo
Shareowner Services at
+1 (800) 468-9716 toll-free (U.S.)
+1 (651) 450-4064 (non-U.S.)
Independent Registered
Public Accounting Firm
Ernst & YouYY ng LLP
312 Walnut Street
Suite 1900
Cincinnati, OH 45202
Media Inquiries
Valerie Schirmer
Media Relations
+1 (859) 357-3235
vschirmer@valvoline.com
Corporate Headquarters
Valvoline Inc.
100 Valvoline Way
P.O. Box 55270
Lexington, KY 40555-1000
+1 (859) 357-7777
www.valvoline.com
Shareholder Information
Financial Information
Valvoline’s annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K
and any amendments to those reports, as well as any
beneficial ownership reports of officers and directors
filed electronically on Forms 3, 4 and 5, will be made
available at investors.valvoline.com after they are filed
with the Securities and Exchange Commission.
Paper copies are also available upon request and at no
charge. Requests for these and other shareholder and
security analyst inquiries should be directed to:
Sean T. CTT ornett
Investor Relations
Valvoline Inc.
100 Valvoline Way
P.O. Box 55270
Lexington, KY 40555-1000
+1 (859) 357-3155
scornett@valvoline.com
Ticker Symbol: VVV
Fiscal 2017 closing stock prices per common share:
High:
Low:
Year-end:
$24.66
$18.90
$23.45
04/03/2017
11/11/2016
09/29/2017
Annual Meeting
The annual meeting of shareholders will be held at
Valvoline’s corporate headquarters, 100 Valvoline
Way, Lexington, KY 40509 at 11 a.m. (ET) Wednesday,yy
January 31, 2018.
Stock Information
Valvoline Inc. is incorporated under the laws of the
Commonwealth of Kentucky. Valvoline common stock
is listed on the New York Stock Exchange.
Questions regarding shareholder accounts or dividends
should be directed to Valvoline’s transfer agent and
registrar:
Wells Fargo Shareowner Services
1110 Centre Point Curve, Suite 101
Mendota Heights, MN 55120
Mailing Address:
Wells Fargo Shareowner Services
P.O. Box 64874
St. Paul, MN 55164
+1 (800) 468-9716 toll-free (U.S.)
+1 (651) 450-4064 (non-U.S.)
www.shareowneronline.com
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